Don’t worry, this isn’t another sore rant on the failings of mainstream economics – just a fine evening of friends and discussion in the pub prompted a thought that’s worth sharing, i hope! We all of us go through life with a necessarily partial and incomplete view of the world. A model that helps us make the decisions we are bound to make every day. Our conscious thought is a fleeting thing, constrained by our past thinking. Our unconscious is an almost boundless resource of insight and experience if we can but harness it. Unfortunately, when we think, we have to start from the model. The formerly partial and incomplete view of reality we had before. Just like in politics, a true revolution in thinking is impossible – we start with our model of the world and add or subtract based on experience and insight.
My own model of the world has been working well recently. My heuristics for looking at the market (look at what narratives could be embraced but are currently nascent, look at long-term real rates as the only true economic market predictions and everything else as guesswork/narratives) have been paying dividends. My PA longs in European stocks and the Euros have done well, as have my recommendations in my day job where I’m charged with making recommendations to macro investors about cheap bets they could take. I’ve been recommending buying calls on French Stocks and selling them on French Bonds, paying 5y European rates and the long end of Europe, and a few other niche things not worth mentioning. My Mental model let me down so badly predicting political events of 2016 that I didn’t turn up to work for Brexit, or Trump! But my focus on real rates meant I had the right ideas for Trump, and has long made me short the GBP, or rather, ensure that I never currency hedge any foreign investments. If you’ll permit me just a little self aggrandisement, my mental model of the social world has also been working well recently! I am enjoying some professional recognition and success – due to my long-term strategy of ignoring everything management tell me to do and being honest with everyone around me – focussing on increasing my stock of trust and knowledge instead.
The problem with our models is that just when they are working, and we’re adding new experiences that could be helpful, we tend to close off. Things appearing to confirm our model induces complacency. Luckily there is a solution – exemplified by a helpful twitter user @LeithMotive who every day posts “You can be right about something, and still be a fud.”
It’s not what he says, it’s that he posts it every day! Due to his many contributions I like and respect him, so I find his consistent posts amusing and engaging. That means they get under my skin and I take it to heart – or rather to stick with my principal analogy – I’m prompted to consciously update my model. This is what friends with sharp minds and different perspectives do to us. We come to the table with them expecting, even hoping, to have our minds changed – our model updating. They free us from the tyranny of our own models – and allow us to explore alternatives. Sitting alone looking at data, all one has is ones own model. You can only see things in the context of what you thought before. The famous problem of the blind men and the elephant is no problem at all when after their elephant prodding session – they retire to the local public house and discuss their findings! A synthesis is possible – something much closer toa revolution, and you know how much I enjoy those comrades!
I was reminded last night that a supine MPC could easily have UK rates even lower than their pancake flat, current state, despite some like Saunders saying he’d have raised rates if GBPUSD were this low. I was reminded of the shifting sands in the UK and the twin possibilities of a united Ireland and an independent Scotland. I was reminded to pay attention to the RPI/CPI wedge, it’s use as a political football, and it’s impact on market perceptions of real rates. I was reminded of how fast and how far a Fed hiking cycle can really go, and how few market participants have actually experienced one! Nothing ground breaking – but an escape from the Tyranny of the model for a few happy hours – and a worthwhile exercise for all I hope!