The Physics of Story

February 6, 2022

I like a good framework. For instance, an equity (a stock) has just two moving parts, earnings and the price paid for those earnings. Earnings, in turn, are spending. A framework puts individual observations, like the price investors are willing to pay to own a company’s earnings, into logical context.

Given my bias, it was only natural that when I wrote my second book I tried to find a framework for story. Season #4 episode #1 (click here) guest John Yorke wrote the best book I’ve read on the topic, Into the Woods. According to John, story has a physics, immutable rules. Understanding his framework can help you understand any story, be it a film, book, origin myth or politician’s speech.

Structure

According to John, every story has three parts: an inciting incident or disruption, a struggle and a resolution. This is as true of Shakespeare as it is Harry Potter. Structures can get more intricate, but even the more intricate ones can be reduced to these three parts.

John’s classic illustration is Jaws. What could be more disruptive than a massive shark devouring, in the opening scene, a fit, young woman? I saw the film when I was 8 and still remember scenes vividly. At the end, of course, the shark dies. In between, there is a life and death struggle, unlikely alliances are formed.

A sales pitch is another version of the same. When I worked at a bank on Wall Street, in retrospect I realized volatility was our shark. If markets were calm, there was less incentive to act and, as a result, less incentive to do a transaction with the bank.

When it comes to politics, John contrasted Hillary Clinton’s storytelling with Trump’s. Her slogan was “better together,” his “drain the swamp.” Like Jaws, “drain the swamp” is visceral. I imagine a toxic brew of malarial mud. “Better together,” as John said, is “art house film.” The simpler the story the broader the reach.

For additional perspective, I asked the people at Rose Technology (to look at the Google trends around the two phrases.

To the degree searches reflect emotional impact, John’s instinct is accurate. Trump had better “shark.” To be sure, it is possible to build compelling narrative out of falsehood. Putin’s shark is NATO. While in reality a defensive force, Putin portrays NATO as an offensive force threatening Russia. Because Russia has been unsuccessfully invaded twice (Hitler and Napoleon) and successfully once (Genghis Kahn), threats of invasion are a compelling shark.

US political extremes have their own sharks. The Left’s shark is “oppression;” the Right’s is “liberty.” Wherever you fall in your political predilections, you are being fed a story, so best understand how they work. After digesting John’s wisdom that I began to look at the news differently.

The Best Stories

While stories can be used to manipulate, the best stories serve a purpose, they illustrate a truth, even if truth is ever shifting. Each generation is tying to share key lessons for the next generation. Love stories are about finding a mate, clearly important for the tribe to continue. As our definition of relationships evolve, stories must too. War stories remind us of how awful our penchant for violence is.

If a story is exceptional and you get lost in its magic and the structure disappears. That there is nonetheless a structure at work was not something I was never taught in school. John suggests there is a resistance to suggesting stories follow a formula, as if it somehow hollows out the art. I don’t see it that way. To the contrary, just like with the framework for a stock, the structure provides coherence.

What’s Going on In Markets

The basic dynamic is simple. The Fed is going to remove liquidity and the West is doing everything it can to dissuade Putin from invading Ukraine. At the same time, the economy is growing quickly.

So far, the bond market is responding to the Fed, not the Ukraine invasion risk, so yields are moving higher. I will give a more detailed update of my positions a bit later in the quarter. A short version is here, an update from my Wins and Losses post. THIS IS NOT INVESTMENT ADVICE, instead it is transparency on how I am navigating the markets for you to take or leave.

1. I remain outright short bonds in the US and have moved this short further out the yield curve. The Federal Reserve (central bank) is now expected to raise rates about six times this year.

2. I have less overall equity exposure (about 25% down from 40%), selling positions as they went negative (such that there was no tax obligation). My overall exposure to US stock indexes is now negative 4%, though I am on net positive US stocks given long exposure to banks and oil companies.

3. I have increased overall commodity and commodity equity exposure, now up to 17%. Here, I have been picking individual stocks to create a customized exposure that an index can’t offer.

4. My overall (unaudited) returns are about zero for 2022. As of this writing, the US stock market was down about 6% and a 10-year US government bond is down about 3% year-to-date.

5. I believe the Fed is going to tighten, US stocks and bonds will fall further, there will be a huge benefit to owning safe havens that don’t fall (thus the stock picking) and at some point, I’d guess in roughly the middle of the year, inflation pressures will start to ease and there may be a time to buy US stock indexes and bonds again.

6. For people who aren’t actively trading (and I wouldn’t recommend that you do) the single simplest thing to do might be to have your dividends go into cash, as opposed to be reinvested automatically in the stock market. When the Fed has stopped its tightening, it’s probably a better time to buy, though of course timing this is extremely difficult.

7. Regarding Ukraine, the invasion risk is still high, but it may be getting harder for Putin to invade in part because the West knows his tactics too well. This is sort of what happened to Trump. Initially his “shark” wasn’t well understood, so it worked well. As his moves became better understood they also became less effective.

8. Regarding the economic recovery, I am currently in Cyprus. Outside my window, I’ve counted many cruise ships sitting empty. They have to park them somewhere. This is visible evidence both of what true business risk looks like and also that some parts of the economy remain completely dead and will bounce very hard when Covid finally (years from now?) disappears. This monster is parked right outside my door.

Other:

What I am reading:

Energy and Civilization by Vaclav Smil. Another “framework” is man’s search for energy. Our legs and arms are relatively weak. Mechanical advantage magnifies our strength. Today’s inventions, like this computer and Substack and high-speed connection I write with, come after generations of brutal work to learn to harness energy. Think hunter-gatherer→farmer→dam-driven mill owner→gasoline driven tractor driver where now one person can do the work that used to require hundreds and hundreds. That is productivity. Today’s concern about global warming comes after hundreds of thousands of years of being concerned about having enough to eat. Many of us have forgotten what it is to feel hungry. Alleviating that sense of hunger was perhaps the original motivation to develop fossil fuels.