My, my, what a couple of weeks. People, don’t you understand that I’m trying to run a business here? Is a recession on the doorstep or is that a 2022 thing? Are things really bad, or really good? How am I supposed to stay dispassionate and analytic when the stock market gyrates and the drumbeat of portentous news never stops? The worst December in the market since the Depression says The Financial Times! It’s very annoying and I feel very much put upon.
All of this has got me thinking, are we ignoring Macro? Are we not seeing what’s actually in front of us? Not seeing the Big Stuff? There is surely enough disturbing things out there to get and hold our attention. The stock market continues to oscillate widely, the 10-year Treasury Rate is now well below 3%, volume is up and every time another headline crosses the ticker, everything changes again. Is our trade dispute with China existential? Is Prime Minister May in or out – happy or sad? Is Boris Johnson having a good hair day? The Italians are leaping around and gesticulating broadly, outraged now about how France may be getting a pass on budget discipline. If France starts to cheat (again), can the center hold? Japan is building an aircraft carrier…think about it. In China, some young general suggested it might be a good idea to shoot at an American warship in international waters. There’s a great idea. The Donald continues to tweet and we almost had a smack down in the oval office between the President, Nancy Pelosi and Chuck Schumer just last week.
This stuff happens all the time, every day, never stops, facilitated by the vampiric appetite of the 24-hour news cycle. For all that, is there something meaningful here we’re missing? Is there a there, there? If all this presages some sort of severe economic contraction, a shooting war, a major change in the world order, shouldn’t we be hunkering down, grasping our go bag in our sweaty, fevered hands?
But we’re not. We’re acting like it’s all noise. The real economy seems to have shaken it all off and even if the stock market was down 1000 points one day, it might be back the next. Everything stays the same(ish). Our hair is on fire one moment, and then it’s not. Are we the proverbial deer in the headlight, or is this a thoughtful, measured response to what amounts to little more than noise.
I own horses (way too many to my way of thinking, but apparently not to my wife’s). My relationship with horses is fraught. I rode for a while until I conclusively demonstrated that my bounce could have been the inspiration for the phrase “a dead cat bounce” and then decided to prolong my life by simply paying for the horses and periodically mucking out a stable. But I do spend a lot of time around them.
Stick with me here. Horses are funny animals and I’ve concluded that my experience with them is instructive for an understanding of the markets and the broader polity. You can have a horse walk by a garbage can every day for the better part of a year with nary a flicker of an ear or switch of the tail. The next day, it takes one look at that garbage can and completely loses its mind, dances, bucks, kicks and runs away in a panic. What happened? Nothing. What little brain it has processed old information in a new way.
Are we as smart as a horse? Well, demonstrably we appear smarter than a horse in many ways. To start with, we wear clothes. We eat processed food. We vote, albeit often for awful people. So, let’s stipulate for argument’s sake that we’re smarter. But I’ve concluded that our environment is coincidentally and correspondingly more complex. Net/net, I suspect we are just about as able and likely to react rationally to our environment as a horse.
A horse’s instincts are fight or flight. That’s what comes of being food. The horse is forever looking around (his eyesight is actually quite good) for danger. He sees something, embraces a narrative, “that thing is going to eat me” and runs away. Pretty rational by his lights. And us? Bombarded with too much information about economic systems, political and technological systems necessary to sustain our modern world, we become numb. Moreover, it all happens way too fast to permit reflection. We are unable to distinguish the garbage can from the monster. Reacting in the moment – ready, fire, aim – as the data changes and changes again. We’re exhausted. And notice, we don’t even stay riled up for long (like my horses), and actually, in some weird way seem to enjoy the frisson of the car wreck happening somewhere else (otherwise why would NASCAR exist?).
We seem to have a built-in bias encouraging us to suppress our perception of risk and embrace the potential of reward. Alfred E. Neuman had it right…What Me Worry? Risk and reward are almost always asymmetrical, at least in our minds. Taking risks contains a kernel of success while embracing caution foregoes any opportunity to win. Look at the business world, who gets paid for caution? Arguing the counterfactual to your boss that having not done a deal caused us not to lose money, does not a bonus make. Oh, we talk risk mitigation at all times, and we talk about managing risk. We put on our best adult face and tut-tut about other parties’ risky behavior and engage in a bit of serious, adult braggadocio about our own high standards, but when the rock is yield and the hard place is risk, we kiss the rock.
So we’re different from the horse, how? The horse has to go out in the field and graze – gotta eat! Has to take the risk that it may get eaten. Same for us – gotta eat! We discount risk and pursue opportunity. We want to conclude it’s just a garbage can. It is just too painful otherwise. Don’t feel bad that we often don’t notice risk and don’t perceive when we are on the cusp of something really awful. It has always happened and always will. As regular readers of this commentary will know, I’m fascinated by this notion of unperceived risk and continue to return to July 1914, a world fascinated by the trials and tribulations of a young aristocrat in Paris and too busy to notice that the Great War was less than four weeks away.
So, we’re horses. Nothing to be embarrassed about. It’s in our DNA; embrace it and move on. When it gets really bad, we’ll probably do something. Probably.