CalmmarketsandtheHedgehogapproach

In the 2015 book Superforecasting - The art and Science of Predictions, author and political scientist Philip Tetlock introduces us to the concept of Hedgehogs and Foxes in respect to people who make forecasts for living. The concept itself isn’t novel and was first used by philosopher Isaiah Berlin in the 1950’s. Hedgehogs, according to Tetlock, are the ones who know one grand idea and one unifying theory which they apply everywhere and to every incident, whereas foxes are shifty, malleable and have ever changing thought processes contingent on the incoming information. In his scientifically designed and conducted experiment to judge forecasting efficacy, Tetlock surmises that the foxes do better, which we must submit is an intuitive result too.

As Tetlock’s study was conducted some years back it didn’t include the burning questions regarding the pandemic outcomes and its impact on the markets which the professional forecasters are grappling with today. Here we see that given the wholly unpredictable nature of the virus, with no historical pattern to fall back upon, any one who tries to assimilate every new data point in his assessment (read foxes) will falter and fail to produce a coherent narrative. In contrast a Hedgehog who knows and believes in one cardinal premise that world has only “one reserve currency plus the central banks have an infinite power and willingness to print money” would have done stunningly well. The returns from the stock markets post the March crash and the rally in the US yields can all be natural corollaries of the one cardinal belief - the hedgehog approach. Readers can fault us to say that the assessment is too fraught with hindsight bias but would do well if they reconfigure their own economic projections taking into account the hedgehog truth. CB liquidity in abundance and the safe haven US dollar is here to stay and will be used in future crisis situations also. In some later note we will write about the time cycles when these cardinal truths change, called Kondratiev Cycles, and how to identify them.

After having had our philosophical fill for the day lets turn back to the current market round up. Stock markets are trading in a stable range. The Dow Jones closed with a marginal gain yesterday. The Hang Seng and Nikkei are both trading around yesterday’s levels.

PBOC has set the Yuan reference rate at 7.0555/$. The USD Index trades at 96.64, Brent Crude trades around 42 $/bbl. The Euro is trading above 1.13 levels as the French business activity data was released better than expected in June, defying virus induced economic misery.

On the domestic front, the INR is trading strong around 75.60 levels. The 10 year benchmark bond yields which had touched 5.91 yesterday have come down to 5.89 now. The 5.91 level was the highest which the new 10 year bond had seen since its inception. The spike in yield in some measure can be attributed to the hike in fuel prices and its impact on inflation. The rise in inflation can check the central bank’s ability to cut the rate further.