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Generally, everyone would prefer it if the world around us evolved in a predictable, linear, textbook fashion. We prefer (the illusion of) certainty. We cling to simple beliefs. Like the comforting story that authority figures are in control of every situation.

While sometimes those things can be roughly true (or at least, appear to be), as far as I can tell, the real world is far more chaotic than even the most basic models can capture. Β 

Despite our best efforts to impose order, we'd be far better off referring to these textbooks to make sense of things πŸ‘‡


My theory that the world is more chaotic than we'd like to admit is surprisingly unpopular. I have theories about the future too.

But first, let's take a quick look back. Dario Perkins has a superb thread on this here πŸ‘‡

Essentially, there was a massive bullwhip effect which fooled many economists into thinking a slowdown would soon follow (manufacturing usually leads).

Then we all went and spent on services, getting out and about because we were freed from our tyrannical prisons (some people call them 'homes').

Fiscal support kept coming. The pandemic stimulus was quickly followed by energy subsidies after Ukraine kicked off.

Now, wages are still rising while inflation is falling, which means real incomes are seeing a temporary(?) burst of higher purchasing power.

The responsibility for 'keeping the economy ticking over' has been passed around and found a willing recipient at each stage. Likewise, monetary policy hasn't had the expected impact on employment.

That's essentially the story of how we got here. The question now is what happens next. And this is another of my unpopular theories.

The margins for a soft landing are exceedingly fine

I really want to believe in the soft landing narrative, but there's just too much change, too much that needs to be adapted to, and all too suddenly. I just can't get on board. Β 

Humans can adapt to anything over time, but we just aren't wired to adapt to lots of things happening quickly.

The change in global interest rates has taken place at breakneck speed. After over a decade of low rates encouraging everyone to lever up...

The sudden surge of pricing power that firms discovered could disappear all too quickly as well. Some would say that process is already underway. Anecdotal evidence of lower wait times for Disney on July 4th for example πŸ‘‡

Plus Disney's decisions to bring back prepay dining plans, discounts and promotional offers for the Christmas period...

Not a disaster, but definitely a sign that demand is slowing and/or becoming more discerning. The post-covid playbook of 'yield management' (fewer visitors but a higher spend per visitor) has run it's course. The adjustment could be painfully swift.

Used vehicles are another example of normalisation. The initial chip shortage meant fewer vehicles were produced as automakers tended to focus on their own version of 'yield management' - by prioritising higher margin models.

The Manheim Used Vehicle Index just fell by 4.2% from May to June...

β€œThe 4.2% drop is among the largest declines in MUVVI history and the largest decline since the start of the pandemic in April 2020 when the index plunged 11.4%,”

The latest US consumer credit data was far from encouraging. The release saw the first decrease in non-revolving credit since April 2020...

Total borrowing rose by $7.2 billion, well below analyst expectations of $20bn plus.

None of this suggests an imminent, immediate crisis. It's more like the air leaving a highly inflated (lol) balloon. Academics will argue about excess savings being all used up, but where did they go?

Presumably, plenty ended up in the hands of corporates who are now transforming and redistributing these former savings to workers as wage hikes.


Excess savings don't just disappear. Money flows around the system, rather than out of it. Β 

Anyway, another of my unpopular theories is that this normalisation process will continue to take place in a haphazard non-linear way.

A clear slowing in economic trend, but with inflation also falling a little more and the economy "continuing to hold up better than expected"... Wage growth slowing but still 'too high'...

The signals will be mixed at best. A mild, persistent volatility in expectations as markets struggle to consistently sort the data points into their respective good/bad categories.

Labour market slowing?

  • Good - less wage inflation. Lower policy rates soon. Soft landing.
  • Bad - Job losses more likely. Higher unemployment. Hard landing.

And which version of central bankery do we get?

The one that thought inflation was transitory & is so petrified of deflation that they'll ease as soon as headline inflation hits 2% and unemployment ticks up a bit?

Or the one that fears a rerun of the '70's and sees rising wages as a sign of imminent doom and inflation entrenchment?

I tend to think the first version will win and there won't be a crisis, but there will be a recession.

This kind of post is poking at the extreme doomers is great fun... πŸ‘‡

...but the higher rates rise, the larger the risk is of another sudden stop in the banking system. Not another 2008, just another sudden stop.

And then what? A new normal between the two? Savvas Savouri of ToscaFund loves an unpopular opinion πŸ‘‡

Now, just as the period from β€˜08 through to early β€˜22 was abnormal in ever so many monetary regards, so in many ways is the one we momentarily find ourselves. I write momentarily, because just as the base rate over the period β€˜09 through to early β€˜22 should never have been considered normal, nor should the period we are in and will remain for the rest of this year, and a period of time into β€˜24; for this too shall pass.
The reality is that in anticipating, as best one can, monetary conditions from the second half of next year, we have to accept that where we find ourselves is as much abnormal as the period that came before. For just as β€˜08-β€˜21 was too-low-for-too-long, so where the base rate is now and will indeed head, is no benchmark for what we should expect in the not-too-distant future.

Seems impossible for anyone who's only seen the post '08 period, but as Alice says...

So, those unpopular theories recapped...

  • The world is chaotic and evolves in uncomfortably non-linear ways
  • A soft landing will be very hard to achieve (but there's a massive space between soft landing and crisis that we'll hopefully touch down in)
  • The economy will continue to normalise at different speeds in different sectors and frustrate everyone calling for a new cycle or imminent recession
  • Central bankers will soon see 'doing nothing' as the path of least regret, which will also be frustrating
  • A sudden stop credit event is an ever-present risk after a decade of ZIRP
  • The 'new normal' will see rates higher than the post '08 period, but lower than currently (once things settle down again)
  • If energy prices spike higher, all bets are off
  • Predicting the future is hard - "anything can happen and it probably will"