Howard Marks on Expert Opinión
John Mauldin
In a week when I have once more gone out on the old limb, in last weekend’s Thoughts from the Frontline, to bring you my forecast for the new year, and when I’m also sharing with readers of my Over My Shoulder service the tea-leaf skryings of some of the boldest and brightest among my fellow economic prognosticators, I’m feeling a need to use today’s Outside the Box to redress the balance a bit.
Thus, I have for you today a piece by legendary investor Howard Marks, co-chairman of Oaktree Capital, in which Howard says not one word about how 2017 may play out, but rather makes a rather convincing case that expert opinion ain’t worth a hill of beans.
(Or perhaps we should say that it ain’t no better than a hill of beans onto which additional beans are being randomly dropped, until we get a bean avalanche, large or small. Longtime readers will have instantly recognized a favorite theme of mine, which we first explored in my letter titled “Fingers of Instability: Ubiquity, Complexity Theory, and Sandpiles,” way back in April, 2006.)
Howard has a beautiful example of the deep worthlessness of expert opinion (especially when that opinion sallies forth into the future); and I got such a kick out of it that I just have to share it up front with you.
Howard shares with us some telling statistics from a full season of the New York Post’s “NFL Bettor’s Guide,” in which each week during football season, the Post’s 11 experts advise its readers as to which teams to bet on. Here’s how these geniuses did over the full 17-week season, covering 256 games:
- The best picker was right 55.1% of the time.
- The worst picker was right 48.8% of the time.
- On average the pickers were right 51.6% of the time.
But wait, it gets even better. The experts also tipped readers off on their “best bets” each week. Here’s how they did with their surest picks:
- The best picker was right 62.7% of the time.
- The worst picker was right 43.1% of the time.
- On average the pickers were right 54.0% of the time.
Howard drolly notes that, with the results compactly distributed around 50/50 – Coin Toss City – and since it costs about 5% per week on average to bet with the bookies, none of the 11 experts’ overall picks added value “after fees.”
Whew! OK, then.
And speaking of experts, I would like to extend a hearty welcome to Paul Krugman as he joins us here in the camp of those who are concerned about high deficits and debt. Paul’s January 9 column in the New York Times is entitled (I do kid you not) “Deficits Matter Again.”
I can only assume it was a kind of Saul-of-Tarsus, road-to-Damascus experience that lead Brother Paul to his new faith – after he had persecuted those of us who have resolutely believed that deficits and debt do matter these last eight years, calling us debt-phobes and worse. Having been singled out as such I will readily admit that it has been hard to turn the other cheek. But still, glad to have ya with us, Paul, even if you’re a bit late to the party.
And yes, with conservative Republicans riding into town, ready to grasp the fiscal nettle with both hands, the federal debt and deficit are definitely more important than they have been for a while. But put me decidedly in the camp of Newt Gingrich and Bill Clinton, who together figured out how to control the deficit and actually reduce the debt over time.
Now, a less warm-hearted and understanding person than I might side with the National Review or the many bloggers who have hastened to note that it was only 78 days ago that Mr. Krugman was going on again about deficit scolds and debt-phobes. We must pardon them for concluding that deficits only matter in the World According to Paul Krugman when Republicans control the Congress and presidency. Some of these critics have uncharitably called Paul a has-been economist who has turned to political hacking. Please guys, no name-calling. He has sincerely stated that he wants to join us in the holy war against the demons Debt and Deficit. His conversion must be acclaimed – even though the latter-day Paul may have in common with his biblical namesake that he was once the chief of sinners. (For those who may not have ventured into the New Testament lately, that’s 1 Timothy 1:15.)
Then again, Paul may be suffering from a dire syndrome that I have recently seen to be spreading among the many liberal and progressive commentators in the media. I call it PTESD: Post-Trump Election Stress Disorder. The tell-tale symptoms include emotional outbursts of varying hues and stripes, the need for safe places to cry and mourn, and extreme difficulty in coming to grips with the fact that the world might actually change. Kind of like it did in 2000, 1992, 1980, 1976, 1968, 1960 – well, you get the idea.
And it is very possible that in the year 2021 our Paul may once again revert to his old-time religion under a new Democratic president. So perhaps his critics are right to be dismissive. I have to agree that in his Monday opinion piece, Paul’s economic arguments are just as weak as they were before his conversion; and so the fact that he seems to have arrived at a diametrically different conclusion 78 days on, when the only data point that has changed is that there is now a Trump presidency, is admittedly suspect.
Those suffering from PTESD seem to believe that the US presidency is imbued with all sorts of powers, some bordering on the miraculous and heretofore unseen, and that President Trump is liable to change everything overnight. The problem with that viewpoint – and this should give the sufferers considerable comfort – is that there is this pesky thing called Congress that has its own ideas as how the magic wand should be waved, and in whose direction. I somehow think it’s going to take more than a little bit of fairy dust to actually drain Foggy Bottom.
Sorry for the digression, but I find this whole business quite humorous. I will be in Washington DC next week for the inaugural, and I’m hoping to be able to interview on camera a number of Washington decision makers, to try to get at some of the real economic questions that will affect our businesses and portfolios this year and in years to come. I want to thank my good friend Monty Bennett, CEO of the Ashford Group of Companies, who moved heaven and earth to find my production team some rooms closer in than 40 miles.
You have a great week. This weekend, for better or worse, we’ll be checking out what some of my daring friends are forecasting for 2017. And hopefully I’ll get the letter to you a little earlier this week.
Your worried that I’m having too much fun analyst,
(I mean, seriously, I am working my tail off but having so much fun that I have to resist looking over my shoulder to see if anything is catching up!)
John Mauldin, Editor
Outside the Box
Expert Opinion
By Howard Marks
In August, I mentioned that I had chosen the title
“Political Reality” for my memo in part because of my liking for
oxymorons. I classed that title with other internally contradictory
statements, such as “jumbo shrimp” and “common sense.” Now I’m going to
discuss one more: “expert opinion.”
This memo was inspired by a thought that popped
into my head when the outcome of the election settled in. You may point
out that at the end of my November 14 memo “Go Figure!,” I said I wouldn’t
write any more about politics. True, but I didn’t say I wouldn’t think about politics.
Anyway, this memo isn’t about politics, it’s about opinions.
Last spring I attended a dinner where one of
Hillary Clinton’s senior advisers was soliciting input, as she and her campaign
were struggling to come up with an effective counter to Bernie Sanders’s
populist message. Most of those present expressed frustration on the
subject, until an experienced, connected Democrat assured everyone, “Don’t worry.
She’ll win. The math is irresistible.” The Hillary supporters were
relieved, and he turned out to be right: she won the nomination going away.
In late October, with the issue of Clinton’s
private email server and the FBI’s new investigation further dogging her, that
same seasoned Democrat was asked whether the election was in jeopardy.
“Don’t worry,” he said. “She’ll win. The math is
irresistible.” We all know the result.
The opinions of experts concerning the
future are accorded great weight . . . but they’re still just opinions. Experts may be right more
often than the rest of us, but they’re unlikely to be right all the time, or
anything close to it. This year’s election season gave us plenty of
opportunities to see expert opinion in action. I’ll start this memo by
reflecting on them.
The Year Polls Stopped Working
Pollsters got off to a tough start last year with
the June referendum concerning Britain’s membership in the European
Union. Right up to the end, both pollsters and bookmakers considered U.K.
citizens 70% likely to vote to remain a member. But, in the end, “Leave”
won by a few percent.
The reaction was shock. Voters on both sides
of the issue were unprepared for the outcome. Within a day or two, the
leaders of Britain’s main political parties had stepped down. People
began to seriously discuss what that outcome meant and how “Brexit” would be
accomplished.
The explanations for the pollsters’ error centered
around Britain’s lower level of experience with, and expertise in,
polling. It couldn’t happen in the U.S. In fact, in the 2008 and
2012 presidential elections, Nate Silver, the proprietor of website FiveThirtyEight, correctly
predicted the outcome in all 50 states once and in 49 the other time.
In 2016, FiveThirtyEight
estimated the odds of Hillary Clinton winning as slightly better than 50/50 as
of the end of the Republican convention in July. Then it had her as an
8-to-1 favorite in August, when the Democrats concluded their convention and
Donald Trump’s perceived missteps peaked. And then it again said she was
slightly ahead just before the first presidential debate on September 26.
It never made her out to be an underdog. And on election day, it
estimated that she was 71.4% likely to win.* Most other pollsters put her
chances of winning at between 80% and 99%, and only one considered Trump the
favorite.
In the end, of course, Trump won in the Electoral
College by a final count of 304 to 227, despite losing the popular vote by
almost 2.9 million votes, or about 2%. In particular, he won in a number
of “swing states,” such as Pennsylvania, Michigan and Wisconsin, where the
polls had him well behind. So much for experts’ forecasts.
Finally, rounding out the pollsters’ failures in
2016, the reform referendum that Italy’s Prime Minister Matteo Renzi bet his
career on – which had been considered 3% behind – lost by 20%. The
outcome wasn’t a surprise, but the margin certainly was.
No one really knows why polling failed so
miserably last year. Clearly there was a groundswell of populist,
anti-establishment and anti-insider sentiment, but shouldn’t it have been
detected? In particular, Trump did much better than predicted (or much
less badly) with a number of important groups, such as Hispanics and
college-educated women.
For some reason, in 2016 pollsters in all three
countries either failed to talk to a representative sample of voters, failed to
elicit honest responses, or failed to accurately interpret the data. Thus
their opinions may be accorded less weight in the future.
So Much for the Experts
I’m struck by how dramatically opinion can
flip-flop:
- During the run-up to the
election, Clinton’s campaign organization and “ground game” were
considered sophisticated, efficient and unstoppable, and Trump’s were
thought of as rag-tag, underfunded and uncoordinated. Now Trump’s machine
is described as having been highly effective, and Clinton’s as having
missed important signs and opportunities.
- Clinton’s message was thought
likely to carry a lot of weight with a broad swath of the electorate,
while Trump’s was viewed as appealing deeply to a few fervent but narrow
fringe constituencies without enough voters for him to win. After the
fact, Trump is described as having had “perfect pitch” and Clinton as
having a “tin ear.”
- In particular, now it’s
considered to have been a big mistake for Clinton to fail to address the
concerns of white men and set out a solution for those who lost jobs and
were omitted from economic progress. But during the campaign, no one
pointed to this error.
* It should be noted – to his credit – that Silver
insisted repeatedly that Trump could win. In fact, he often reminded his
followers that the Clinton landslide most people expected was no more likely
than a modest Trump victory. Silver also entered Election Day citing a
10.5% probability that Trump would lose the popular vote but win the
presidency. We can’t say he predicted that outcome, but (a) he was more
explicit about it than most and (b) he assigned a fairly material probability
to an event that in the past has been quite rare (so it can’t be said that he
was just extrapolating).
- Finally, up until Election Day,
most observers (including me) talked about the likelihood that the
Republican Party would emerge from the election torn between its traditional
faction, the Tea Party conservatives, and Trump’s economically
disgruntled, anti-establishment supporters. That may turn out to be the
case, but now the Democratic Party is described as being at risk as well
because of the schism between the Clinton-type moderates and the
Sanders/Warren progressives.
Here’s some of what I wrote in “Go Figure!,”
six days after the election:
Think back to just before
last week’s election. What did we know?
- The polls were almost unanimous
in saying Hillary Clinton would win . . .
- There was a near-universal
belief that a Trump victory – as unlikely as it was – would be bad for the
markets.
So what happened? First Clinton didn’t win.
. . . And second, the U.S. stock market had its best week since 2014! . .
. Thus two key observations can be made based on last week’s
developments:
- First, no one really knows what
events are going to transpire.
- And second, no one knows what
the market’s reaction to those events will be.
One of the key conclusions we should draw from the
surprises of 2016 is that the pundits often failed to understand people and
their views. It’s clear that people who work in the media hadn’t
understood many average Americans; people with college degrees hadn’t
understood those without them; and people living on the coasts and in
metropolises hadn’t understood the rest. Strong sentiments and beliefs
swung a pivotal election in ways the experts absolutely failed to grasp and
thought were virtually impossible.
Of course there are no “facts” regarding
most future events, just opinions. Experts – especially
people who are paid to be experts – often couch their statements as facts, but
that doesn’t mean they’re sure to come true.
And the Media?
When I was young, a limited number of media
outlets were the public’s primary source of information. There were three
TV networks and four local stations – no more room on the dial – and until 1987
they were subject to the FCC’s Fairness Doctrine that required broadcasters to
discuss controversial matters of public interest and air contrasting
views. Edward R. Murrow, a TV news anchor, was one of America’s most
respected men, and I often make reference to the time he said, “Anyone who
isn’t confused doesn’t really understand the situation.” Walter Cronkite,
Chet Huntley and David Brinkley were similarly trusted. Newspapers may
have had Democratic or Republican leanings, but outside the editorial pages
they largely avoided partisanship in covering events.
The subsequent proliferation of cable TV networks
set off powerful competition for viewers. A few chose to be full-time
purveyors of news, along with some talk-radio stations. Rush Limbaugh,
Roger Ailes and Rupert Murdoch realized that a big following – and big money –
could result from highly partisan, even inflammatory, broadcasting. Radio
“shock jocks” like Don Imus and Howard Stern chipped away at standards for
language and demeanor, and news and talk shows emulated them. So now we
have outspoken, boisterous speech, along with highly partisan messaging.
These days the news media shows little resemblance
to what it was 30, 40 or 50 years ago. Many outlets are highly biased to one side or the other and
make it possible to read, watch and listen all day and never be exposed to all
aspects of the issues. Thus most people find something to
complain about in the media coverage of the 2016 presidential election.
Today’s media personalities rarely express the
confusion Murrow did. Rather, they tend to state forecasts as
certainties. When do you hear a TV commentator say “I think” or “it seems
to me”?
In fact, they often remind me of the description
of economists I heard in the 1970s: “portfolio managers who never mark to
market.” That is, they find it easy to overlook the times when they’re
wrong. In August or September of 2015, when Donald Trump was beginning to
achieve success in his pursuit of the Republican nomination, a New York Times columnist flatly
stated that because Trump couldn’t stand the prospect of losing, he would drop
out of the race before the primaries began in January. We didn’t see that
happen . . . or any further mention of his assertion.
What to Do About the Media
Given the nature of the candidates for the
presidency, the starkness of the choice, and the recent trends in media
coverage, I spent a great deal of time last year following political
developments via websites, newspapers and television coverage. Most people
I know did, and you may have as well. For many it became a preoccupation,
even a mania.
My son Andrew has helped me dope out the media
effects:
- Following events makes people
feel they’re actively involved in them and well informed.
- People think and act with more
confidence when they consider themselves informed.
- But the media pundits often are
no more insightful than the rest of us.
- And anyway, people tend to
follow media outlets that confirm their beliefs rather than challenge
them.
- Thus following the media
experts, while entertaining, can be a waste of time intellectually.
For these reasons, I greatly enjoyed an article
that appeared in the Observer on
November 16, a week after the election. It was entitled “Want to Really
Make America Great Again? Stop Reading the News.” Ryan Holiday, its
author, talked about what it’s like to be caught up in the news cycle.
For a number of reasons, there has arisen in the
media:
. . . a system that needs
more and more eyeballs for longer periods of time while gutting high-quality,
reliable sources of information. We have more “news” but less original
reporting than ever before, an order of magnitude more in the way of opinion
and analysis, but as [author and academic] Tom Nichols has pointed out, somehow
less expertise.
Chuck Klosterman [a writer
on American culture] once remarked at how strange it was to walk through the
front offices of a football team and find that everyone there was watching
ESPN. Didn’t they have better information than the average viewer or
reporter? Turns out, no – they’re addicted to the same media we are and
subject to the same groupthink. . . .
Twitter isn’t designed to
help you get in and out with the best information as quickly as possible – it’s
supposed to suck you into either a contentious world of argument and debate or
an echo chamber that reassures you everyone thinks like you do. . . .
We’re “participating” in
the ecosystem because it’s addicting and because we’re curious.
So author Holiday came up with a useful
prescription in response:
It’s not that I am going
underground or completely disconnecting from current events. It’s that I
have decided I am no longer going to watch them develop in real time. I’m
going to watch the Saints play every Sunday, [but] I’m not going to fool myself
into thinking that tuning into “Sports Center” on Tuesday will help.
A lot of people’s lives would be more
tranquil and more productive if they accepted that what the media says about an
upcoming event – and whether you watch or not – won’t have any impact on the
outcome.
What Do the Experts Know?
One of the reasons I crafted this memo this way is
so I would have a chance to return to a subject I introduced in 2015: the New York Post’s “NFL Bettor’s
Guide.” Each week during football season, the Post’s eleven experts advise its readers as to
which teams to bet on. Here’s how the experts did over the full 17-week
season, covering 256 games:
- The best picker was right 55.1%
of the time.
- The worst picker was right
48.8% of the time.
- On average the pickers were
right 51.6% of the time.
The experts further help readers by specifying up
to three “best bets” each week. Here’s how they did on their strongest
picks:
- The best picker was right 62.7%
of the time.
- The worst picker was right
43.1% of the time.
- On average the pickers were
right 54.0% of the time.
The available observations from this data are as
follows:
- The way the overall results are
distributed around 50/50 suggests the experts’ process is little more than
a coin toss.
- On average the experts were
right just 2.4% more often on their “best bets” than on all their picks.
- Two of the experts did worse on
their “best bets” than on their other picks.
- Eight of the eleven pickers
were right more than half the time. But since it costs about 5% per week
on average to bet with the bookies, virtually
none of the eleven experts’ overall picks added value after fees (sound
familiar?). Even the average of the experts’ “best bets” wouldn’t have produced
a positive return after fees.
Two additional observations:
- In week 16, all eleven of the
experts predicted the favored New York Giants would beat the Philadelphia
Eagles, and five of the eleven thought the underdog New York Jets would
beat the New England Patriots (in both cases, after adjusting the scores
for the “point spread” that the bookies impose to equalize the two teams’
chances of winning). When the games were played, the favored Giants lost
by five points (meaning they did even worse after the 2½-point spread was
subtracted from their score), and the Jets (who were expected to lose by
16½ points) lost by 38 instead. In other words, (a) the experts may have
been heavily biased in favor of the New York teams and (b) they were wrong
73% of the time on these two games.
- Bettors also have the option to
bet on the “over/under” in a game – that is, whether the two teams’
combined score will exceed or fall short of a threshold set by the
bookies. It’s just another way for bettors to get “action.” The results
show the experts were right in 128 games (52% of the time) and wrong in
123 (there were five ties). Again no value added, especially after fees.
If economists won’t publish their performance
data, the Post at
least performs a service by showing how its football experts did. The
bottom line is that their opinions are of little help, and the related coverage
omits all discussion of their lack of predictive value.
The Importance of the Macro
Interest in “macro” has amped up meaningfully over
the last dozen years or so. I think it largely started with the increased
activism on the part of the Greenspan Fed, and investors’ heightened interest
in it. Today many analysts seem preoccupied with central bank behavior,
government actions, trends in interest rates and currencies, and the movement
of markets, as opposed to the fortunes of individual companies.
These things are almost all we hear about.
And most people think knowledge regarding the outlook for them holds the key to
investment success. Thus I want to make this a major topic here.
Since I speak a lot to clients, prospects, CFA
societies and student groups, I get a lot of chances to hear what’s on people’s
minds. And usually they focus on a relatively small number of
questions. Over the last few years, the ones I’ve gotten most often have
been these:
- What month will the Fed raise
interest rates?
- What could go wrong in the
economy or the market?
- What inning are we in?
- And in each country I visit,
how’s the outlook for that country?
When will the Fed raise interest rates? – On May 22, 2013, in
testimony to Congress, then Fed Chairman Ben Bernanke surprised the world by
saying, “If we see continued improvement, and we have confidence that that is
going to be sustained, in the next few meetings we could take a step down in
our pace of purchases [of bonds]. . . .” By indicating the Fed could
“taper” its bond buying – the quantitative easing that was an important part of
its stimulus program – Bernanke was foreshadowing that interest rates, which
had been suppressed for years, would begin to rise.
Ever since then, people have been preoccupied with
when interest rate increases would take place, and that’s the question I’ve
been asked most often. My response has been consistent: How would I know, and why do you care?
First, how would I know? I always point out
that I’m not an economist or Fed watcher. And I don’t think economists or
Fed watchers know the answer, either. No one consistently knows the
timing of these things in advance, in particular because the Fed itself
probably doesn’t know.
But more importantly, why would anyone care?
If I say December, I ask them, what actions would you take? And if I
changed that to March, would you do something different? The idea that
you would do something different with a March expectation rather than a
December expectation ignores the likelihood that the expectation of a March
rate rise would begin to be reflected in asset prices well before March.
That means the likely date of a rate rise is not a very useful piece of
information.
What could go wrong? – For years it has felt
to most people that we’ve been in a Goldilocks environment: neither too hot nor
too cold. The economy hasn’t grown slowly enough to cause recession or
deflation, or fast enough to bring on hyperinflation and the need for
restrictive action. The markets have been strong enough to bode well, but
not so strong as to suggest a bubble. Ditto for investor psychology.
Most people don’t want to tempt fate by saying
things will go well forever, and in fact they know they won’t. It’s just
that they can’t decide what it is that will go wrong. The truth is that
while I can enumerate them, the obvious candidates (changes in oil prices,
interest rates, exchange rates, etc.) are likely to already be anticipated and
largely priced in. It’s the surprises no one can anticipate that would
move markets most if they were to happen. But (a) most people can’t
imagine them and (b) most of the time they don’t happen. That’s why they’re called surprises.
So I can guess at “improbable disasters” like acts
of war, disinflation or a sudden seizing up of the economy, but they’re
unlikely to happen, and I don’t know much more about them than anyone
else. The greatest single influence of the last three years was doubtless
the 75% decline in the price of oil from June 2014 to February 2016. But
who predicted it?
In my memo “It’s All Good” (July 2007), on the
doorstep of the financial crisis, I insisted that the good times couldn’t roll
on forever. But I didn’t know it was sub-prime mortgages that would be
the catalyst for a turn for the worst, and when I listed my candidates, I ended
with “the things I haven’t thought of.” That’s still about the best I can
do . . . or most others, it seems.
What inning are we in? – Perhaps no one can say
just what it is that will ring the bell on today’s positive trends, but people
still want to know how advanced we are in the process, and thus when it will
come to an end. People began to ask me what inning we’re in during the
financial crisis of 2008, and they’ve continued ever since.
First of all – admittedly I’m being picky here –
people rarely specify which game they’re asking about. Is it the economic
recovery, the credit expansion, the string of low-default years, the upswing in
investor psychology, or the stock market rise? Certainly the answer could
be different for each.
But, more importantly, the question assumes we
know how long each game will go on. A standard baseball game consists of
nine innings, so “second inning,” “sixth” or “ninth” has a clear meaning.
But with the things we’re wondering about here, we never know how long the game
will run.
So rather than “what inning,” I’d suggest
investors ask whether things are or are not in an extended state. Is psychology
depressed, average or euphoric? Is the capital market shut tight, normal
or unthinkingly generous? These are questions that can be answered in a
helpful way, not how close the game is to being over. No one knows the
answer to the latter.
What’s the outlook for country xyz? – The bottom line for me
here is that people tend to confuse general intelligence, good investment
records, expertise in specific areas, and all-around insight. Thus I’ll
reiterate that I’m no economist (and even if I were, my chances of being right
would be limited). And then I’ll add that being experienced as an
investor and even hopefully intelligent says nothing about being able to divine
a specific country’s macro potential.
After I spend a day or two in a country, people
often ask for my conclusions. But in the course of my visits, I generally
(a) visit only big cities, (b) meet only with financial types, and (c) spend
more time answering questions than gathering information. In fact, on one
recent visit I responded to the usual question by telling my audience that I
hoped each member knew more about their country than I did. I sometimes
gain visceral impressions of the countries I visit, but they’re usually
data-lite and likely to come true only in the longest run, if at all.
Implications of the Election
Of course, the U.S. presidential election was the
biggest story of 2016, and it brought me endless questions. Who would
win? I’d read the same polls as everyone else, lived on the coasts, and
reached the same conclusions. I could bring no unique insight on the
basis of which to question the likelihood of a Clinton victory.
How would the two candidates differ as
president? It didn’t take any brilliance to conclude that a Clinton
administration would be quite predictable and operate within rather narrow
boundaries, while anything was possible from a Trump presidency – in some cases
better than a Clinton one, but also with considerable potential for worse.
I was in Australia on Election Day and just after,
and questions about the implications started immediately. In fact,
they’re what inspired me to write “Go Figure!” over the following weekend in
Seoul. In it, I described the following questions as being open:
- How much of what Trump said
while campaigning did he mean?
- How much of what he actually
meant will he try to implement?
- And how much of what he tries
to implement will he be able to effect?
We still don’t have answers. As for the
markets, it’s clear Trump intends to be a very pro-business president. But
what actions he’ll take and whether they’ll succeed is very much up in the
air.
Of course, only nine weeks have elapsed since the
election. Any expert who tells you what’s in store from the Trump
administration – or from Britain’s departure from the EU; Italy without reform
and Renzi; the Indian economy with 85% of its currency cancelled (the
highest-denomination notes, 500 and 1000 rupees, were declared no longer legal
tender in order to rein in corruption and the underground economy); or the
coming elections in France and Germany – is talking through his hat.
My Opinion of Opinions
Since I’ve discussed these things at great length
over the years, I‘ll try here to sum up succinctly:
- There are no facts about the
future, just opinions. Anyone who asserts with conviction what he thinks
will happen in the macro future is overstating his foresight, whether out
of ignorance, hubris or dishonesty.
- Developments in economies,
interest rates, currencies and markets aren’t the result of scientific
processes. The involvement in them of people – with their emotions,
foibles and biases – renders them highly unpredictable.As physicist
Richard Feynman put it, “Imagine how much harder physics would be if
electrons had feelings!”
- It’s one thing to have opinions
on these subjects, but something very different to be confident they’re
right (and act on them).
- Taking bold action based on
forecasts of things that are uncertain isn’t just misguided; it’s
dangerous. As Mark Twain said, “It ain’t what you don’t know that gets you
into trouble.It’s what you know for certain that just ain’t true.”
- Everyone at Oaktree has
opinions on the macro. And when we see extremes in markets and,
especially, capital market behavior, we’re apt to take strong action. But
we’re highly aware of what we don’t know, and when conditions are moderate
or indistinct, we don’t bet heavily.
I’ll end this section by sharing my latest
epiphany on the macro. I realized recently that in my early decades in
the investment business, change came so slowly that people tended to think of
the environment as a fixed context in which cycles played out regularly and
dependably. But starting about twenty years ago – keyed primarily by the
acceleration in technological innovation – things began to change so rapidly
that the fixed-backdrop view may no longer be applicable.
Now forces like technological developments,
disruption, demographic change, political instability and media trends give
rise to an ever-changing environment, as well as to cycles that no longer
necessarily resemble those of the past. That makes the job of those who
dare to predict the macro more challenging than ever.
What about Facts?
While I take a dim view of forecasts, and
especially of opinions presented as facts, I do believe there are such things
as facts. Unfortunately, however, the concept of “facts” is among the
casualties of the increasingly partisan environment. Recently we have seen both the
elevation in status of “non-facts,” as well as the tearing down of “real facts.”
“Fake news” emerged as a significant issue
in 2016. Some
people believe it influenced the election. Ease of access to social media
makes it quite simple to create and disseminate statements that others will
believe, even if they’re total fabrications. The pizzeria fronting for a
child-abuse ring led by Hillary Clinton is just one of 2016’s wilder
examples. I expect to see continuing discussion of the proper role of
social media in taking down untrue posts, and of the conflict between defending
freedom of expression and preventing the publication of falsehoods.
At the same time, I’m concerned about the
disappearance of real facts. Nowadays it seems almost anything can be
characterized as questionable. There’s broad agreement among scientists
that humans play a significant role in climate change – as there is among
sitting world leaders – and yet we hear this idea dismissed as “a matter of
opinion.” The other day I heard a former U.S. Senator who now leads a
policy think tank describe as “fake news” a Congressional Budget Office report
with which his organization takes issue. If the non-partisan CBO isn’t
accepted as objective and truthful, who will be?
In a time of raging partisanship,
disrespect for experts, and drastically debased standards for discourse, is
there such a thing as a fact? Can
there be no distinction between opinion, fact and fake fact?
Can there be a figure everyone trusts, another Edward R. Murrow? Can any
statement be safe from disparagement even though it’s not 100% measurable and
provable? Is history subject to unlimited revision if there are no video
images? What will our grandchildren be taught is the meaning of the word
“true”? What authorities will they trust? We certainly live in
interesting times.
Macro Investor Performance
The acid test of an investment strategy is whether
it produces good results. So here we are: first, “everyone knows” macro
is a key determinant of investor performance these days, and second, there have
been a lot of significant macro developments of late, providing opportunities
for those with foresight to apply their predictive powers. Thus the
ingredients have been in place for significant gains on the part of
macro-oriented investors.
Let’s take a look at the results for two Hedge
Fund Research macro fund indices and compare them against the HFR index of all
hedge funds:
Periods ended November 30, 2016
Annualized Net Returns
1 year
3 years
5 years
HFRI Macro (Total)
Index
(
1.17%)
1.64% 0.74%
HFRI Macro: Discretionary Thematic Index* (
1.96)
( 0.47)
0.35
HFRI Fund Weighted Composite
Index
3.37
2.46 4.23
* Macro funds run by individuals, not algorithms
While the average hedge fund’s return has been
puny, I think it’s fair to say the average macro fund’s return has been
seriously deficient. In fact, the average macro fund’s net return may not
have been statistically different from zero. Thus, based on the indices,
it’s hard to say managers paid to profit from macro developments have done so.
The Last Word
To close, I’ll weave together a few recent
inputs:
First, I had dinner with Warren Buffett about a year
ago, and he pointed out that for
a piece of information to be worth pursuing, it should be important, and it
should be knowable. These days, investors are clamoring
more than ever for insights regarding the macro future, because it’s important:
it moves markets. But there’s a hitch: Warren and I both consider these
things largely unknowable. He rarely bases his investment actions on
them, and neither does Oaktree.
Second, I want to include a final paragraph from
the Observer article
about the media that I mentioned earlier. I think it’s golden:
“If you wish to improve,”
Epictetus [first-century Greek philosopher] once said, “be content to appear
clueless or stupid in extraneous matters.” One of the most powerful
things we can do as a human being in our hyperconnected, 24/7 media world is
say: “I don’t know.” Or more provocatively, “I don’t care.” Not about everything, of
course – just most things.
Because most things don’t matter, and most news stories aren’t worth tracking.
(Emphasis added)
Finally, I want to describe a great phone call I
received this past spring, from a sell-side economist I worked with in the
early ’70s and have stayed in touch with since. “You’ve changed my life,”
he said. “I’ve stopped making forecasts. I study data and report on
my inferences. But I no longer express opinions about the future.”
Mission accomplished.
January 10, 2017
Bonus section: I’ve been collecting (and
recycling) quotations for almost forty years, more of them concerning forecasts
than anything else. Here are five of the very best. Together they say virtually everything that
has to be said on the subject:
We have two classes of
forecasters: Those who don’t know – and those who don’t know they don’t
know.
– John Kenneth Galbraith
No amount of
sophistication is going to allay the fact that all of your knowledge is about
the past and all your decisions are about the future.
– Ian Wilson (former GE executive)
Forecasts create the
mirage that the future is knowable.
– Peter Bernstein
Forecasts usually tell us
more of the forecaster than of the future.
– Warren Buffett
I never think of the
future – it comes soon enough.
– Albert Einstein
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