Global Agenda: Flummoxed

I'm all at sea, and I'm not the only one

April 21, 2011 22:38
4 minute read.
The Mirage 1

'Mirage' Yacht. (photo credit: Courtesy of Yesh shipping)

It’s always dangerous, and usually incorrect, to claim that a specific state of affairs is “unprecedented.” Ecclesiastes’ dictum that “there is nothing new under the sun” is a more accurate guide to the chances of anything being truly unprecedented.

However, if we avoid the “never” word and substitute the more circumspect, if vague, formula of “can’t recall anything like this,” it is possible to convey some measure of the extraordinary degree of confusion that reigns among those professionals devoted to analyzing the global financial system.

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This is not just my view. In other words, to admit that I am personally confused is not a big deal. What I find striking, and somewhat frightening, is that in the course of several decades of following markets and economies, I have never seen so many analysts so patently “at sea” – and in many cases, prepared to admit this quite openly.

The roster of experts who are confounded, dumbfounded or just plain flummoxed, includes some of the most experienced, some of the best known, some of the most highly paid – as well as others who are less famous or rich, but probably much smarter.

How do I know these guys are floundering? In many cases, because they say so. In other cases, they pretend they are engaging in business as usual, presenting ongoing analyses – but if you follow them consistently, it is plain that they have changed their position dramatically.

A prominent example of the latter sort is the Goldman Sachs team, led by Jan Hatzius. In late 2010, to much fanfare, he announced that he was becoming very bullish on the outlook for the US economy – and presented his reasons why. In recent weeks, he has sharply cut back his outlook for GDP growth in the first quarter and this presages similar moves with respect to the second quarter and the full year.

In itself, this is perfectly legitimate – in theory conditions can change and in practice the global developments in recent months, including those in the Middle East and Japan, have indeed changed.

But when Hatzius flipped in December, he stressed that this was the first time in five years that he was moving to a position far more bullish than the consensus. This was a strategic, not a tactical call. Now he has flopped back – and is leading his colleagues back down the other side of the hill.

These are not minor adjustments, rather the opposite. In the most positive view of Hatzius’ behavior, he is responding to the developments within the domestic and global economies. If these are changing so rapidly that he is reduced to flipping and flopping, then it is clear that circumstances are far from normal.

Hatzius is very high profile, thanks to the Goldman Sachs moniker. But as noted, many other, perhaps better, analysts are in the same boat. Some of them are fundamental analysts and some are technical – and under each of these general umbrellas there are many different schools and methodologies. But the flipping and flopping cuts across all of them.

It is not hard to see why the analysis business is now so unusually difficult: the number of phenomena that don’t seem to add up is increasing all the time.

Let’s take one critical example – the state of the US dollar.

There are many analysts who have been predicting for some time, with varying degrees of vehemence, that the US dollar was heading for collapse. Many of them pointed to gold as the ultimate beneficiary of this expected development, others merely noted that other currencies would benefit as the dollar fell. But all of them tied the dollar’s impending demise to the crisis in American budgetary policy – the soaring deficits and the huge weight of debt pressing on the US economy.

Thus the dollar’s predicted fall was to be part of a crisis in confidence in the US. The corollary would therefore be an unwillingness to buy more US government bonds – at least until the yield on them rose significantly.

Yet what we have seen in recent weeks, and most dramatically in recent days, is that the dollar has plunged against other currencies – to levels not seen in many years, in some cases ever – but gold has risen only slightly, much less than silver. Most importantly, US Treasury bonds have not fallen but have been largely stable, with an upward bias over the last week.

This mixture of movements does not match anyone’s predictions and does not fit anyone’s analysis. That is what is forcing the wise men to either admit they are confused or to implicitly confirm that they are, by flipping and flopping their predictions.

Some people must find this scary, others maybe draw comfort from the fact that even the supposedly smart guys are out of their depth. What’s for sure is that we are living in interesting times.

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