Equitiesrise,stableDollarandPhilipTetlock

S&P and Nasdaq composite equity indices have hit their all-time highs. Dollar index trades just a shave below 92 and US yields exhibit serenity where 10-year is at 1.48 and 30 year at 2.1. Brent Crude is down 2 $ to trade at 74.30 $/bbl. EM currency pack is holding its own and shows no excess volatility. The new corona cases have dropped in the places like the US and India with India showing regular numbers below 50k against the 400k around the end of April. New variations and mutations continue to bother but their effects have been localised. Central banks though in their regular commentaries keep the tone as optimistic but cautious.

Caution is one word which we also drum up a lot in our notes. Our note’s content generally seeks to satisfy two objectives, one is to explain what has happened and second is to present a reasonable guess of what can happen in future. The former is a relatively easier part as hindsight vision is always 20-20. One can put forward an intellectually compelling argument of why things happened the way they happened as if everything was preordained. Nothing can be farther from truth though. Even now one can’t be sure that an innocuous mutation will not wreak havoc once again. Explanations hence should be taken with a pinch of salt. Our later objective of forecasting is inherently more difficult and humbling. Chance events happen and they can completely change the course of future.

Author Philip Tetlock in his book Superforecasting: The art and science of prediction introduces us to many ills which plague the forecasting industry. He writes that there are two kinds of forecasters, one is a hedgehog and the other is a fox. The reference itself comes from the writing of a Greek poet Archilocus who wrote that the fox knows many little things, but the hedgehog knows one big thing. Tetlock writes that in his study he found out that foxes do better as they are cautious and take an incremental approach towards knowledge on the other hand hedgehogs are married to one big idea and they don’t want to change. But the problem is that hedgehogs appear more confident about their convictions, foxes on other hand are circumspect and appear fumbling because they know that future is uncertain.

Why is this context important for an economic newsletter? When we see that people are very convinced about their idea being the only true version of reality, they can miss many things. For example, take inflation hawks like former US treasury secretary Larry Summers, he has been convinced about the idea that central bank money printing will bring hyper-inflation. But the evidence from Japan earlier and the larger DM world post GFC has been completely different. Though we saw asset price increase, but the CPI have remained well tethered. Is there a possibility that something fundamentally has changed? Maybe. The foxes on the other hand would analyse the inflation data without any dogmatic burden. Maybe the world has moved on and theories which worked well previously won’t work. They would be willing to give more credit to continuous productivity improvement and globalisation. Covid for good or bad has preponed the digital technological combo.

All in all, we would shy away from giving any hedgehogian judgement like a Dollar demise, hyper-inflation etc. As of today, risk on appears to be the flavour, we will revisit the same on the NFP day (or may be in between too).