“When arguing with a fool, first make sure that the other person is not doing the same thing.”
- Old Proverb
There is a condition in medicine known as anosognosia which derives from the Greek phrase meaning “without knowledge of disease.” It can arise as a byproduct of certain mental illnesses or insults to the brain such as parietal lobe damage. Anosognosia describes a disability that causes an unawareness of the disability, i.e. a dynamic wherein a person is unaware of their condition due to their condition. As per WebMD, “someone with anosognosia isn't simply in denial or being stubborn. Their brain can't process the fact that their thoughts and moods don’t reflect reality.”
If not for the inability to self-comprehend it, that would be a bitter pill to swallow from a diagnostic standpoint for sure.
Interestingly, there is a more subtle, non-clinical form of anosognosia that is a well-documented psychological phenomenon known as the Dunning-Kruger effect, first hypothesized in 1999 by social psychologists David Dunning and Justin Kruger. It does not arise because of mental illness or traumatic brain injury. Instead, it is a pervasive cognitive bias that most people exhibit without realizing it.
Dunning-Kruger describes the process whereby people with low expertise in a given subject rate themselves highly in that area while those who are expert in that same subject tend to both underestimate their own abilities and overestimate those around them. This is known as illusory superiority, and it explains how we tend to judge ourselves better than others to an extent that violates the laws of math. For instance, 88% of drivers consider themselves above average [fast fact: the least experienced drivers – those with less than 6 months behind the wheel – are 8x more likely to be involved in a fatal auto accident], while 42% of engineers at a particular software company rated themselves among the top 5%. In fact, those with the least abilities are most likely to overrate their skills to the greatest extent.
This mismatching of actual abilities versus perceived abilities gives rise to a peculiar bizarro-world in which those who tend to know the least about subjects often are the most outspoken, most convicted and never-in-doubt on a given topic. Meanwhile, those who truly understand the subject best are often more nuanced, more reserved and less assured in their presentation because they know just how complex a given subject is.
One of the paradoxes described by Dunning-Kruger is that, as David Dunning wrote in his 2005 book on self-awareness entitled Self-Insight: Roadblocks and Detours on the Path to Knowing Thyself, “If you’re incompetent, you can’t know you’re incompetent. The skills you need to produce a right answer are exactly the skills you need to recognize what a right answer is.”
Dominant modern day information channels have given fuel to Dunning-Kruger on a scale that is still underappreciated. Consider the 24-hour news cycle. Far too often, those on television speaking about issues are often the least expert but claim full expertise and express little/zero uncertainty. Consider social media. Opinions – often wrong – that are presented as facts amass massive numbers of likes and reposts.
MIT researchers published a paper in the journal Science in 2018 that investigated social media’s propensity to spread false news. The researchers looked at 126,000 stories on twitter that were analyzed for truth vs falsehood by six independent fact-checking organizations that exhibited 95-98% agreement on the classifications. These stories were tweeted by 3 million people some 4.5 million times. Their findings were that falsehoods diffused significantly faster, farther, deeper, and more broadly than the truth in all categories of information including science, financial information, natural disasters and, of course, politics. They also found that the role of ‘bots’ was to amplify both true and false stories at similar rates meaning that the cause was inherently human.
Study author Soroush Vosoughi, an MIT data scientist, had this to say, ‘It seems to be pretty clear that false information outperforms true information’.
Now, combine Dunning-Kruger with that MIT research and you have the foundation for a twisted, conflicted world in which those with the least expertise and who are more often wrong are among the most vocal and most convicted and their views are the ones most amplified across social media channels and latched onto by other Dunning-Krugerites eager to spread the gospel of novel [false] narrative.
According to Pew research, more than one in three (36%) Americans regularly get their news from Facebook, while roughly one in four (23%) regularly get their news from YouTube and more than one in seven (15%) get their news from Twitter. If we were to assume these were mutually exclusive categories – which Pew does not indicate – this would equate to almost three out of four Americans regularly getting their news from Facebook, YouTube or Twitter. So, the real number falls somewhere between one in three and three in four – any way you slice it, that is a high proportion.
At the risk of getting off topic briefly, a podcast I listened to a few years ago from Sam Harris called “The Trouble with Facebook” explained how Facebook realized early on that if its algorithms showed users photos of friends it could hold their attention for a few minutes, but if it could show them subject matter [often false narratives] that angered them it could hold their attention for an hour or more per day.
Now, combine Dunning-Kruger with the MIT research and what we know about how social media’s algorithms are specifically designed to maximize user engagement through the promotion of content that is likely false, and you have the recipe for a perfect storm of misinformation constantly circling the globe like a never-ending fake news wildfire.
Back to Dunning-Kruger. In the investment world, we see Dunning-Kruger on display almost daily. Think back to the early weeks of Covid and how it seemed that many in the Financial media suddenly spoke with the conviction of a board-certified epidemiologist when asked for their opinion on what would happen with the virus. We use the term ‘macro tourists’ a lot at Hedgeye. Perhaps what we should be calling them is what they really are – Dunning-Krugers.
Back to the Global Macro Grind…
Now with that in mind, let us consider the actual complexities of the forward outlook. Here are a few of the moving pieces in the months and quarters ahead – all of which we’re tracking individually.
- The labor market is poised to continue with strong gains in the coming months, as we saw in the July NFP reading, but how will Delta impact that progress?
- Inflationary pressures remain at multi-decade highs and the shelter component of CPI is poised to offset disinflationary impulses from other, smaller categories like rental cars.
- Fiscal support is poised to slacken with the looming expiration of enhanced UI on September 6th, student loan forbearance on September 30th and mortgage forbearance programs expiring in Q4.
- The Federal Government will have spent $6.845 Trillion in fiscal 2021 (the Government fiscal year ends in September). In fiscal 2022, the CBO says that based on the laws currently on the books, the Federal Government will spend $5.544 Trillion. That’s a step-down Y/Y of $1.3 Trillion, or roughly six percentage points of growth ($1.3T/$22.8T). Current estimates for Y/Y GDP growth are in the 6% range for the next three quarters (Q3, Q4, Q1).
- However, the Government is looking to pass its $1 Trillion ‘hard infrastructure’ spending plan that will include $550 Billion in new spending over five years. This works out to ~$110Bn/year. Meanwhile, they are also looking to pass through reconciliation $3.5T in incremental ‘soft infrastructure’ spending over the next ten years, or roughly $350Bn/year. Together, these work out to ~$460Bn/year or roughly a one-third offset to the $1.3T step-down in 2022. Nevertheless, that’s still a loss of 4% of GDP on net. Further, this assumes that both bills pass and at these amounts.
- Next, consider that there is now north of $3.0T in excess savings that has been accumulated since the start of Covid. This is a function of $2.492T in positive aggregate net income change combined with a $605Bn reduction in net outlays. How much of this will be spent in the next 4 quarters? The answer could swing GDP by as much as 13 percentage points.
- A further complexifier is the fact that rising Delta is likely to further increase that excess savings glut and raises the odds for additional fiscal and monetary stimulus.
- However, if Delta proves short-lived and peaks in a matter of weeks – as it appears to have in India – then we could well find ourselves in the scenario where labor gains are strong amid a still-strong inflationary backdrop and virus pressures are receding, pressuring the Fed to taper and Congress to allow support to expire.
This example should illustrate just how complex the macro backdrop can be. There are many known knowns and known unknowns, but there are also unknown unknowns.
It is with a healthy understanding of and respect for the complexities associated with macro that we have built and developed our macro process. It’s based on probabilities, not certainties. Anyone on mainstream or social media speaking in absolutes or certainties is likely afflicted by some degree of Dunning-Kruger. Our confidence in our process stems from it being dynamic and probabilistic in nature.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.17-1.41% (bearish)
UST 2yr Yield 0.18-0.26% (bullish)
SPX 4 (bullish)
RUT 2182-2260 (bearish)
NASDAQ 14,661-14,908 (bullish)
REITS (XLRE) 45.99-47.13 (bullish)
Tech (XLK) 152.68-155.99 (bullish)
Utilities (XLU) 66.71-69.43 (bullish)
Energy (XLE) 48.06-50.90 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 27,117-28,090 (bearish)
DAX 15,607-16,022 (bullish)
VIX 14.73-18.98 (bearish)
USD 91.81-93.27 (bearish)
EUR/USD 1.168-1.188 (neutral)
Oil (WTI) 66.16-72.07 (bullish)
Nat Gas 3.83-4.25 (bullish)
Gold 1 (bullish)
Copper 4.27-4.50 (bullish)
TSLA 664-711 (bullish)
Bitcoin 39,994-49,991 (bullish)
To your continued success,
Josh Steiner, CFA
Managing Director
Macro & Financials
