Third Quarter, 2012: A Few Misplaced Ideas
To say that we live in interesting times is an understatement from a financial, economic and political standpoint. Confusing is perhaps a better term than interesting – maybe even dangerous?!? This past weekend, a macro fund that we have been following for some time decided to close its doors after its 31-year veteran of financial investing and trading noted:
“The past two years have presented unique challenges in the Macro space. Interest rates around the world are at or close to zero and central banks have pledged to keep them there for the foreseeable future; foreign exchange markets are buffeted more by political than by economic events; and it seems unlikely this will change any time soon. There will be good opportunities over the next few years but I do not believe those opportunities will align with my skill set or allow me an edge in these markets.”
I suppose it is safe to invoke Schumpeter or Darwin at this point; adapt or die. Or invoke the old adage from Keynes about changing your strategy when the facts change. But “rational” investors whose stock in trade involves macro analysis of economic and political affairs are at wit’s end. Leigh Skene at LSR sums up what most know but few are prepared to say to clients:
“Government intervention is causing the chaos by destroying the analytical value of any economic or financial variable it touches. The extremely wide ranging fiscal and monetary policies since the AIG/Lehman default have rendered financial variables such as interest rates, yield curves, credit spreads and various money supplies useless for either assessing asset values or forecasting.”
Maybe that is a bit extreme but it highlights the real challenges now faced by investors and business leaders.
I personally do not believe this period of government and central bank largesse can last another two years. Cass Sunstein prepared a brief for Bloomberg in which he explored the behavioural science concept of “present bias” – taking decisions that create short-term pleasure at the expense of long-term problems. You know, like that extra shot or glass at the end of a fun evening! He also quotes St. Augustine: “Grant me chastity and continence, but not yet!” to reinforce the point. The cure, so to speak, is to try to imagine yourself in the future given your decisions today. Imagine the consequences, though this can be extremely difficult to do.
Albert Friedberg, manager of Friedberg Macro Fund (we are an investor in full disclosure) penned a terrific Q3 letter in which he highlighted four misplaced ideas that are now “conventional wisdom”. I believe these have been borne out of present bias and narrative fallacy by so called economic and political leaders/experts. Narrative fallacy, as noted by Daniel Kahneman, is created when we treat the limited information upon which we base our decisions “as if it were all there is to know… Our comforting conviction that the world makes sense rests on a secure foundation; our almost unlimited ability to ignore our ignorance.” According to Mr. Friedberg, these fallacies include:
- Central banks can print money without impunity
- Fiscal debt and deficits are not to be feared if you have monetary sovereignty
- Eurozone must be saved at all costs
- Sovereign debtors never default
We and many others have been questioning these issues since 2010, yet these fallacies, as borne out by historical precedent, become wisdom while our financial system has taken on further leverage. Let’s review each and imagine, as Sunstein suggests, what the future might hold.