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Anyone voluntarily making a living in markets has a screw loose. We're all insane and I love it.
Over the past few years, the crypto industry tried to act like it was responsible for inventing this insanity. A new financial frontier of degens and longoooors.
Sorry to disappoint but crypto didn't create a new mind virus. It's just the latest variant of the same market illness that's afflicted every generation.
Obviously, some things are objectively insane. Like thinking it's easy to get rich quick and keep it. Although, oddly, sometimes it can be. 👇
But that's not the brand of insanity I want to focus on today. It's this 👇
And this isn't restricted to the FinTwit echo chamber either. There's all kinds of weirdness beyond that, out there in the wider world. The one permanent bull market is people confidently predicting the future...
So will there be a recession?
I could grab almost any data point to support whatever point of view I have on this fine day, point at it and say "Seeeee?" in an ominous, provocative tone.
People will respond.
They'll say "I KNEW it" or "STFU you know-nothing c***" and every variant in between.
Let's try one out. The narrative that the EU economy is going to perform exceptionally well this year. Or at least, much better than feared.
Which is why nobody needs to borrow any money 👇
See that? Obvious hyperbole. Nobody? Any? Nearly got those through unchallenged.
So, is this evidence for the coming recession? Or evidence of prior pessimism that will soon be replaced with optimism? Maybe corporates think they've generally got enough cash on the balance sheets to keep on trucking and it's evidence of neither?
Perhaps things aren't as bad as everyone fears and we just need to think more positively...
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This chart from John Authers and Goldman notes the difference in the objective and subjective data 👇
The latest hard data suggest the economy is doing better than expected; the soft data suggest the deepest gloom since the first acute stages of the pandemic. Goldman also breaks down ISM surveys of businesses into the “objective” (when execs are asked if new orders are rising or falling, for example) and the “subjective” (when they are asked for their opinion on the future, or for their impressions of the present).
Again, it really doesn't matter if these views are correct. This stuff tends to be self-fulfilling. Hard data is backwards looking, soft data is forward looking.
Risk aversion sets in as uncertainty grows.
Because people are insane.
Insane: a state of mind which prevents normal perception, behaviour, or social interaction
As Howard Marks is so fond of pointing out, how can anyone be expected to normally perceive something as complex as the global economy (and the erratic behaviours of the billions of humans that comprise that same economy)?
Especially when everything can be spun in a positive or negative light. How do you normally perceive the US savings rate?
December (not May) printed at 3.4%. Is that...
A sign of a wealthier consumer who isn't seeing their purchasing power eroded by inflation to the same extent and has a little left over at the end of the month?
Or, a scared consumer who's stopped spending because of their fears about the future...?
Consumption data released at the same time shows that the consumer is consuming less. Around 0.2% less in December (vs November which was also revised down to -0.1% from +0.1%).
And isn't that all that really matters? Whatever the reasons, if consumption is lower, that's another component of the economy slowing as inflation normalises.
Which is where we come back to those recession predictions. If you believe that central banks tightening policy is a leading cause of the recession, then your recession predictions have to assume that you know how they'll react.
They claim they're haunted by the mistakes of the 70's - Burns/Volcker era and that's why they'll stay the course. Are they really not subject to recency bias like the rest of us mere mortals?
The whole post GFC era where they struggled to get inflation above 2% isn't fresh in their minds? It's just forgotten...?
On something like a first principles basis, the direction of travel is what matters most. The business cycle is maturing, layoffs are rising and corporate priorities are changing 👇
Given the overall state of things, prediction confidence should be extremely low. We're all insane. Anything can happen. And it probably will.
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