How Narratives Shape the Market
Last week, I did something different in Top Stocks.
Rather than talk about specific companies, I kicked off a series of guest interviews. And not just any guests, but ones I believe are the top thinkers on the issues that matter most in the world... and, in turn, your wealth.
Last Friday, I shared my interview with famed short-seller Carson Block. We spoke about fraud, artificial intelligence ("AI"), and the economy.
This week, I've got Ben Hunt... the co-founder, chief investment officer, and president of AI-research firm Perscient.
I've been reading Hunt's work for years. I still remember the first time I heard him explain his thoughts on how the world works.
I know "how the world works" is a bold phrase... But he's really working at that level. He traces how different stories drive our culture, politics, and markets.
Importantly, certain narratives have major implications for today.
To start, Hunt sees a huge story shaping up around AI... and he's worried where it may lead.
Three Big Ideas From Ben Hunt
AI Will Cost You More Than You Think
Hunt isn't anti-AI. His company runs on it.
But as he lays out in his "World War AI" essay, there's one big thing most investors are ignoring: The scale of the AI build-out is on par with a wartime mobilization – and something has to give.
The demands on capital and energy are enormous and converging.
Every developed country in the world is running a massive budget deficit right now. And AI infrastructure and industry reshoring... well, they're competing for the same resources at the same time. The result is a situation that's reminiscent of World War II.
The most immediate sacrifice for everyday people is simple: Your electricity bill is skyrocketing... and it'll continue to rise alongside AI demand.
The deeper risk is subtler. When societies make wartime-scale sacrifices, the powers that be need to tell a story to get the people to come along.
We won't be told we're sacrificing for chatbots or corporate efficiency. We'll be told we're in an "AI war" with China... and we need to win.
As such, you need to be skeptical of what you're told.
Markets Run on Stories, Not Spreadsheets
Another argument Hunt has is simple, but valuable: What moves markets isn't your research, or even the consensus – it's what everyone thinks other people think.
It's called the "Keynesian beauty contest."
The concept was developed by economist John Maynard Keynes in the 1930s.
Essentially, it involves a hypothetical newspaper contest where contestants are asked to select the six prettiest faces from 100 photos. The prize goes to the person whose answers best match the most popular answers of all the participants.
In other words, the winning strategy isn't picking who you think is prettiest. It's picking who you think the crowd will pick.
Markets work the same way.
What drives this dynamic is what Hunt calls "missionaries" – prominent people whose words, when spoken, are assumed by everyone to have been heard by everyone.
In recent times, the Federal Reserve chairman was the dominant missionary. Today, it's more likely President Donald Trump.
The practical takeaway: You can identify a genuinely undervalued company, be completely right about the outlook... and still lose. The value won't be realized until a story starts to form and the crowd takes note. That's when the money gets made.
Private Credit Is Following the GFC Playbook
Lastly, let's look at what's happening in the financial markets today...
Hunt's company, Perscient, has been watching a familiar story unfold in private credit.
There's a lot of chatter about trouble brewing in private credit. You've probably seen it in the headlines. Perscient tracks all this with data.
Hunt says this looks a lot like what happened leading up to 2008.
Packaged loan securities are being sold to financial advisers at private-credit firms the same way packaged mortgage securities were sold before the great financial crisis ("GFC").
Hunt is careful to say that the underlying loans might be fine. But that's almost beside the point. The narrative can still drive asset prices.
When people get scared, they want their money back. That leads to a liquidity problem. And liquidity problems, as 2008 proved, are death for asset prices.
Private-credit asset managers are now putting limitations on how much money investors can withdraw from packaged-loan funds.
It's not a crisis yet, but the narrative appears to be driving us toward one. We'll have to watch and see if it hits the "tipping point."
Watch to Learn More
To hear more about my discussion with Ben Hunt, check out today's Top Stocks video. We sit down for a wide-ranging and deep discussion of what's driving several narratives today, including how AI can change our lives for better or worse.
You can watch the entire episode on our YouTube page by clicking the image above. Be sure to like and subscribe to get more of our videos.
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Straight to the Source
- Epsilon Theory, where Hunt writes
- Studs Terkel's book The Good War – required reading for understanding life during World War II
Until next week,
Matt Weinschenk
Publisher and Director of Research
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