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A Broader View: Informational Dissonance, Investing and Nationalizations

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As investors who have met us, and readers of our monthly commentaries have come to know, our core focus at Plotinus is on US equity markets investing and the application of Artificial Intelligence to seek to improve trade decision-making. To that end, we are always seeking insights that have the potential to be usefully integrated into our AI approach.

One particular area of research and analysis from which we seek such insights has to do with the concept of what we call Informational Dissonance. This has the potential to occur when some new information seems to be at odds with previously held beliefs or feelings. So, an Informational Dissonance situation could have the potential to affect an investor’s subjective-based decision making. Or, it could make a systematic trading model suddenly find its risk, return, or both, no longer performing as it may have in the past. Better yet, however, Informational Dissonance related analytics in the investment marketplace, we believe, has the potential to lead to more statistically valid trade signals on which to act. In the case of the investment strategy we run, we conduct derived-data data mining from digitalized information, as we seek to separate trade signals from market noise.

The observations we offer for this month’s commentary, however, are an example of how we examine more than just historical trade directionality as we seek insights that might be usefully integrated into our AI approach.

The concept of Informational Dissonance can take many different forms, such as when a government narrative diverges from an agnostic underlying data narrative. Garnering information on how these types of situations impact public markets is beneficial in the development of our AI.

So, here is a timely example from France:

The renationalization of the French Utilities provider EDF (Electicité de France) has received some degree of attention in the international financial press, mostly focused on the ramifications for the investors who presently hold the 16% held privately (the government already owned 84%). The €9.7B on the table, at €12/share, means investors have been offered a 53% premium on the share price prior to the government takeover announcement. This, though, is in comparison to the woes of long-term investors who invested when the company first went public in 2005. These investors are looking at a 63% decline in value of their original investment.

By any standards, the nationalization of EDF represents an abject failure for both public and private finances (except for savvy early investors who sold at the share’s peak back at the end of 2007). The company is in bad shape and requires a bottomless pit of money to maintain it. In other words, it needs government ownership.

What has not, however, received much focus, are the broader implications of this renationalization and what it is saying about changing political-economic dynamics in France. The country, like all of its European neighbors, has just emerged from its aberrative, Covid-economy; in effect, an artificial, government subsidized economy. The consequences of this government intervention are several: increased government control, high inflation, and a more dependent population with high expectations that their government will “protect” them from economic harm. This has intensified the contradiction between free-market economics and less free-market protectionism.

It was not an accident that Monsieur le President, Emmanuel Macron “celebrated” the July 14 national Bastille Day with a speech from Paris, the city of light, warning the French people to brace for energy rationing and hardship in the months ahead, including a reduction of public lighting. The presentation of this struggle as something of a national duty is very much in keeping with the atmosphere of the pandemic shutdown as having been a national duty.

With the backdrop of an actual war in Europe, it makes it easier to demand hardship from the people. Everyone is aware of the reality of higher energy prices directly relating to the war in Ukraine.

However—to return to EDF—its nuclear reactor corrosion problems, which didn’t start with the Russian invasion on February 24, are something the public are likely to be less aware of. EDF’s exposure to the vicissitudes of the war-influenced high energy market prices is only a consequence of the long-term underlying internal systemic problems at the utility provider. It would be a much harder sell to the French public were the French president to ask them as part of their national duty to brace themselves for energy rationing and tough economic times ahead—in part due to a difficult to manage, semi-private/public monolithic energy provider that was being managed so poorly it was more vulnerable to the high cost of energy than it should have been; and, in fact, the government needed to step in with an additional €9.7B of public finances to fully renationalize it.

Whilst this is a particular French example, it has its parallels in other countries. The public perception in European countries—that they were ‘looked after’ by their respective governments during the pandemic—has set an unfulfillable expectation that they will be looked after again in the event of economic hardship. The tide of labor unrest in the face inflation-depreciated incomes is indicative of the real current economic difficulties, not of those that are yet to come.

Hardship as a national service—as an idea—will be sorely tested if it is overused by governments that cannot repeat the Covid-economy style protection they delivered previously to ease the pain. The EU commission for instance recently skirted this issue. The EU’s thus far, unified approach on sanctions against Russia revealed a growing strain with Italy and Spain both sounding disgruntlement towards the Commission’s suggested voluntary reduction of gas use by 15% from September to March. This is the kind of friction governments should expect if the anticipated economic downturn deepens, in the face of restive populations struggling with poverty.

There are many less obvious than always meets the eye conclusions to be drawn from broader types of examination of economic and investment related considerations. The key to all such examinations of situations where Informational Dissonance is, or may be, occurring is being able to determine contextuality. For the long-term institutional investor, for instance, an EDF investment would have at first ticked all the ‘sensible’ boxes: a strong, government-backed, practically monopolistic utilities corporation. Yet, even with the more than 50% sweetener in the share price, from the long-term investor’s perspective, this has clearly been an investment to forget.

It is not simply a question of investors being able to discern what is actually noise and what is actually a signal. Keep in mind that one person’s signal is another’s noise. Therefore, determining what are the most relevant subtlties (e.g., under-recognized factors) regarding a company, a market or an economic situation, and developing the potential to be able to read them, can play a useful role in both identifying windows of investment opportunity as well as risk to seek to mitigate.

All this makes the use of AI in trade-decision making an exciting field of opportunity for investors.

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