When I first came to the United States as a 17-year-old college freshman, I was invited to the home of a professor of biology at the California Institute of Technology for Thanksgiving. I soon fell in love with this holiday. First, it comes on Thursday and leads to a long weekend. Second, you will eat an infinite amount of food. Finally, after eating a ton of food, you can relax on the couch with others, without being shy, while watching reruns of old Hollywood classics and football. My favorite was to make a fuss with the rerun of the Twilight Zone. There, it always seemed strange things were happening under normal veneer. Subsequent weekends were usually spent recovering from food gluttony.
Someday today, if that hasn’t happened yet, a sort of harsh twilight zone will also occur in many turkeys. This is called the “Turkey Problem” and is a parable eloquently quoted in his book by Nassim Tareb, a fame of “Black Swan”. This shows the quote verbatim:
Consider a turkey that is fed daily. All feeding consolidates the bird’s belief that daily feeding by friendly members of humanity “looking for the best interests” as a politician is a common rule of life. I will tell you. Unexpected things happen to turkeys on Wednesday afternoon before Thanksgiving. It leads to a correction of beliefs.
Turkey estimates the latest history of what happened to predict that things will be just as wonderful in the future. They are provided with plenty of food to fatten them, they roam freely, and every day things just … become more confident when things get great.
The problem is that Thanksgiving is held annually and 100 million turkeys are slaughtered, except for couples pardoned by the president. “Peanut butter” and “jelly” are allowed this year, and you may be able to live relatively happy. For all other turkeys, “correction of belief” is immediately accompanied by sudden death.
Investors in the bond market have similarly become accustomed to central banks offering backstops. People insist on buying government bonds, even when inflation is intensifying and the “temporary” camp is now changing its tone. Jerome Powell and Janet Yellen are now talking that inflation is probably more sustained than they thought, but more importantly, more about what to do if they are wrong in this assessment. ing. In other words, they are preparing to shock the market, or to use Taleb’s term “correction of beliefs” in simple monetary policy.
In 1994, another Fed chairman, who dropped out of the now graceful “non-maestro” Alan Greenspan, suddenly tightened his policy on February 4, 1994, shocking the bond market. crash. A few months later, the Fed tightened again between meetings. Then, in May 1994, the Fed accelerated the pace of rate hikes by 0.50%. To catch up with the market, the Fed raised rates by 2.5% in 1994. Two-year government bonds increased from 4% at the beginning of the year to more than 7.5% at the end of the year (Source: Bloomberg). Among other suffering leveraged investors, Orange County, California, which I now call home, went bankrupt. Turkey.
I was a young merchant at the time, literally trying to catch falling knives many times. My education was quick and painful, and I felt like a turkey, how the market could correct beliefs without much warning. I was also an overloaded turkey.
Today, the Fed is in a similar situation, lagging behind due to the Fed’s own arrogance and belief in apparently wrong economic forecasts. Government officials will never admit they are wrong, so the market will have to prepare themselves to deal with falling knives. Despite the daily record of the stock market, real yields in the world’s most serious negative territory have at the mercy of unelected civil servants making ad hoc decisions. increase. And when a belief change occurs, there is little to hide in the liquid asset market.
Back in the days of California Institute of Technology, there’s one more thing I’m not so proud of. Our undergraduates called graduate students “graduate turkeys.” Perhaps it was considered too difficult for graduate students who attended other schools as undergraduates to survive a math and physics course designed for undergraduates at the California Institute of Technology. Their awkward appearance, flightlessness, rattling noise, and the overdose of tryptophan, the most important thing that puts you to sleep, have made turkeys a symbol of stupidity. Of course, all this bad news about turkeys could be a myth. But we are not sure.
It’s a matter of truth, but turkey day reminds me of the fact that when I’m in the market, I don’t want to be the last turkey, thinking that everything is forever okay. We are certainly in the twilight zone of the central bank-led market, and the hangover from gluttony is not clean for the bond market.