Thoughts From the Divide: When The Facts Change
Bonus Edition!
“What can be, unburdened by what has been”
It has been a big news week. So much so that it’s quite hard to decide which was the biggest story. It’s certainly hard to ignore the announcement that Mr. Biden will not be running for re-election and has endorsed his VP, Kamala Harris. We generally try to avoid offering opinions on politics because a) it is not our day job and b) it’s a surefire way of making half your readers hate you. That said, we do think VP Harris’ exhortation to consider “What can be, unburdened by what has been” is good advice for both investors and policymakers.
Ex-NY Fed President Bill Dudley seems to have taken Harris’ advice to heart. We were not alone in being struck by his abrupt change in view, but there is nothing wrong with changing your mind. John Maynard Keynes is often credited with saying “When the facts change, I change my mind. What do you do, sir?” but it was Paul Samuelson. What Keynes said was, “When my information changes, I alter my conclusions”. Still, the key point is that a bull abruptly turning bear is always thought-provoking. You wonder what changed their mind?
We are markets people, so it’s often price action which catches our attention. The collective expression of a market changing its mind. MI2 has been concerned for a while that markets were priced for perfection, and we were not alone in this. Our concern is both that inflation really isn’t dead, which will complicate monetary policy, but also, that we can see a plausible case that recent price action reflects a reflexive (self-reinforcing) price move driving certain markets to unsustainable levels. AI in both public and private markets might be an example, but it’s certainly not the only one. Markdowns can have a sobering effect and have the potential to create their own reflexive moves, often in inconvenient directions. So recent tech stock results and their impact on the market certainly caught our eye. It isn’t every day that you get to see $ 1.1 trillion disappear.
The thing about markets priced for perfection is that perfection is a very unusual outcome. What makes it worse is that policymakers may have front-loaded their gratification, as Stephen Miran and Nouriel Roubini suggest in a very interesting paper. We at MI2 have made much the same points about Grannie Yellen’s funding policy not so long ago.
P.S. While we wouldn’t want anyone to think that we are one-trick ponies, we remain deeply concerned about the dumpster fire that is the US real estate markets. Recent evidence suggests that the problem is now metastasizing into the multifamily market. Generally, big losses tend to hurt markets, and given the funding maturity wall, it is hard to avoid thinking there is more of this on the way.
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