Monday, 21 January 2013

Differentiating between wishes, opinions, posturing and facts

Here’s a clue: this is an opinion, with a fact or two thrown in

The recent relentless rise in major equity indices and compression in credit spreads has led to a fair amount of chatter about whether the financial crisis is over (O-VER, fin, like stop living in the past, dude) and we’re getting back to normal. See: pretty much the entire recent output of Business Insider (link is to the apparent recantation of a gnomic utterance by Mohammed El-Erian that received a fairly resounding WTF in the first place), Mark Dow's twitter timeline or an entertaining piece by Josh Brown (one of the best and most readable financial commentators out there) for some good examples.

I’m just a pseudonymous guy in a tinfoil hat and I’m certainly not looking to pick a fight with such big hitters, but I do think it’s worth reminding ourselves of the difference between wishes, opinions, posturing and facts.  

Before that, a category error: the financial crisis effectively ended with Lehman, not because they were the cause of it (though their management did contribute some impressively bad decisions), but when policy makers discovered that the gods were unimpressed by the blood sacrifice offered and remained as vindictive as ever. They collectively stared into the abyss and when the abyss stared back they collectively said “feck doing that again”; and thereafter, the financial crisis became your crisis.

What we have had since then have been a rolling series of related and unrelated crises (crisii?) as the world scrabbles about the floor looking for the teeth it had kicked in back then, tries to deal with the collapse in both the shadow banking sector and demand for credit, stumbles over the various cans it didn’t kick far enough into the future or realises that some things (I’m looking at you, Euro currency) it thought were good ideas were actually really bad ones. I have used the analogy of a game of whack-a-mole a few times and I still think it’s pretty apt.


1. Wishes: generally brought to you directly by the sell-side and long-only fund managers, or whispered by the same into the ears of journalists looking for story filler. If you need a sense check on their forecasting track record, here’s a nice piece by the FT on Why Wall Street is always bullish. Caveat emptor.

2. Opinions: as the saying goes, are like assholes: everybody has one, and everybody's stinks but yours. Two people look at the same data point and draw different conclusions to suit their situation or cognitive bias (just try asking someone who lost their job or their house to cheer the great recovery - you may end up looking for your teeth too). You may well believe that whatever latest existential crisis we have been having has lifted, you may think the world is going to end next week. Nobody knows for certain, so either position is valid. Manage your risk properly, don't get suckered by wishes or opinions, keep as many chips as you can to play with tomorrow and you'll be fine; it’s a very long game.

3. Posturing: understand that some people’s emotional needs are fulfilled by being seen as pioneers – trailblazers of the market (this category frequently overlaps with the population found under ‘wishes’ above). A few of them get it right - and to the victor, the spoils. More often, they don’t. Stand well back and let these guys walk into the minefield on your behalf, and preferably not whilst carrying all of your money in their pockets.

4. Facts: used to extrapolate into wishes, add power-ups to opinions, or stand on for extra height when posturing. Here are two: pretty much every Central Bank that matters continues to lend (and indeed increase) exceptional support to risk markets. Without this support, risk assets would likely be priced very differently. You may wish (as I do) they were not in the market at all; you may be of the opinion they can withdraw this support in the future without any negative consequences; you may be posturing for a melt-up or selling their eventual defeat; but the fact is, you can’t tell me that we’re anywhere close to getting back to normal until they are gone.