Abounding Stories

Follow The Money:

Economists are never wrong, only early; traders are often wrong, but never in doubt.

Economists look at interest rate differentials, growth differentials, current account positions, and other fundamental factors. It doesn’t always help much, but it is a defensible place to start. Traders, on the other hand, cognizant or not, focus not on the fundamentals, but on the “fundamental story”.

These stories typically emerge to fit recent price action and are then coupled with what economists refer to as stylized facts.

Unlike facts, stylized facts are not stubborn things.

Some stories turn out to be true, others false, but whether they are true or not the most powerful ones share two characteristics: they are easy to explain and intuitively appealing.

And once a good story takes root it can be very difficult to dislodge it—irrespective of how untrue it may be.