Failing Conventionally

By Michael Every of Rabobank

Failing Conventionally

85 years ago, the economist Keynes noted cynically in The General Theory of Employment, Interest, and Money that:

“It is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

In other words, it’s better not to deviate from the market consensus or benchmark, even if that consensus or benchmark is wrong, because even if everything then goes wrong, at least you can say that *you* were not to blame individually – “the market” was.

85 years later, with advances in technology, society, and political geography few would have believed possible, what has changed in that investment mentality? In an age that champions diversity, do we have any greater freedom to take strong off-benchmark/consensus views, or do we still herd towards them regardless of knowing that a series of exculpatory individual “Whocouldanooed?”s after a crash does not compensate for the damage done by everyone being collectively wrong? Sadly, it’s a timeless question, but one prompted in particular by headlines today.

We have Carson Block, the CIO of Muddy Waters Capital, quoted on Bloomberg saying: “I think that investors for the past decade were basically pulling the wool over their own eyes on the capriciousness of the policy environment in China. So that’s coming home now to bite a number of investors. But it’s just one of many risks that you really need to take into account but investors have not.” I won’t dive into any more of Das Kapital today in response.

A step up in importance on the “Whocouldanooed?” scale is Covid-19. 18 months ago, risk-reward/fat-tail-risk thinkers were screaming at TV screens in frustration listening to the WHO tell us patiently this wasn’t a pandemic, and global travel should continue as normal “because markets”; and today the strategy is ‘vaccines (or bust)’ in developed economies – with no focus on the fat-tail bust part. By contrast, China is taking a hardline zero Covid stance. Indeed, yesterday three Chinese research groups released a report titled “America Ranked First?! The Truth about America’s Fight against Covid-19”, which: vilifies Bloomberg’s ranking of the US as #1 in the Covid Resilience Ranking; describes the US Covid objective as to “save the stock market, not to save lives”; and states “The freedom of movement and ‘normal functioning’ of society advocated by Bloomberg’s rankings are not about the safety of the American people. They are only about the need for the free flow of capital, and the desire for excessive profits.” So somebody else brought up Das Kapital for me! This underlines the broader Bloomberg point when it writes “China’s Covid-Zero Strategy Risks Leaving It Isolated for Years.” Have investors got enough wool left if so?   

But far more existentially on the “Whocouldanooed?” scale, we have a story summarised by The Guardian as: “Major climate changes inevitable and irreversible – IPCC’s starkest warning yet” In short, the climate gurus say human activity is changing the Earth’s climate in “unprecedented” ways, with some shifts now inevitable and “irreversible”; and within the next two decades, global temperatures are likely to rise by more than the 1.5C above pre-industrial level 2015 Paris climate agreement red line, bringing “widespread devastation and extreme weather”. Specifically, the IPCC states the 1.5C level is very likely to be exceeded under a sustained very high Green House Gas (GHG) emission scenario; likely to be exceeded if GHG emissions are intermediate to high; more likely than not to be exceeded if GHG emissions are low; and still more likely than not to be reached and briefly exceeded even if GHG emissions are very low, with only a hope that temperatures might dip slightly lower again by the end of this century.

In short, the IPCC says the mildest end of the worst-case climate scenario spectrum is now a given, meaning life-changing shifts for many of us, unless we see the kind of GHG emission falls experienced during the height of Covid lockdowns,…also meaning truly life-changing shifts for many of us. Imagine the implied shifts required not just in technology, but in the pattern and price of ‘allowable’ green activity, and if/how markets, or governments, make those choices. In the meanwhile, we are doing all we can to re-open from Covid as quickly as possible, pushing up GHG emissions again,…while saying Build Back Better a lot.  

One can understand how energizing –and polarizing– this debate is. We also need to see how a risk/reward framework of thinking about what to do cannot produce an answer without massive structural changes one way or the other – but against a backdrop in which markets aim to just keep on “failing conventionally.”

Underlining the issue perfectly, the collective financial and intellectual might of Bloomberg goes with the morning headline of “HEATING UP” today – but it is talking about Bostic and Rosegren of the Fed calling for QE tapering to start as soon as September. The IPCC story implying a more than 50-50 probability of life on earth as we understand it today changing irrevocably for the worst gets second billing. “Because markets.” Because $120bn a month…for now.

Again, this is not to focus on the details of the climate issue specifically – we have huge, unresolved structural issues all over, as I have pointed out in the last few Dailies. It is instead to underline that too much conventional thinking on all sides fails collectively too much of the time.

Markets will ultimately have to catch up to that failure one way or another: only some parts are already starting to. In the meantime, collectively-failing conventional traders are focused on US CPI tomorrow, US fiscal stimulus on infrastructure as soon as today(?),…and perhaps the crypto-controlling measures attached to it.

Does anyone have any spare wool?