Hello,

Narratives drive our lives. Human beings think in stories, memes drive discourse, and more importantly, gif’s inform us of the state of the world.

We’re going to talk about what a ‘narrative-driven economy’ is, walking through a couple of examples in GameStop and the recession of 2022, as well as where this leaves us.

Let’s get to it!

📝 What is a Narrative-Driven Economy?

A narrative-driven economy is the study of popular stories that affect individual and collective economic behavior.

By learning more about this, we improve our ability to predict and prepare for sudden changes in the economy.

We all know ideas can go viral and move markets, whether true or false, stories that spread like wildfire drive the economy by driving our decisions about how and where to invest our money and how consumers are feeling right now (aka ‘consumer sentiment’). Do they feel bullish about the economy and letting the good times roll? Or, is it doom and gloom & time to tighten the figurative economic belts?

We’ve seen some glaring examples of a narrative-driven economy in the past 12 months - let’s dive into a couple of examples.

🎱 Example 1: GameStop

One of the most real examples to bring a Narrative-Driven Ecnomy to life is…GameStop. Some of the fun memes:

What Happened:

For the most part, investors follow the "buy low, sell high" format when it comes to stocks. Short sellers do the opposite — they borrow and sell a stock when it's high and bet that it will continue to fall, then buy it back later at a lower price and bank the difference.

Because short sellers — frequently hedge funds — in essence are betting against a company's success, it can be a risky position. Any positive news or enthusiasm for the stock will push up the stock's valuation, minimizing profit for the short seller.

So, for GameStop, an unassuming group of retail investors decided to band together (primarily on Reddit) and invigorated interest in buying the stock, pushing up the price, which in turn fueled more interest.

The speculative trading left short sellers with no more shares to buy to cover their positions, creating a short squeeze and leaving them with millions of dollars in stocks they had bought at a high price but which they then had to offload at an even higher price.

S3 Partners, a financial data company, said that its analysis found that short sellers had lost $23.6 billion on GameStop.

This all started from a Reddit community called r/wallstreetbets (WSB).

Think of this sub-reddit like a frantic YouTube livestream chatbox mixed with a Bloomberg Terminal (one for all you finance nerdssss reading this).

The narrative shaped by r/wallstreetbets had spread across average retail investors and this turned into a David vs Goliath battle, of multi-billion dollar Hedge Funds vs the community of retail investors.

Gamestop’s stock grew by 8,000% within six months.

📉 Example 2: The Recession of 2022

The “R-word” is everywhere right now. According to the Wall Street Journal, economists have raised the probability of recession, now putting it at 44% in the next 12 months.

This wouldn’t be a web3-focused newsletter if we didn’t focus on the impact to the crypto markets.

As we mentioned last week, in the past couple of months we’ve seen:

• Cryptocurrency market losing $2+ trillion of value in six months.

• Inflation at officially 8.5%, and higher for certain goods (e.g. electricity & gas).

• Interest rates rising to curb rising inflation (thus leading to less excess capital to invest/spend).

• Less spending on discretionary reports (according to Walmart and Target, leading to missed revenue targets).

• Job losses at companies like Coinbase.

• Major $ losses at companies like Celsius, Three Arrows Capital and more.

The current narrative is one of inflation-inducing memes:

We thought cryptocurrency would be a hedge against inflation, but we’re seeing a strong correlation between the tech stock price crash and the crypto price crash.

Memes and gifs have spread across social media, and have to the decline in consumer sentiment, thus leading to a self-fulfiling prophecy of:

Conclusion:

When we stop paying attention to mainstream media or turn on cable news daily at 6pm, and instead we subscribe to the incessant never-ending news cycle on social media, we’re more likely to learn about the state of the economy from local communities or the social media accounts we follow.

This puts a responsibility on ourselves to challenge how our internal narratives are shaped and question the information we subscribe to, however it also depicts the viral nature of meme stocks, gifs and more to shape our views on the current economy.

Memes and gifs will continue to shape our economy and our ways of thinking.

Additional Reading: 

• Wall Street Narratives Distort Reality; A Deep Recession Is Rapidly Approaching 

• The Advent of Narrative Economics

• Storytelling in the Narrative-Driven Economy

• Narrative Economics: How Stories Go Viral and Drive Major Economic Events

Picture Of The Week:

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A very-British Sunday Roast :)

Until next time

I hope you enjoyed this week’s edition - I'd love it if you shared it with a friend or two.

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Fahim