Ben Hunt Narrative

Ben Hunt on The People’s Narrative | Bankless Podcast

Check out the Bankless Episode Page & Show Notes

Key Takeaways

  • To win at the investing game you have to both examine fundamentals and play the player
  • Individuals may believe in some private information, but their behavior doesn’t change until this private information becomes common knowledge
    • A missionary creates common knowledge by shouting that information publicly – Now everybody knows that everybody knows
  • A central bank-issued digital currency enables it to monitor and censor transactions and to freeze accounts, it can also be tied to a good citizen score
    • “Coming soon to a liberal democracy near you” – Ben Hunt
  • Government is the control over money
    • “I don’t think you can fight the nudging state and the nudging oligarchy on this battlefield of money” – Ben Hunt
  • “I honestly think that there is an enormous reservoir of desire, of hunger, for an alternative financial network of investors and markets and trading that is outside of the public market casino that we have today” – Ben Hunt
  • We can all make a difference, “Find your pack, work from the bottom up, and watch how the world changes” – Ben Hunt

Intro

Playing the Player

  • There are 3 sides to the investing game:
    • Alpha – your portfolio’s performance
    • Beta – your own performance
    • Epsilon – All the stuff we don’t understand
      • That said, our inability to understand or formalize something doesn’t mean it isn’t real, it just means it’s outside our scope of thinking
  • The world is about narratives and how they impact behavior, all of which is outside market rules and laws
    • Epsilon is the human side of things, the strategic behavior of market participants
  • Whether it be investing, voting, or crypto markets, there are predictable patterns in human behavior in strategic settings
    • To win at the investing game, you have to play alpha, beta, and play the player

The Keynesian Beauty Contest

  • The contest required people to choose the most beautiful girl from a hundred photographs, those who picked the most popular faces were eligible for a prize – let’s play the game:
    • First-level thinking: Vote for the girl you think is the prettiest
    • Second-level thinking: Vote for the girl everyone else thinks is the prettiest – the consensus
    • Third level: Everybody trying to figure out what everybody thinks – the consensus of the consensus
  • The contest is like the stock market and buying a stock is akin to voting for a pretty company
    • First-level thinking: Fundamental analysis of a company
    • Second-level thinking: A company that everyone else thinks is attractive
    • Third level thinking: Common Knowledge, something that we all believe everyone else believes

The Common Knowledge Game

  • Individuals may believe in some private information, but their behavior doesn’t change until this private information becomes common knowledge
    • How does the crowd figure out what the crowd is looking at, aka the common knowledge?
      • A missionary is someone willing to shout the information publicly, thus, creating common knowledge – Now everybody knows that everybody knows
  • Most days are uneventful, but some days have a huge impact on markets
    • The more people share non-common knowledge with you, the longer it takes for a break in the narrative, but the bigger the break will be
  • The common knowledge game is the game of markets and is a framework for understanding crowd and market behavior

Successful Species Communicate

  • Bees, ants, termites, and humans are the most successful species on Earth, here is why:
    • They are social animals on the biggest scale. For instance, multiple generations live in the same nest and take care of the young, etc.
    • Animals use pheromones to communicate while humans have language and narratives
  • Only recently in the modern world did it become possible to quantify the amount of data and messages flowing between people
    • This enables us to predict and anticipate human behavior like never before

The Narrative Machine

  • Ray Dalio describes markets in terms of The Economic Machine
    • However, the economic machine may not always work and one may need to understand the bigger picture: The narrative machine
  • A new narrative came into effect in 2008, the Fed stepped into the free market and announced banks will not shutdown
    • In essence, Epsilon grew stronger in the face of Alpha and Beta, suddenly going bankrupt didn’t  mean shutting down
  • Dave Portnoy (@stoolpresidente) is like a missionary creating common knowledge: stocks only go up because that’s what the Fed wants

The Nudging Oligarchy

  • Self-censorship is much cheaper than forcing compliance and is the goal of the nudging oligarchy
  • In 1984, George Orwell depicts the state as a boot crushing humanity.
    • In reality, it is a smiley face button, narratives.
      • One such narrative, Crypto is used by terrorists
  • A digital currency issued by the Chinese central bank enables it to monitor and censor transactions and to freeze accounts, and it can also be tied to a good citizen score
    • “Coming soon to a liberal democracy near you” – Ben Hunt
  •  “I don’t think you can fight the nudging state and the nudging oligarchy on this battlefield of money” – Ben Hunt
    • “This is what a government is, it is the control over money”
    • To that end, governments always coopt financial innovation

Possible Paths for Crypto

  • Bitcoin and Ethereum represent the ability to exit the system
    • That said, the risk of focusing on the store of value use case is to get ghettoized, like gold bugs
  • We could witness a game theory scenario between nation-states, where whoever gets in first acquires the most value
    • However, powerful countries aim to replace the Dollar with their own currency, adopting a decentralized currency isn’t aligned with their goals
  • Younger generations may rise up and own a non-sovereign form of money

Where Crypto Fits

  • For the past 11 years, value investors have been getting crushed
    • However, the transparency of information on open blockchains allows the resurgence of value investing, making fundamentals matter again
    • “I honestly think that there is an enormous reservoir of desire, of hunger, for an alternative financial network of investors and markets and trading that is outside of the public market casino that we have today” – Ben Hunt
  • Distributed ledger technologies solve an age-old problem at the core of citizenship, namely distributed trust
    • The solution gives one the ability to control their data, vote, and identity

Closing Thoughts

  • On COVID economic crisis “I think it gets a lot worse before I think it gets any better here in the US” – Ben Hunt
    • The common knowledge is the Fed will keep supporting stocks and that’s why the stock market stays up
  • Change doesn’t always happen on a grand scale, we can all make a difference from the ground up
    • “Find your pack, work from the bottom up, and watch how the world changes”
      • Good work is even more contagious than viruses
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Notes By Mostafa Khaled

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