“The fact that logic cannot satisfy us awakens an almost insatiable hunger for the irrational.”
-A.N. Wilson
On Monday, I had the opportunity to attend my first Chicago Cubs game at historic Wrigley Field. I wouldn’t necessarily call myself a baseball fan, but this game was a beauty. The final was a 2 – 1 pitcher’s duel victory for the Cubbies. (Sadly for Cubs fans, last night they lost and are now headed back to Washington for the series deciding Game.)
While flying out to Chicago, I was hit with the news update that Professor Richard Thaler from the University of Chicago, and also a die-hard Cubs fan, was awarded the Nobel Prize for Economics. Thaler’s key contribution according to the Nobel Price Committee was:
“By exploring the consequences of limited rationality, social preference, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.”
To summarize: human decision making is often irrational. This, of course, is much to the chagrin of the old school economic community.
One my favorite Thaler experiments was called “The Dictator”. The objective of this experiment was to test the idea of the economic man. According to the theory of the economic man, humans are consistently rational, narrowly self-interested agents who usually pursue their subjectively-defined ends optimally.
In this game, the first player, “the dictator”, decides how to split an endowment (typically a cash prize) between himself and a second player, “the recipient”. The second player’s role is completely passive and he simply receives what the dictator decides to give him.
In many variations of this game, it has been shown that dictators often do not act rationally and actually act to reduce the amount of money they personally receive. There are many variations of this experiment, and other experiments, that disprove human rationality in economic decision making. As stock market operators, this human irrationality is one key factor in providing alpha generating opportunities year-in and year-out.
Back to the Global Macro Grind…
Speaking of irrational actors, the Federal Reserve’s minutes were released yesterday. Now perhaps it’s not fair to call them irrational, but indecisive is certainly fair. The key debate is now around inflation; or lack thereof. Inflation, you see, is transitory when it fits the narrative of the policy makers and non-transitory when it doesn’t.
In a speech late last month, Fed Chair Yellen noted:
“The Fed’s framework for understanding inflation dynamics could be mis-specified in some fundamental way."
In the same speech she also reiterated that she and her colleagues believe this year’s low inflation is probably temporary. Yesterday’s Fed Minutes highlighted a similar confusion / debate. According to the Fed Minutes:
“Many participants expressed concerns that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent.”
Ironically, Thaler may be getting in his wish with the nation’s top economists forgoing strict rational decision making related to policy. Ideally, the Fed at least sticks to the facts and does watch CPI, which is highlighted in the Chart of the Day, and not theoretical ideas about what is, or what isn’t, transitory.
Back in the real world of data, we had two relevant data points reported this morning:
- U.S. weekly jobless claims for the week ending October 7th came in at 243,000 versus and expectation of 252,000. Continuing claims for the week ending September 30th came in at 1.89 million, also a bit lower than expectations; and
- September U.S. PPI came in at +0.4% in line with consensus, while ex-food & energy (because you know food and energy are transitory) also came in at +0.4%.
So, if the Fed was looking for any data driven guidance this morning, they probably didn’t get it. The labor market remains “tight” and inflation, at least as measured by PPI, somewhat benign.
Despite the Fed’s consternation, the data continues to support the #Quad1 environment we outlined in our recent Q4 2017 Macro themes deck. In fact, currently our GDP projections for the next three quarters are well above consensus, specifically:
- Q4 2017E we are at 2.59% versus 2.30% consensus;
- Q1 2017E we are at 2.99% versus 2.51% consensus; and
- Q2 2017E we are at 2.99% versus 2.38% consensus.
While it may be irrational to have a view that is above consensus, especially when consensus is declining, when it comes to the data we’ll stick to the rationality of our predictive tracking algorithms.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.28-2.39% (bullish)
SPX 2 (bullish)
NASDAQ 6 (bullish)
Nikkei 204 (bullish)
DAX 127 (bullish)
USD 92.40-93.99 (neutral)
Oil (WTI) 49.36-52.31 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
