“I'm a Silicon Valley guy. I just think people from Silicon Valley can do anything.”
We can thank the ancient Greeks for so many of civilization’s achievements: stunning advances in philosophy, logic, mathematics, politics, economics, and technology. We can even thank them for these very words: They all derive from Greek.
It is only fitting that an ambitious people who learned to soar so high gave us yet another word: hubris. Sophocles defined it as “outrageous arrogance” that offends the gods. To possess hubris is to consider yourself so all-knowing and all-powerful that you have the world utterly within your grasp. To you, all secrets are revealed. To you, the weakness and worry of other mortals is a mere annoyance.
From what I know about Elon Musk, I greatly admire him—for his daring, imagination, and obvious brilliance.
But as I read the breaking news about Tesla—the SolarCity deal and, more seriously, the new SEC and NHTSA investigations about the fatal accident in Florida—the word hubris does come to mind. And I’m not just talking here just about Musk’s personally, but about the entire Silicon Valley community he personifies. These digital titans take pride in their brain power. They mock the gods. They create high-tech miracles. And after each success, they promise to create something even more awesome and revolutionary than the last.
Does there come a moment when hubris over-reaches? When it meets nemesis, the divine spirit of retribution? It happens in Greek tragedy: No one was bolder, smarter, and more “rational” than Oedipus Rex before his fall. So what about real life?
Well, it just might happen, blow by blow.
As head of Hedgeye’s new Demographic Sector, on Monday I wrote a Hedgeye column called “Driverless Cars: Unsafe at Any Speed: Why Fully Autonomous Vehicles are Still a Long Way Off.” I won’t recap the piece here (you can read it yourself), but my basic argument focuses on (1) the absurd overconfidence in the ability of today’s AI and sensors to replace the higher-order thinking of human drivers; (2) the all-or-nothing contradiction of semi-automatic driving; and (3) the obvious revulsion with which people will respond to machines that kill them at random.
Silicon Valley technophiles have persuaded Detroit that it will be able to bring driverless cars to the consumer market by 2018 (Tesla) or 2021 (BMW). My own estimate, admittedly a guess, is more like two decades at a minimum. I don’t know that I’m right. But I am certain that they’re wrong.
What interests me more, though, is the mindset that leads to such grossly unrealistic expectations. Apparently it starts with taking something as social, human, intimate, and complex as personal transportation and treating it as a mere engineering problem. And it ends with chilling cost-benefit dismissals of those who die as a result.
I wonder what leads to this mindset. Is it overconfidence or arrogance? Is it too much left brain or too little EQ? Could it all be summed up in just one word, hubris?
Back to the Global Macro Grind…
What are we to make of the post-Brexit rally? This morning, after a day in which the rally seems to have stalled or paused, it’s a good time to reflect.
Clearly, a dramatic shift in the market’s perception of future CB behavior is the major driver. The market believes the Fed has responded to Brexit by taking any Fed hike this year off the table. The BOE will soon initiate cuts. The ECB is turning up the dial on its corporate-bond vacuum cleaner. And the BOJ, in the wake of Abe’s electoral triumph, awaits orders to unleash the Kraken (or Mizuchi, if he’s still around).
With ECB and BOJ now buying corporates, often at negative yields, they are putting direct downward pressure on U.S. corporate yields—which in turn directly subsidizes stock buybacks. And this puts further fuel under the S&P.
Bottom line: Policy leaders are promising to keep rates low and pour oil on the waves of volatility. Over the last decade, we have repeatedly witnessed this positive equity-and-bond rally from redoubled QE, just as we have seen the opposite—recall the tantrum?—when cold turkey was on the menu.
It may seem perplexing that monetary leaders will respond to a perceived global threat by pushing markets higher than they were before the threat. Perplexing indeed. But you’re used to that by now, right? In our brave new world, markets serve less to give authorities information about the future; they now serve more as tools by which authorities try to manipulate the future.
The recent rally has also tilted global markets toward the U.S. By fundamentally weakening Europe’s prospects, Brexit makes the still-chugging U.S. economy look all that more appealing. And despite Janet’s white flag on hikes, she has no plans to try out the exotic new QE and NIRP experiments coming out of the ECB and BOJ. Which makes the U.S. economy look better still.
Not surprisingly, while the U.S. S&P is hitting record highs, stock markets elsewhere remain way down in the shadows of prior glory elevations. So the dollar is rising. Oil is falling. Deflation is once again on the table. And, should these trends continue for long, the global economy will suffer. At which point markets would ultimately protest and reverse direction.
One critical fact to keep in mind: The recent rally is not a response to any significant improvement in the economic outlook.
The United States? The Atlanta Fed’s GDP Nowcast for Q2 has actually declined 50 basis points since June 23. The Fed’s beige book for June, released yesterday, was utterly ho-hum: Steady but tepid growth, no price pressure, possibly “weakening” retail. And now we are entering earnings season, which is nearly certain to deliver a stunning fifth-in-a-row quarter of declining S&P profits.
The rest of the world? Late last week, the IMF further downgraded its forecast for the Eurozone’s GDP growth and inflation for both 2016 and 2017. For the past 15 months, according to a report released yesterday by Global Trading Alert, the volume of global trade has flatlined—the first time this has ever been known to happen outside of a global recession. Needless to say, most commodity exporters will be hammered by a further rise in the dollar.
Now there are some who will say this is all perfect news to keep an equity bull market rolling: Just enough momentum to keep the economy above stall speed, but not enough to trigger another bother from inflation, from wages, or from the Fed.
I won’t dismiss the possibility out of hand. After all, a steady diet of luke-warm “Goldilocks” gruel has worked pretty effectively in recent years.
But in our current late-cycle environment, with so many indicators gathering negative speed in rate-of-change terms, I doubt this is likely. And even if such an arrested or “frozen” business cycle were possible economically, it won’t fly politically. People will no longer tolerate it. The social mood has its own cycle. Don’t forget: In November, America faces its own Brexit moment.
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Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.32-1.55%
Oil (WTI) 43.28-47.40
Best of luck out there today,