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Good morning Instacart’s IPO yesterday valued the company at up to $10 billion. Even with a quarter of the company’s richest private financing round, this represents a win for the market. Companies with unproven business models can get money! That’s good! Send me an email: [email protected]

Great market narratives

On the Apple TV show Foundation, endowmentBased on the novel by Isaac Asimov, the plot is set in motion by a mathematician who uses a sophisticated algorithm to predict that the centuries-old galactic political order is doomed to collapse. Like the premise of all good science fiction, this one is intellectually unconvincing and emotionally compelling. Not convincing because societies are dynamic systems that change with the beliefs of the people who are their constituent parts. The idea of ​​definitively predicting them using a series of equations is about as likely as faster-than-light travel. Compelling because people in the real world have always been drawn to the dream of historical order and predictability.

If you doubt that anyone is really falling for the great historical algorithm that predicts the big thing that will happen, I recommend you check out Francis Fukuyama’s review of Neil Howe’s The Fourth Turning Is Here and Peter Turchin’s End Times read The New York Times. Turchin’s book is based on something called “cliodynamics”: in Fukuyama’s words, “a type of big data analysis that makes predictions by applying mathematical models to a vast database of previous historical crises going back several millennia.” the method is indistinguishable from the “psychohistory” of Asimov’s mid-century fantasy.

On Wall Street, some grand theories and historical narratives come from investors who have made a lot of money, giving them credibility. It is tempting, for example, to take George Soros’s theory of reflexivity or Ray Dalio’s speech about the five great forces of history seriously as predictive frameworks. But good investors can’t see the future any better than the rest of us; Your ability is a keen sense of the present. If someone starts with “I’ve been reading a lot of history lately…”, ask the waiter for the bill.

And yet we must try to look as far forward as possible. Since we believe that economies and markets are amenable to analysis, it goes without saying that we should try to anticipate not only cyclical changes but also regime changes. The latest to try it are Jim Reid, Henry Allen and Galina Pozdnyakova of Deutsche Bank, who yesterday published the third part of their long-term asset return study, “The History (and Future) of Recessions.” The study is long and sweet and contains many useful charts and tables on the frequency, depth and duration of recessions in developed markets, going back decades and even centuries.

The article’s forward-looking argument is that the post-1982 period of falling interest rates, low inflation, and long economic booms is historically unusual and probably over. This period was characterized not only by deepening globalization, but also by activist fiscal and monetary policies that mitigated economic downturns and led to high levels of debt accumulation.

Now, however

[T]his approach is reaching increasing limits. In particular, the public and private debt burden has risen to a very high level, which limits our scope for action in the future. Additionally, real yields have risen sharply in recent years, increasing the cost of additional debt. And with [ageing demographics and deglobalisation] As inflation continues to face upward pressure, we may well see more volatile fluctuations in interest rates and therefore more volatile economic cycles in the coming years. This is likely to place even more constraints on policymakers. . . a more regular pattern of boom-bust cycles and more frequent recessions are likely

This new regime won’t necessarily be bad for growth, Reid and his co-authors argue. In fact, there is a strong strain of market fundamentalism running through the report, suggesting that a “natural” business cycle will encourage innovation and growth through creative destruction. And in a nice nod to the indeterminacy of history, the authors also argue that one reason for the long economic cycles of the last few decades is pure luck. In the past, many recessions have been due to disasters, wars, pandemics, and other endogenous shocks, and “the fact that we have only experienced four recessions in the U.S. in the last four decades is very unusual and is likely to occur absent an enormous crisis.” don’t repeat.” good luck”.

Longtime readers of Unhedged will recognize another important feature of this thesis: many people agree with it, or at least hold views closely related to it. This is near consensus among people who have the audacity to predict changes in the economic regime. It has a lot to do with Charles Goodhart and Manoj Pradhan’s demographic argument about interest rates. It is a milder version of Nouriel Roubini’s prediction of a stagflationary debt crisis. It sounds a lot like the BlackRock Investment Institute’s house view. Michael Hartnett of Bank of America argues for similar results. The list goes on.

The teenager in me reacts to the popularity of this forecast with doubt. I just don’t think people tend to fully understand big calls like this, and the fact that so many people are drawn to this particular call makes me wonder if the story’s appeal lies in its order rather than in lies in their severity. However, my position does not deserve to be called a counter-argument, and there is a lot of substantive work in the Reid Report and its predecessors.

However, I suspect that part of what drives the consensus view of regime change is shockingly simple. It’s hard to look at a long-term chart of US interest rates and not think that we are on the verge of a regime change where interest rates will rise. Here is Deutsche Bank’s version of the chart:

line increase 1950-1982; Line drops to zero by 1982-2020; Now the line has to go up! That’s not an argument either, but at least it’s not science fiction.

A good read

The San Francisco office market is capitulating.

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