Hedge Fund CIO: It Can’t Happen… But It’s Happening

By Marcel Kasumovich of One River Asset Management

“The Government of Japan must continue working to maintain Japan’s peace and security, which is an essential premise for its prosperity,” Abe concluded in a statement on the Japan-US Alliance on September 11, 2020. Shaken by the sudden loss of a mentor and friend, Japanese PM Kishida observed “[it is] an attack on the core of democracy.”

Boris Johnson’s scandals pose their own threat to the UK system. “I want you to know how sad I am to be giving up the best job in the world,” he said after cascading defections from his government.

China contemplated an early sale of local government bonds as Premier Li Keqiang indicated that “[the economy’s] foundation is still not solid” and “strenuous effort is required to stabilize growth.”

Smaller emerging markets are under severe strain, packing the IMF calendar, including its likely support for Egypt. “We are continuing our close engagement with the authorities towards reaching staff-level agreement,” said the IMF.

US Secretary of State Blinken pointedly asked, without the presence of his Russian counterpart at the G20 meetings, “Why are you blocking the ports? You should let the grain out.”

Belarus received reinforcements of weaponry from Putin that can carry nuclear warheads.

“There needs to be a reform of EDF, we know that; a transformation so that EDF is more efficient,” observed French Finance Minister Le Maire, speaking to the nationalization of Europe’s largest nuclear energy producer.

Germany’s Economy Minister confronting similar challenges with utility Uniper SE mirrored France, indicating that “[the government] won’t allow a systemically important company go bankrupt, and throw the global energy market into turmoil.”

The Swiss government is readying plans “to keep the reduction in natural gas deliveries to all consumers as low as possible, all non-protected customers are to be allocated quotas without prioritization. In addition, restrictions on use are being examined.”

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Can’t Happen I: “We must forge an unshakeable oath with all civilized people that never again will the world stand silent, never again will the world look the other way or fail to act in time,” said President Carter in 1979. He commissioned a report on the Holocaust, already three decades past the UN Declaration of Human Rights, an attempt to avoid repeating history. Today, Kaliningrad is the fulcrum between peace and war. Fiona Hill, foreign affairs specialist, laments “sadly, we are treading back through old historical patterns that we said that we would never permit to happen again.”

Can’t Happen II: A rapid switch to gold and the US dollar was widely anticipated after 1945. Special international coordination stretched it across decades, highlighted by the Basel Agreement in 1961. The dethroning of reserve currencies is slow. And it is not preordained by a historic norm. A dominant reserve currency other than the US dollar is not obvious. But there are always competitive forces, revealed with subtle policy such as the RMB Liquidity Arrangements recently organized by the BIS. China is positioning to be a reserve currency. It can happen.

Can’t Happen III: Over hundreds of years ahead of the Industrial Revolution, GDP per capita grew 0.16% per annum in the United Kingdom. In the past hundred years – despite wars, depressions, and default – living standards exploded to 1.5% annual growth. It is now presumed to be the natural state of being. To be sure, growth can be perpetual even with finite resources. But it is innovation and austere policies supporting productivity that generates the outcome. Living standards aren’t enshrined – not even for rich countries. Growth can stagnate for long periods.

Can’t Happen IV: “Demographic drivers should propel housing construction…to new heights.” This was the judgement of experts at JCHS of Harvard University in June 2006. Financial businesses were built around the historical norm that home prices do not decline – they never had nationally. Most of those businesses disappeared, rightfully. Yet, housing investment as a share of GDP peaked at 7% of GDP in 2005. It fell for two years before the financial crisis. Two years. And it has never, and may never again, reach those heights.

Can’t Happen V: In 2012, ECB President Draghi emphatically declared that “within our mandate…within our mandate…the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Draghi set in motion words that turned into programs. Now, ten years later, the widening of peripheral spreads presents the perfect time to employ these prescient programs. But they are deemed unusable – too politically charged. Europe’s monetary union is incompatible with its political interests. Whatever it takes is not whatever you want.

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Anecdote: “Cognitive psychologists call it recency bias – a built-in mental tendency to exaggerate the significance of recent events and experiences while slighting those further back in time,” Gideon Rose offered in explaining the seemingly invisible fraying of living standards. “The fault lies not in our algorithms but ourselves.” It creeps into all aspects of our lives, our thinking, and most certainly our investment decisions. The power-hungry prey on recency bias with the repetition of a simple message – the more it is seen, the more it is heard, the more it is internalized, the more real an issue becomes. Dominating thought processes and narrative. Increasing future risks. Neuroscientist Dr Kristjian Kalm reminds us that “this recency bias persists even when past events contain no information about the future.” It is a behavioral reality. Statistical exceptionalism won’t help – it can even hurt. Short-sightedness is built into big data exercises with a tendency to overestimate short-term trends at the expense of history. Being aware is half the battle. Terence Tao teaches a Masterclass on the issue. Hunt for diversity in expert opinions. You may learn more from a zoologist about the vulnerabilities of a financial ecosystem than a banker. Stay grounded. Decisions are best made well-rested while turning off the daily news. Look to the distant past. Mathematics advanced rapidly in the 9th and 10th centuries during the Golden Age of Islam, transitioning to Europe in the 10th to 12th centuries. Names like al-Hassar are critical to modern mathematics. It is a reminder that all power and all privilege is vulnerable to the assumption that it can’t be lost. Fight to be better than the day before. Resist the temptation of leveraging past success. Get comfortable with discomfort. And if all else fails, a long, humbling hike will clear your mind of recency delusions.