Market Thinking

making sense of the narrative

Christmas past..and present

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We are spending the days running up to Christmas writing a series of upcoming posts about some of the key structural problems facing Asset management and by extension Wealth Management, to be followed early in the New Year with our proposed solution to some of these. In the meantime, still time for a few musings (albeit delayed from a Monday)

One of the things we used to enjoy about Christmas was the tradition of doing things the way we always did and the way our parents did before that. Indeed, one of the main sources of tension in many extended families is the clash of tradition over the timing of lunch/dinner, when to unwrap presents, and so on. Whose ‘tradition’ prevails? Well, obviously the last two years the answer is nobody’s, having been largely ruined by the Zero-Covidians in terms of crowds browsing shops (awful in masks and impossible with social distancing), Christmas parties (ditto), Christmas carols, Concerts, Pantomimes and generally, well, crowds of well-wishers anywhere and everywhere has meant that the home based traditions are even more important. One that not even the Grinches of Sage can deny us is putting up a Christmas tree. Here I must confess that a childhood where parents thought a four foot tree on a table somehow counted as a ‘large’ tree has clearly left me emotionally scarred and my wife and family having to tolerate my annual quest for a ridiculously oversized tree.

This of course means lots of decorations are needed and one important tradition we invented in the BC era (Before-Covid) was a family lunch and then a trip to the ‘posh grocer’ that is Fortnum and Mason where we all get to select one new Christmas bauble (for the oversized tree) and then to add these to the existing ones, carefully wrapped and stored from the year before to be put on the tree in the week before Christmas (another subliminal attempt to justify a large tree).

This year I noticed that many of the baubles had been continually ‘re-wrapped’ in the same paper as the year before and in many cases this was an edition of the FT, from 2011. With no parties to go to, I decided to read through the headlines for messages from Christmas past and while it would be easy to invent some, these are the actual things I noticed.

  1. Some things stay the same, there were complaints about the size of JP Morgan’s bonuses and Goldman Sachs was announcing an initiative to ‘improve it’s image’.
  2. Some things seem from a distant era – Portugal was being bailed out, Europe’s jobless rate was over 10%, BP was being sued over the oil spill and there was surging demand for Anthony Bolton’s (ill fated) China Fund.
  3. Amazingly in the light of this year’s record Budget of $778bn, granted without any dispute and actually even more than they asked for, ten years ago the Pentagon had its Budget cut to only $553bn.
  4. Some things we take for granted weren’t even around. Verizon was announcing a new initiative, the iPhone (!), while there was a lot of (also ill fated) excitement about the Blackberry Playbook – no me neither – and the importance of 3D TV.
  5. Finally, the benefit of hindsight shows Goldmans invested $500m in a private company called Facebook (with another $1bn for its top clients) for a valuation of $50bn. At $900bn today it probably explains why it hasn’t had to revisit its ‘image issues’ much since then.

Of course there are many other things that have changed in the last decade alone, I noted while in ‘absolutely essential and not at all pointless hotel quarantine’ in Hong Kong back in September that while most of the furnishings in my hotel room could have come from any of the last three decades, the things I relied on – my iPhone, IPad, Bluetooth headphones, Netflix, Amazon Prime, Podcasts, Audible – all of course delivered by wifi and hi-speed internet – could only have happened in the last decade or so. The flipside to that of course is that without this technology we would never have been able to have the track and trace technology that has driven the lockdowns and quarantines.

As to (a) Christmas Present, well to take a positive approach, if someone had suggested that we could take a free pill that would ‘vaccinate’ us from Covid in the traditional sense of the word, i.e. an attenuated version of the virus but with very limited side effects beyond a few aches and pains, a headache and a scratchy throat for a few days, then surely we would all have been happy to take it? Even the most anti-Vaxx among us would have jumped at the chance of long term immunity with no serious side-effects and the much derided, but absolutely essential, concept of natural immunity would be achieved within a week or two and with almost no strain on the healthcare systems.

Sounds ideal? Well isn’t that essentially what Omicron appears to be achieving? While anecdote is bad data, it is often nevertheless informative. I personally knew only one person who got Covid in the first wave, a considerable number more who got Delta (mostly seemingly teenagers), but with Omicron it is a multiple of that. ‘Everybody’ seems to have ‘got’ this version, vaccinated or not and even if many more are not testing to see if that scratchy throat and headache is the dreaded ‘thing’, it looks like nature is delivering the Christmas present of herd immunity to the UK regardless of quixotic attempts by politicians to contain it and thus somehow ensure a new variant appears. Of course Virology 101 tells us that this is the way viruses behave (and die out) but as the extra-ordinary interview by Fraser Nelson of the Telegraph and Spectator this week with the head of SAGE’s SPI-M modelling unit discovered, the reason that the Modelers are always so pessimistic is that the Politicians and Health ‘Experts” are only asking for worst case scenarios.

The other revelation of last week (that inspired Fraser Nelson) was the sensible adoption by JP Morgan of a scenario approach to modelling the possible/probable outcomes of Omicron, which challenged the central (in fact only) assumption made by SAGE that while it was more transmissible, it was no less deadly than Delta. Modify that, and the (always) dire conclusions are radically altered.

In financial markets we are taught to challenge the consensus, not to be willfully contrarian, but because there is no money in investing in what is already in the price. This makes us look actively for arguments that disagree with our view, rather than shutting them down. It also means we ask our analysts like those at JP Morgan for a range of scenarios (hence the Fed and its dot-plots) rather than just for the one that supports our existing preferences. By contrast, Policy based Evidence Making, as it is known, is an known failing of much of the public sector. We have long noted Professor Fergusson’s woeful track record of wildly over-estimating the negative scenario of everything, as well as his highly criticised coding skills. Perhaps JP Morgan and the private sector should have got into the forecasting business a lot earlier? Still, they are here now and looking to Christmas future we can be but optimistic. If they are right and they actually change public policy then I am sure that nobody will be complaining about the bonuses at that part of JP Morgan.

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