When I first came to the United States as a 17-year-old college freshman, I was invited to my Caltech biology professor’s home for Thanksgiving, along with several other foreign students who had There was nowhere else to go. I immediately fell in love with this holiday. First, it falls on a Thursday leading into a long weekend. Second, you get to eat an infinite amount of food. Finally, after eating a large amount of food, you go on to lounge on the couch with others, without hesitation, as you re-watch old Hollywood classics and football. My favorite was to binge on the Twilight Zone reunion, where weird things always happened under the veneer of normalcy. The weekend that followed was usually spent recovering from food cravings.
At some point today, if it hasn’t already, there will also be a kind of severe twilight zone for many turkeys. This has been called the “turkey problem”, a parable cited explicitly in his books by Naseem Taleb of “Black Swan”. Here’s that quote verbatim:
Consider a turkey that is fed every day, every single meal will reinforce the bird’s belief that it is the general law of life to be fed every day by friendly members of the human race, ‘in search of their best interests’, As a politician would say. On the Wednesday afternoon before Thanksgiving, something unexpected will happen to the turkey. It would be a modification of the faith.
Turkey has taken the most recent history to predict that things will be just as wonderful in the future. Plenty of food is provided to them to make them fat, they roam freely, and become more and more confident every day that things will be all right… well.
The problem is that Thanksgiving comes every year, and a hundred million turkeys are slaughtered, except for the couple pardoned by the president. This year “peanut butter” and “jelly” will be forgiven and they can live their lives relative happiness, For all other turkeys the “revision of the faith” is quickly followed by sudden death.
Investors in the bond markets have likewise become used to central banks providing back-stops. Even when inflation is rising wildly and the “temporary” camp is now changing its tune, people insist on buying government bonds. both Jerome Powell And Janet Yellen is now talking about inflation which is probably more stable than she thinks, but more importantly, now she’s talking more about what they can do if they’re wrong with that assessment. will do. In other words, they are getting ready to shock the markets – or to use Taleb’s words, a “modification of confidence” in easier monetary policy.
In 1994, another Fed chair, now “non-maestro” Alan Greenspan, stunned the bond markets by abruptly tightening policy on February 4, 1994. Rates were lowered, stock markets on fire since 1987. Accident. A few months later the Fed tightened again between meetings. Then in May of 1994 the Fed accelerated the rate hike to 0.50%! To hold on to the markets, the Fed raised rates by 2.5% in 1994. Two-year Treasuries increased from 4% at the beginning of the year to more than 7.5% at the end of the year (source: Businesshala). Orange County, CA, the county I now call home, went bankrupt, among other leveraged investors. Turkey.
I was a young businessman then, and tried several times to catch the falling knife, literally. My learning was swift and painful, and like a turkey, I realized how markets can modify beliefs without warning. I was that overstuffed turkey too.
Today, the Fed is in a similar situation, lagging behind by its own arrogance and confidence in its economic forecasts that are clearly wrong. Since government officials will never admit they are wrong, the markets will have to prepare themselves to deal with the falling knife. With real returns in deep negative territory globally, even as stock markets set records daily, bond markets are at the mercy of non-elected officials making ad-hoc decisions. And when there is a revision of confidence, there will be few places to hide in the liquid asset markets.
Going back to my Caltech days is another thing I’m not so proud of. Our graduates used to call graduate students “grad turkeys”, possibly because surviving the math and physics courses designed for an undergraduate at Caltech was considered too difficult for graduate students who went to other schools as undergraduates Were. With their faint figures, inability to fly, “gobble-gobble” sounds, and most importantly tryptophan overdose that puts you to sleep, turkeys have become the epitome of stupidity. Of course all this bad press about turkey is a myth. But we cannot be sure.
Right or wrong, Turkey Day reminds us of the fact that when you’re at the markets, you don’t want to be the last turkey thinking that everything will be okay forever. We’re certainly in the twilight zone of central bank-run markets, and a hangover from gluttony won’t be pretty for bond markets.