Friday, April 20, 2018

Economics: A Confidence Game

"You have to dance like a trained monkey, while the music is playing"

In order to calculate the average person's financial IQ, take their actual IQ and subtract 100. Call it the "greed" tax. Whereas the bond market represents economic reality, the stock market represents economic fantasy. Until the end of every cycle, when they meet again...

"Bull market!"

There's a straightforward reason why the typical EconoDunce never sees recession coming. It's because they can't predict the future. Therefore, they look in the rear-view mirror and extrapolate the past into the present. Which works, nine times out of ten, meaning they're only ever right due to sheer numerology. And of course when they are wrong, they are catastrophically wrong.  

For central bank economists the forecasting dilemma is worse, much worse. Since they control the monetary levers of the economy, there is pressure on them to convey an optimistic bias. They don't want to be seen as contributing to economic weakness, so they continually spin negative data as positive. Not only do they extrapolate the past, they inflect it higher. 

Wall Street economists exhibit an even bigger problem than the former two sets of dunces. Wall Street of course wants to sell more stock, so they have what used to be called "conflict of interest" - One of just many old-world concepts the Idiocracy has long since abandoned. Along with social responsibility, personal maturity etc. In other words, Wall Street Economists embed all of the biases listed above: linear extrapolation, over-optimism, and conflict of interest. So when they make their Magic 8 ball predictions for their clients at the beginning of the year, they are loath to abandon them by April. Because that would prove beyond any doubt that they're total fucking dunces. Best to leave some margin of doubt.  

All of which is good background context for what is happening now, globally. Last week we learned that European macro had inconveniently and *unexpectedly* crashed back down to post-2009 lows. Due to the fact that global synchronized reflation was entirely an end-of-cycle confidence game.

"What a difference a few months makes. The best year in a decade in terms of euro-area growth has given way to a series of surprisingly weak economic readings across the 19-nation bloc."

The dimming data --- have also turned Europe into ground zero for a question increasingly bedeviling investors: Has the global synchronized growth story that powered the bull market peaked? It also leaves them with a dilemma: jump back in or assume the best is now behind them"

That is quite a dilemma. Giving new and unexpected meaning to the word. Perhaps we should ask E*trade the proper course of action at this point in the cycle. To only complicate matters for gamblers, here is what Draghi said today:

"Notwithstanding the latest economic indicators, which suggest that the growth cycle may have peaked, the growth momentum is expected to continue"

Here is what gamblers heard:

And please remember:

"The expectation for higher inflation is not out of line with consensus opinion. Indeed, higher inflation is the consensus view of those sampled by Bank of America's latest monthly global fund manager survey, as net 82 percent of respondents earlier this month expect the core consumer price index to rise over the next 
year. Notably, this is just under the post-crisis high of 86 percent, recorded last month."

Notably, cycle high reflation peaked in 2010. And notably, these are not intelligent people.

They are hypersynchronized idiots. Bad news comes in one end and bullishit comes out the other.