Narratives, counter-narratives and narrative fallacies
At the end of last week, markets were in an emphatic “risk-taking” phase. After the initial shock of Russia’s invasion of Ukraine, the S&P 500 had regained 6.6% in two days of trading. I argued that the market operates on the assumption that Vladimir Putin would get what he wanted, and that the world could live with that. I also added the following:
The first two definitely seem to be happening. The third is not, for which we can be grateful, but Putin currently seems to have overplayed his hand – and his invocation of the nuclear threat suggests a risk that he will do so even more. While it would still be wishful thinking to say the fourth is going to happen, there is far more internal opposition than many had thought possible. So by the criteria I laid out last week, the dark but market-friendly narrative that dominated then now looks seriously flawed. It matters a lot.
Politics is indeed the battle of narratives. A few days ago, a story built around NATO’s overreach in encircling Russia, a weak and undemocratic “State Department client state” in Ukraine, and a need to understand the priorities of the strategic genius Putin seemed to have had influence – no doubt even in the United States, where he had some prominent supporters in the media. Putin would end up getting what he wanted with very little damage along the way; nobody could do anything about it. Stability would eventually return, and it was all the fault of the West. For an explanation of how this narrative was nurtured and established, read this post from Ben Hunt’s Epsilon Theorywhich now seems prescient.
This tale has expanded to include other dire notions. Europe is divided, Germany is dependent on Russian energy, the world’s growing ranks of autocrats will support Putin, the United States is inextricably divided with a weak president and a substantial body of support for Putin and what it represents. All of this has some truth to it, of course. The point is how the narratives feed into themselves so that any points that don’t line up with them are ignored. They can become self-fulfilling prophecies.
Markets also move on stories. With the strength of the wisdom received as the invasion began and the early headlines, it was easy for the narrative that fueled the rebound to take hold. As a rapidly victorious Putin who then went back to minding his own business would imply greater global stability, this imagined scenario quickly became positive for the market.
This whole story is now in tatters. The strength and success of the Ukrainian resistance to date, the brutality of the Russian onslaught, and the support for Ukraine in the rest of the world and even among Russians have contributed to this. Now, two narratives are vying for primacy.
The first is that it turns out to be “The Great Turning Point”. According to this analysis, the European Union is now pulling itself together, the other autocrats of the world are deciding to fall into line, the crazy pro-Russian tendency within American conservatism is decisively defeated, restoring the United States to a party of credible centre-right while bringing a new breath of life to the president. And maybe, just maybe, this is when Russia turns on Putin. Liberalism is finally gaining the upper hand over authoritarian populism. Here are some of the talking points in favor:
The other story only needs one word: “Chaos”.
The cover, as far as I can tell at the moment, oscillates between these two narratives, with a whiff of premature triumphalism mingling with growing disquiet. In the long run, it matters a lot which one wins; in the short term, the fact that Putin cannot simply take Ukraine and leave the West powerless to do anything about it means that the situation is much more risky than it appeared last week.
Many historical analogies circulate. I think the best might be with “Red Monday”, August 19, 1991, when Mikhail Gorbachev was detained at his dacha and a group of Soviet extremists declared a coup. The era of glasnost and perestroika was over; the world should once again get used to a Brezhnev-style Soviet Union. The markets have closed. Then Boris Yeltsin stood on top of a tank, the coup failed, and on Friday Yeltsin threw a piece of paper in Gorbachev’s face and demanded that he sign a law banning the Communist Party .
In five days, the narrative went from “Return to Brezhnev” to “Russia is no longer a communist”. By the end of the year, the Soviet Union was finished. These were developments of frightening rapidity, which reverberated throughout the following decades. They have serious ramifications in Ukraine right now. The roles of Gorbachev and Yeltsin, both considered unequivocal heroes at one time, remain controversial. But the chances that we will come to see an analogy between Volodymyr Zelenskiy and his social media posts with Yeltsin’s speech from a tank seem strong. And even if Putin finds himself in the role of Gorbachev, which still seems unlikely, there is plenty of room for things to go right or wrong in the years to come.
This time around, the narrative departed from “Putin can have what he wants” with equally astonishing speed. The lesson for investors is to be extremely cautious and remember that a short-term outcome that is unfavorable to the market (more uncertainty) is a much-desired long-term outcome.
Last week, as some noticed, I didn’t include a “Survival Tips” section for the first time since the early days of the pandemic. I wrote one, but it seemed in poor taste under such circumstances. Of course, we should all hope (and those who pray should pray) for the survival of the many people whose lives are now in danger in Ukraine.
Then, irony upon irony, on Friday morning, I tested positive for Covid-19, for the first time. As soon as Putin persuaded me to forget the coronavirus, I finally succumbed. My survival is not in danger, but as many of you already know, I can report that it is a thoroughly unpleasant experience. Even with the horrors in Ukraine, we cannot yet declare that we are done with Covid, unfortunately. For karma’s sake, here’s what I wrote last Thursday night:
And since Russia is so unpopular with so many people at this point, allow me to recall a few reminders of the country’s great cultural contribution to the world. Two pieces of music that speak to me a lot about the experience of Russia in the first half of the 20th century, by Prokofiev Cantata for the 20th anniversary of the October Revolutionwritten in 1937, and Shostakovich’s Seventh Symphony (“The Leningrad”) The first is a setting of the works of Marx, Engels, Lenin and Stalin (and the music has always strongly suggested to me that Prokofiev did not have complete respect for these men, and successfully bet that Stalin was too philistine to understand what he meant.) The second is a musical representation of the siege of Leningrad. For more Russian works of musical genius, try Rachmaninoff’s Vespers (sung in this version by a Ukrainian choir), Stravinsky’s The Rite of Springand Tchaikovsky’s Fifth Symphony.
I also got the same nice suggestion from more than one reader. Chopin’s groundbreaking studyplayed by the Russian pianist Vladimir Horowitz, and here by the Georgian Khatia Buniatishvili. It is also known as A Study in the Bombing of Warsaw, written in response to a failed revolution against Russia. It is a powerful piece of music. And here is another: that of the Polish composer Polish militaryplayed here by the Russian-born Austrian concert pianist Anastasia Huppmann.
With that, try to have a great week everyone. Be careful.
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John Authors is Managing Editor for Markets. Prior to Bloomberg, he spent 29 years at the Financial Times, where he led the Lex column and chief market commentator. He is the author of “The Fearful Rise of Markets” and other books.