Getting stuck in the past

Modelling of returns is the financial markets executing on the adage that those who forget history are destined to relive it. A model by its very nature is taking the past and expecting it to repeat. George Santayana the philosopher who made that sentiment popular also went on to say that “History is a pack of lies about events that never happened told by people who weren't there.” Modelling may not be a pack of lies, but certainly cannot be based on the full picture not just what prices did, but what were the conditions that created those movements.

This popped up in a Bloomberg article this week by Aaron Jones who noted that the reductionist brain that we all possess wants to ascribe a few factors as the catalysts for big events where in reality there are always multiple pressure points that cause those significant rifts. Politicians, commentators and economists alike (I am looking at you Rogoff and Reinhart) almost invariably conclude that solutions to a problem are an easy fix if we could just change one thing.

Often repeated (especially on this platform) is the idea that high interest rates are good for us all because we learn to be frugal. It is the modern economic equivalent of self flagellation. It treats (not particularly well in my view) one of the contributing factors and is relied upon in the absence of political action. We like to blame central banks and politicians where in fact the problem in any crisis is us.

We are the consumer. We are the borrower who didn’t remember we were paying a variable rate and that over 30 years that could occasionally be very inconvenient. We are the keyboard warriors (guilty) shortening the political cycle to tomorrow’s headline instead of empowering our leaders to lead. How  popular would an extension to 5 year terms be so they could do just that? We get what we deserve.

The clearest message we get from history is that complexity rather than simplicity is the norm. This complexity can help markets but usually makes them very tough to negotiate. Having only been in market for 40 years my data is not complete, but I don’t recall a time that felt that work life was easy. To be fair it was often fun.

Geo-political risk has always been ever present and maybe it is elevated in 2024 compared with the last decade or so. It is not unprecedented and also not telling us to hide our cash under the bed. Taking volatility out of your portfolio is a tremendous idea as long as you can replace those potential returns because otherwise we will all be working into our 80s.

There is no history that covers that.