An Older, Anxious, Mildly Paranoid Analyst

By Michael Every of Rabobank

An older, anxious, mildly paranoid analyst

US Treasury yields spiked higher yesterday after strong consumer confidence data and weak bond auctions, pushing the dollar up. The Fed’s Kashkari said the FOMC hasn’t entirely ruled out further rate hikes, but the odds are “quite low”. But how does one assess the risks of a shock like that? Market pricing just shows you what all uniformed people think, so zooms around wildly, e.g., shifting expectations for 2024 rate cuts over the past six months. Data means you have to forecast them right. Fundamentals, perhaps – but which? And, ultimately, fundamental psychology.

On which, because I don’t get all my news from financial or mainstream media --a deliberate epistemology-- I stumbled on a report for the Israeli army by psychologist Ofer Grosbard explaining why it disastrously failed to anticipate October 7. It applies equally to those who didn’t expect Russia to invade Ukraine, and to a host of other problems right in front of us now.

In summary, Israeli intelligence was too optimistic. They ignored repeated warning signs, including a copy of the Hamas invasion plan, believing Hamas didn’t mean it or had no desire or ability to attack. That should be clear unless you believe in conspiracy theories, so need a psychiatrist.

The follow-on conclusion is intelligence services --and those running market risk-- need experts who can spot patterns or subtle clues of possible emerging threats in geopolitics, human behavior and psychology. That’s clear.

However, data show older, pessimistic, and anxious, mildly paranoid or mildly depressed people are better placed for this kind of thinking as their outlook is more analytical and “fosters a heightened sense of vigilance” and “a cautious approach, ensuring all possibilities, no matter how unlikely, are considered and prepared for.” By contrast, younger optimists say, “Buy all the things,” or “rate cuts!”, or “I see no ships.”

Crucially, however, most institutions promote the assertive, confident, and optimistic to senior roles: then hubris meets nemesis. One hopes new Dutch Prime Minister (Hendrikus Wilhelmus Maria) Dick Schoof, with an intelligence background, is a gloomy individual.

Would he have predicted risks to “rate cuts!” optimism now repeated in a Financial Times deep-dive into the Deep Ship EU ports are in due to the Houthi Suez Canal blockade? As we said months ago, if West Med ports run at 100% capacity as trans-shipment conduits to the East Med in peak pre-Xmas retail season, firms build higher inventories to compensate for longer delivery times, and consumer spending picks up as rates fall -- that first ECB cut is in June -- then supply-side inflation shocks can be expected. Things may also get worse as Israel enters the heart of Rafah, the Houthis try to hit the East Med, Iran is closer to a nuke, and the $320m Biden Gaza aid pier drifts off and breaks apart, a metaphor for the how the broader region sees the US.

In Australia, with reluctant RBA talk of another rate hike, April monthly CPI weighted to goods was 3.6% y-o-y vs. 3.4% consensus and 3.5% in March. Housing was 4.9% with rents 7.5%; food and beverages 3.8%; alcohol and tobacco 6.5%; transport 4.2% with fuel 7.4%; insurance and financial services 8.2%, education 5.2%, and only holidays -6.2%: if you don’t eat or drive on one. Our house forecast is two more hikes unless the RBA is hoodwinked by the budget artificially supressing CPI with subsidies. Which, optimists will say is the case: the market is only pricing around a 25% chance of a September rate hike despite inflation well over the 2-3% target, a stimulatory budget, and the global backdrop being inflationary again, not disinflationary.

But do you really need to be older, pessimistic, anxious, mildly paranoid or mildly depressed to see how large the structural problems that we face are?

In the UK, one headline just said, ‘Rishi Sunak winning back 2019 Tory voters after announcing snap election’. The polls say it’s 2,019 Tory voters. The Labour Party, with “secureonomics” at its pledge, is ruling out further tax increases after extending the windfall tax on energy companies’ profits, imposing VAT on private school fees, and ensuring private equity bonuses are “taxed appropriately”. Yet it faces a large fiscal deficit and wants to spend more to transform the UK economy: something doesn’t add up. One hopes for the best, but paranoid political risk types are not looking at the upcoming election, which seems a given, but at the one after that; they are wondering what the backlash to a failed Labour government might look like, as well as how far right the post-defeat Tories shift.

In the US, all eyes are on the New York court that is likely the only Donald Trump trial that will come to a conclusion before the November election – and as many legal and political commentators have pointed out, it’s been a clown show likely to be turned over on appeal even if a guilty verdict is returned, and which has boosted Trump’s electoral prospects. Those of a more paranoid mindset had thus correctly already been factoring in what hypothetical higher US tariffs might mean for inflation and the world economy.

In Canada, we got a headline which runs true everywhere in the West, and much of the world outside China: ‘Trudeau says real estate needs to be more affordable, but lowering home prices would put retirement plans at risk’. Yes, homes need to be more affordable. No, prices can’t come down, “because Boomers.” Can rates come down? No, “because inflation” and “further house-price inflation.” Can wages go up? NO! “Because inflation > rates > Boomers > markets.”

Let’s be frank: thinking high house prices were a good way to juice the economy was an idiot plan at its inception to those with functioning brains, not just ones with mild paranoia or depression. The socioeconomic-political (neo-feudal) and geopolitical trends emerging because young, idiot, optimist economists didn’t tell their bosses those risks when they started to blow this bubble are now enough to give everyone severe paranoia and depression. For example, Al Qaeda are expressing their appreciation to Western Ivy League student protestors, after Osama Bin Laden went viral on TikTok a few months ago. They might even pick up a percentage of the vote if they ran in some countries’ elections.

Then again, are we surprised no optimistic young economists told their bosses not to juice house prices (again) when the American Economic Review reviews the reproducibility of 17 of its own papers from 2013 onwards, and finds that “many of the results are not robust, with no improvement over time”, while “a sample of economists (n=359) overestimates robustness reproducibility, but predictions are correlated with observed reproducibility.” In other words, economists believe their own hype even when they can’t reproduce any of the ‘results’ they claim. Then those same individuals set policy for governments or central banks.

And where economics meets national security, some in China are pushing it to adopt a Green Marshall Plan to deal with its overcapacity by sending vast sums to the Global South to accelerate transition, which could be transformative for the global economy, if it happens. By contrast, parts of the West are excited about an ECB rate cut in eight days, and Germany is --again-- backing off any serious martial plan even as it gets marginally cheaper to fund: it now won’t be adopting conscription after all. Because the other side has no desire or ability to fight, right?

It gives me no pleasure to say I tick all the Grosbard boxes for the characteristics needed for better risk analysis methodology; but then not getting a lot of pleasure from things is sadly part of the whole deal.