How global stock markets, especially tech shares, are faring show the disconnect between data on the ground and what investors want to make of it. Image Credit: AP

To remember is not to time travel - it is to alter how time feels.

Over time, our memories are supposed to fade and, as they do, we come up with explanations of the past that enable the illusion of us understanding the dynamics of history. We know we overestimate our knowledge of these events and phenomena, and yet we do it, as we “fit” the data into a narrative that satisfies our desire for a story.

Devoid of rationale

Take the explosion in prices of tech shares, even as millions of people have lost their jobs and SMEs suffer. This increase in value has been explained by 1) the virtually zero cost of money and liquidity pumped into the system; and 2) an accelerated understanding of the fact that technology (especially in light of the pandemic) is now the only way forward for all industries.

Therefore, every bet that is made on the technology sector is viable (the arguments are somewhat more nuanced than this but essentially lie on the same foundation). It starts to approach ludicrous levels when crypto assets are talked up to the stratosphere, devoid of fundamentals, where the explanation offered is that these fundamentals do not matter because they are part of the “old narrative”.

This is exactly the narrative that was in place prior to the 2001 stock market bubble and the 2007 global financial collapse. After the fact, the narrative changed to incorporate the “obviousness” of the asset price bubble and that there were plenty of warnings in the ecosystem that were just ignored.

Rival narratives

Take the stop-start nature of travel throughout the world based on the spread of the pandemic. Bouts of optimism are replaced by despair every time a new variant of the virus leads to further lockdown measures, battering the already fragile sentiments of the SME sector. And adding to the layoffs that have taken place.

The “inevitability” of layoffs has been a given for some time, and is a price that needs to be paid, as industry after industry resets to the new equilibrium. So, in real estate, we have the excitement of transactional volumes rising, but each bout of optimism is tempered by rents (and prices) falling as job losses continue.

Data shows that prices have a higher correlation with money flows than it does with economic growth, and yet when we look at money flows themselves, it is a function of growth, both domestic and global; stimulus measures in place; and a function of travel (which until early 2020 was taken for granted). It is only now, with the advent of the repeated nature of on/off restrictions that data scientists have started to trace the pattern of money flows to ease of travel.

Live with it

These stories of optimism and pessimism exists side by side, and the stress of multiple stories is the stress of living at two times at once. When people are young, the prospects of uncertainty are exciting; as they age, the future becomes daunting and confusing.

Even as the damage continues side by side with progress, and analysts scramble to make sense of “fitting” new narratives, it is obvious (yet something that cannot be proven quantitatively) that our systemic overestimation of knowledge without experimental verification is a key factor behind the rapid rise of problems in society.

Economists get caught because we have the data and the means to check the quality of their knowledge, but historians, pundits and other analysts can hide for longer. It was an old adage that “the wise see things coming”.

However, what we see and what the wise truly know is that they cannot see things coming. Decision-making, therefore, does not have to rely on estimation models, but rather on a new set of tools that are more analogous to doing research in a “time lab”, where we look and challenge our linear concept of time.

And re-examine our memories to make sense of the stories that are being constructed for us and those we can interpret in order to navigate day-to-day decisions. It’s a consolation to travel through time by way of our memories, but it serves a far better tool than the pundits of our age to examine what are fads and what are not; what waves of change are permanent and what we take for granted at our own peril.

- Sameer Lakhani is Managing Director at Global Capital Partners.