Monday, April 17, 2017

Irrational Expectations And Magical Thinking

"If you don't know who the sucker is at the casino table, then it's you"
- paraphrase Warren Buffett

First, Trump's own economic team sold the Trumpflation hoax. Next, it was bank executives. Now, the rest of Wall Street is piling on. Wall Street sharks may not be the smartest people on the planet, but they are the most cunning. If there is an edge or angle to be gained, they will find it and exploit it ahead of everyone else. Which is why ironically Trump's own cabinet were the VERY first ones to bail on the fake "Trumpflation" trade:

ZH: Leaving Goldman Sachs to work for the government has always been a lucrative career move: eight years ago, it allowed former Treasury Secretary Hank Paulson to sell $500 million in Goldman stock tax free, and now its the turn of Gary Cohn, Goldman's former COO and president, who is leaving to join Trump's cabinet, who is departing with an "accelerated" gift.

All of this adheres to the premise behind the "Rational Expectations" model of common sense economics:

"Profits accrue to someone who acts on the basis of better forecasts, whether that someone is a trader in the stock market or someone considering the purchase of a new car."

The concept is motivated by the same thinking that led Abraham Lincoln to assert, “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.”

Enter the concept of "magical thinking" aka. irrational expectations:

The term "magical thinking" refers to how children believe that their thoughts have a direct effect on the rest of the world.  So last week we learned that the Trump Bump is not real. Lower taxes, increased spending, these were never really serious goals, but merely political talking points.

A key takeaway from earnings so far is that we have confirmation of a slow-down in lending and a related slowing of the economy. The other obvious takeaway from earnings is that we’re pretty deep into the current credit cycle.  If anything, the Fed should be thinking about mild easing.  But instead Janet Yellen & Co are trying to “normalize” rates as the economy slows.

Spot the magical thinking:

Treasury Secretary Steve Mnuchin on Monday became the latest official to dial back expectations for a time table that included a tax plan by August. 

In the bond market, there was little surprise. Bond yields, which move inversely to prices, have been falling for weeks

"At this point, it's either tax reform or bust, the stock market is hanging on the prospect."

What does he know, he's just the Treasury secretary and he sold already anyways...

"We are deep into the credit cycle"