Curb your Enthusiasm (née Irrational Exuberance)

Written by Scott Fulton, Co-CIO and Co-Host of Keanaissance

After another rehearsal, the band repaired to the pub. The discussion turned to the lack of bookings for the band’s innovative brand of yacht-rock and shoegazing. In 1983, it was becoming clear that there was a limited market for a fusion of Steely Dan and early Smiths.

“Ringo”, who was to give up rock stardom for a career in accounting, suggested that it was time to set expectations higher. Specifically, he said, the band should make a “statement” and self-release an album of its songs.

Its title? “Greatest Hits, Volume 2”. For publicity reasons, he said.

It has been said that expectations are easy set but hard to meet. Warren Buffet, a serial confounder of others’ expectations, said that “the secret to happiness is having low expectations.” Thus, the context in which expectations are framed is critical. If there is certainty or, critically, the appearance of certainty, then expectations can become self-fulfilling prophesies.

The appearance of certainty has been critical to Central Bank policy since the mid-1990s. Led by Alan Greenspan, of irrational exuberance fame, monetary authorities around the world employed a strategy of setting expectations rather than reacting to events. It is argued that this strategy allowed all market participants to understand how these authorities would act in the face of change. As a result, the risk premium for change rose. The irrational exuberance which saw its zenith in 2008, heralded an historically unprecedented period of low interest rates, set essentially on the Greenspan Principle.

In May 2022, there is no appearance of certainty. With the possible exception of Ukraine winning the Eurovision Song Contest, there are no “sure things” anymore. Indeed, continuing the Eurovision analogy, the odds that the Eurovision Song Contest will be hosted physically in Kyiv in 2023 are best described as “long”.

Central Banks in the G7 have continued to set expectations (see Keanaissance #2) but the context in which these are set is changing so rapidly (viz Covid and Ukraine) that monetary policy statements tend towards the Billy Connolly rather than the Alan Greenspan:

“I want some of that, most of this, plenty of the other and, stick around, because this will all change tomorrow…”

In such an uncertain environment, expectations tend to polarise. Tomorrow and “someday” tend to be the delineation. Next week, month, or year are all ill-defined and, as a result, too difficult to predict.

With apologies to John Stuart Mill and Hans Eysenck, we, all, may have to engage in Economic Behavioural Therapy. As Wayne Dyer said:

“If you change the way you look at things, the things you look at change.”

In all such analyses, it is understood that the starting point is the known. What do we know now about the Global Economy?

Price levels have risen, are rising, and will continue to rise as the combination of Covid and the Ukraine restrict supply but support demand.

Faced with rising price levels, Central Banks have increased interest rates and will do so further.

The costs of Covid and, to a lesser extent, Ukraine have been borne by Governments. National debts are high and will need to reduce in order for economic equilibrium to return.

The Price/Rate/Debt triumvirate is likely to dominate economics for some time to come. We must set our expectations accordingly. Debt will be more difficult to raise and more expensive to service. Equity will be priced against that scenario and is unlikely to be “free”. All companies will be expected to demonstrate how they expect to make profits, repay debt, and pay dividends within a shorter timeframe. Analysis of these expectations will be more focused and will tend to the “glass half empty” frame of mind.

These are the “things” which comprise the corporate / investor vista. VIP is determined to change the way both look at them. In so doing it is our belief that these “things” will change.

Join VIP at Keanaissance. Greatest Hits, Volume 2.