Pessimists Are Smarter
Monday, 2/05/2024 09:01
But poorer for it amid the US stock market boom...
"AS GOES January, so goes the year,"
says Brian Maher in The Daily Reckoning.
So runs an ancient Wall Street wheeze.
How did January 2024 go?
The Dow Jones Industrial Average opened January at 38,033. It closed January at 38,355.
If the year goes as January goes...2024 will end in clover.
Perhaps. Perhaps not.
Jerome Powell has dashed Wall Street's yearnings for a March "pivot".
The fellow grabbed hold of his telegraph, and messaged Wall Street that a March rate cut was out:
"I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to [cut rates]...That's probably not the most likely case."
"Probably not" translates to "certainly not."
Poor Wall Street. Poor, poor Wall Street.
"There were no surprises in the Fed statement," said Wealthspire Advisors' Oliver Pursche, adding that:
"It does appear that further rate hikes are off the table, which is a positive, but investors should continue to expect higher for longer as we're still quite a ways away from the sort of economic data that would push the Fed to lower rates."
It is the old case of good news and bad news says Art Hogan of B.Riley Wealth:
"The good news is we can forget about any more tightening. The bad news it's 'when', not 'if' they're going to cut rates, and that 'when' has been pushed out to what had been the fringes of consensus."
Rates will dangle between 3.75% and 4% by year's end, soothsays the market. They presently range between 5.25% and 5.50%.
The market assumption is that inflation is very nearly licked. It will retreat further yet, and the Federal Reserve can begin axing rates.
Is it true? We observe that the M2 money supply has expanded $100 billion since October.
We further observe that supply chains remain, to a fair degree, unlinked.
These do not suggest deflation or disinflation – but lingering inflation.
The Federal Reserve claims it will not quit until inflation retreats to its 2% Goldilocks rate. Inflation, officially defined, runs at 3.4%. Thus the Federal Reserve is within hailing distance of its 2% target. Yet it is not within grasping distance.
And so Wall Street's gleeful "pivot" may suffer postponement beyond even March.
Here is one additional reason we believe in a persistent inflation:
Experts are nearly unanimous that inflation is scotched. They believe the Federal Reserve will soon have this tiger back in its cage.
And when experts are in one camp...we instinctively decamp for the opposing camp.
We distrust crowds – expert crowds in particular.
It is admittedly a bias, a disposition, a prejudice. We do not claim it is entirely rational.
And events may prove us mistaken. Perhaps the Federal Reserve will finally seize inflation by the scruff. Yet we cling to our instinct.
Is our judgment addled by a pessimistic pall? Perhaps. Yet one recent study indicates pessimism is realism. Moreover, that pessimism is intelligence.
The United Kingdom's University of Bath conducted a study, published in the Personality and Social Psychology Bulletin.
From which:
"It is a puzzle why humans tend toward unrealistic optimism, as it can lead to excessively risky behaviour and a failure to take precautionary action. Using data from a large nationally representative UK sample...our claim is that optimism bias is partly a consequence of low cognition – as measured by a broad range of cognitive skills, including memory, verbal fluency, fluid reasoning and numerical reasoning.
"We operationalize unrealistic optimism as the difference between a person's financial expectation and the financial realization that follows, measured annually over a decade. All else being equal, those highest on cognitive ability experience a 22% (53.2%) increase in the probability of realism (pessimism) and a 34.8% reduction in optimism compared with those lowest on cognitive ability. This suggests that the negative consequences of an excessively optimistic mindset may, in part, be a side product of the true driver, low cognitive ability."
More:
"The findings we present provide evidence that forecasting accuracy is linked to cognitive ability. Specifically, we find that higher cognitive ability is associated with a higher incidence of realism and pessimism in beliefs and a lower incidence of unrealistic optimism...
"Alongside the large body of literature on unrealistic optimism sits the literature on overconfidence – overestimation or excessive precision in one's estimates of own ability (Moore & Healy, 2008). As with unrealistic optimism, overconfidence has been found to be a pervasive human trait with important affective benefits, such as maintaining self-esteem..."
Is not overconfidence a distinguishing feature of experts? Hard observation informs us it is.
Do they not believe in their superior sagacity? Again, hard experience informs us they do.
Hence our disbelief in them. Hence our disbelief in – or at least suspicion of – the 'inflation is licked' theory.
This disbelief now finds validation in science.
Thus we are not pessimistic. We are, in the calculated conclusion of science, realistic. And realistic is superior to optimistic.
Of course, there is danger here. Validated by science, we may be seduced by belief in our own sagacity. We may swing to the extreme belief that pessimism fully equals realism.
We must therefore recognize limits. The science, we must concede, may be mistaken. It is even possible that optimism is realism.
Germany's Iron Chancellor, Herr Bismarck, once argued that "God looks after fools, drunks and the United States of America."
Is their continued prosperity not the triumph of optimism over pessimism?
We must concede that it is. A pessimist would wager against all of them. Yet their continued prosperity cannot be denied.
We cannot speak to God's future invigilation of fools and drunkards. Yet He gives strong indication He is turning his gaze from the United States of America.
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