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Life In General
If there's anything that frustrates me about opining on macro, markets and policy on a daily basis it's the extent to which no one besides yours truly will concede the very real possibility that a lot of what we claim is knowable or able to be estimated, analyzed and modeled, in fact isn't.
That unwillingness is a manifestation of hubris, and it's not unique to any one school of thought or macro sect. A long, long time ago, we collectively decided that economies and markets are objective realit
Humans trying to explain the unexplainable.
Sadly, an unshakeable belief in the efficacy of models and economic relationships learned in college often have real life consequences for most of us.
In college, I studied something far less esoteric than economics. I was an accounting major.
Therefore, my belief/truth is that debits equal credits!
In a similar vein, in my straightforward view, I believe that when there is a lot of money āfloating aroundā, then a lot of that money will find US equities.
So far, this is working out for me.
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This is true and can be applied to all aspects of life. From time to time, I will sit and think about space and quantomechanic theories. My understanding is rudimentary, but the overarching conclusion is the same at all levels of understanding. We will never fully grasp what lies beyond Outerspace and what started “life” as we know it. This doesn’t stop people from trying because human nature drives us to “understand”. In my opinion, religion was created to cope with the fact that we will never know what happens after death. (It eventually evolved into a way to control the mass public, but I will leave that for another post.)
I say all of this to point out most everything is a waste of time in the grand scheme of things. But hey, we have to spend our time doing something. Right?
You are correct about religion – humanity requires control and this institution is the most effective way to do it — if one believes.
a purity of nihilism is the only way to understand that we canāt understand.
Absolute chaos is a beautiful place.
Absolute beauty is very chaotic.
Time doesnāt allow for absolute.
Say what you will about the tenets of national socialism, at least it’s an ethos.
Absolute chaos is entropy and the endpoint of the universe. It will arrive … eventually.
The older I get and the more I study/learn, the less I know.
I think that we underappreciate how anomalous the period since crematories started filling up in Wuhan has been. Vaporize 8MM from the US workforce in less than a year, send many of the rest into shelter-at-home, suddenly drain store shelves, flood the economy with $4TR fiscal and $4TR monetary, these are like throwing cinderblocks into a goldfish pond, the fluid dynamics are violent and unpredictable other than in hindsight. Add on global political dysfunction, rapidly evolving market structure, and the plague of populism and prejudice. Naturally the economics textbooks struggle to forecast the 2020s using the tools of the 1950s and 1970s.
Moreover, forecasting is always a struggle. I suspect that economists and investors were just as confused in 1970 as today, and you can hardly claim that forecasters of the day confidently predicted 2000 or 2008. Sure there was the 1% who had special insight, the 5% who were lucky, and the 10% who were and are stopped clocks, but personally I remember the confusion and frustration then.
So what to do?
You can doggedly try to forecast something tradeable, which might be macro or micro.
You can act on charts and indicators, which I think of as a sort of highly abstracted version of forecasting.
You can choose long term trends, ranges, and relationships to believe in, extend your investment horizon, and pit solvency vs irrationality.
You can bet on the data points and newsflow that you think others use in their forecasting, in other words the reaction function.
At the end of the day, we are here because of all the ways to make a living, we find this the most engrossing and interesting one. That we are capable of, anyway. I might rather be a F1 driver or a supermodel, but that’s not in the cards.
For more comfort, consider this: if there was no confusion, no uncertainty, no volatility, if everyone knew what inflation and the 10 yr and every company’s earnings in future quarters will be, there would be no investment opportunities. Confusion and uncertainty are good. They just don’t feel good.
Every moment of time is represented by a single point in a number of continuous distributions. Each of those infinitesimal points supersedes all that have come before and is the predecessor of all that which will follow and is unknowable. William Goldwyn is often attributed to be the first to point this out when, in a speech about Hollywood, he was the first to utter the axiom: “Nobody knows anything …” Statistical law backs him up and renders economists mostly irrelevant.
I spent seven years getting a Ph.D. in economics. It’s not a decision I question, but your writing has made me question the utility of the discipline as a whole. Luckily my work life is not spent opining on esoteric topics. Most of what I do is useful to my clients and falls well outside of the realm of crystal ball gazing and I am thankful for that because otherwise I would internalize a lot of what you’re saying and probably switch careers.
One of the four fields my doctoral program (major in finance) required was the core of the econ doctorate. The day before our qualifying exam a bunch of us miserable candidates was sitting around one of our bullpens going over the prospective questions when this guy came into the pit, clearly distraught. This was going to be his third time around and he was totally panicked. He couldn’t remember whether the demand curve was upward sloping or downward sloping. [no lie] I quietly cried for the fellow who was headed toward his untimely end. He was, in fact, felled by his Gordian Knot. The econ rep on my committee wrote the best question on any of my qualifiers: “True or false, advertising has no economic value, explain.” (60 miniutes)
You remind me of my reaction (astonished then contempt) when decades ago I first heard talking heads and analysts talk about “The Consumer” and what “”She” would do regarding retail sales, etc. I said to myself (common practice then and now), “Do they have any idea what they’re saying?”; if so, they didn’t care. I wondered about the evolution of those terms and their relationship to reality. Studying philosophy teaches how to ask the right questions well and places a premium on logic and precision in thought. These days, I just ignore a lot.
Just finished reading (actually listened to it on Audible) “Ishmael” by Daniel Quinn. Using the topic of this essay to offer it as a recommended read. If you only have time for one book this year let it be this one.
Until human beings can live peacefully, while sharing and sustaining our home planet environment,
all communiquĆ©s expressing certainty should be taken as biased conjectures imhoā¦
The field of quantitative macroeconomics does provide quite a few insights into what we’re living right now. The recent supply and demand shocks have been modeled well enough in open literature that the desired (optimal) policy reaction is known. So far, the central bank’s rate decisions have stuck to what models in literature say they should do (granted, the most impactful papers are written by the researchers at the Fed).
We can’t expect policy makers to teach us all advanced classes in numerical methods, modern control theory, and stochastic processes to convince us that they’ve got things under control. They have to use layman terms like “it’s data-dependent”, or “interest rates will be higher for longer” or “tightness is working through the system”.
If they said something more precise like “our policy response is dependent on delayed feedback and hence must depend on 12-month projections that need to be updated every time a new data point comes in to prevent major overshoots or de-stabilization”, they would lose credibility with the common professional.
The article’s point is akin to saying there’s no point in predicting the behavior of turbulent flow because the trajectory of each air molecule is unknowable, or that any model must be wrong for that reason. The truth is that the models used to design the aircraft we fly in are all imperfect in their own way. But used properly they’re useful enough that we can carry on flying. And we can ensure the system we design (be an economy or an aircraft) remains within the bounds of predictability and, hence, control.
QM – I beg to differ on your take on the supply/demand modelling. Specifically when it came to HOUSING. The predicted impact from higher rates on housing prices and supply was radically different than the real world impact. That’s not a trivial part of the economy = not an errant molecule.
The failure carries a big cost to anyone trying to follow the American dream by buying a home.
thanks derek, agree. and beyond… have the macro economic models successfully predicted (for example) our job market dynamics over the past year+? jobless rates too are staying Lower For Longer despite the Fed’s efforts and stated expectations. for every macro theory >> policy >> outcome success, there are failures, and it’s usually impossible to disentangle variables and establish that policy caused the intended effect.
It’s one thing when we fallible humans read headlines and econ/financial reports, or plot and interpret graphs, but quite another when we create algorithms and LLMs to stand in for us as the readers, makers, interpreters and ultimately executors. The widely-held presumption seems to be that this will lead to improvement despite the interim hallucinations, as our stand-ins can avoid bias or emotion or even fatigue in a much more expansive fact- and conclusion-finding expedition. Maybe. But this fallible human has never seen so many dramatic after-market and pre-market reversals once the broad market opens and the beating hearts take over. Almost as if we are fooling ourselves into fooling ourselves and calling that progress.