8 stories that caught my eye and what I took from them.
I will still be skiing more than reading next week, so WIRTW will be taking a well-deserved break.
Gravity Always Wins - Teun Draaisma / Ruffer
- OUR TWO CENTS - Ruffer Review 2024 | Gravity always wins (foleon.com)
- Teun makes the case that active investors can still have an advantage over machines by focusing on the long-term. I agree.
- Interesting angle: the rise of the machines in investing might hand more opportunities to active investors with a long-term focus
- Why? Machines’ short-term focus might create more dislocations from the long-term fundamentals. He cites the depressed level of the VIX below where it ‘should’ be based on the macro environment.
- I wonder whether we might end up with different disconnects from long-term fundamentals than before. Maybe even more. But it’s not like humans have also excelled at creating dislocations, bubbles. Perhaps machines create more, but less extreme dislocations than humans. Food for thought.
- Bottom line: if you want to beat the machines, focus on the long-term
Microsoft’s AI talent raid will test regulators – Financial Times
Turns out Tech companies are as innovative in avoiding regulators as they are in inventing the future
Regulators have clamped down on Tech’s M&A appetite, which is reflected in declining deal numbers and volumes. Look no further than the recently failed attempt of Adobe to buy Figma.
Microsoft has built a dominant position in AI without acquisitions, but also not exactly organically.
There’s the investment in OpenAI and and Amazon’s investment in Anthropic.
And now the deal with Inflection AI. Instead of acquiring the company, Microsoft hired almost all its employees. This includes Mustafa Suleyman, Inflections co-founder and one of the top names in AI, to run its consumer AI business. Plus, a $650m licensing fee to access the remaining company’s technology. But technically it’s not an acquisition, so the regulations don’t apply.
Regulators will have noticed this as well, but always look at least two steps behind.
Bottom line: Innovative Big Tech is a step ahead of regulators
Cryptocurrency Investors and their Dark Personality Traits – Luo et al
- delivery.php (ssrn.com)
- What a surprise! Cryptocurrency investors lean towards being machiavellian, narcissistic psychopaths.
- So crypto is just like other asset classes after all!
- There is a long history of research that links the dark traits mentioned above to investment behaviour, like stock market traders displaying similarities to certified psychopaths.
- What’s different about crypto? While existing studies show that dark personalities are associated with worse investment performance, crypto investors with more ‘dark traits’ had better investment performance.
- My question: how much of the correlation comes from the extreme volatility of cryptocurrencies in their infancy? Will a more mature crypto market begin to favour investors with fewer ‘dark traits’?
- Bottom line: Crypto is like other assets, traders lean towards dark personalities
Climate Change & Inflation – Kotz et al
- Climate change could turn up the heat on inflation, according to report | Euronews
- A new entry on the debate on how climate change impact inflation by the Potsdam Institute for Climate Impact Research
- Comprehensive research: more than 27,000 observations of monthly price indices across 121 countries during the 1996 to 2021 period, using 21 different versions of the latest climate models.
- Unsurprisingly, higher temperatures increase food and headline inflation persistently over 12 months
- Recent example: the 2022 extreme summer heat increased food inflation in Europe by 0.4-0.9%
- Using temperature increases projected through 2035, would boost food inflation by as much as 3% and overall inflation by 0.3% to 1.2%.
- Bad news: they found little evidence that past and current adaptation measures to climate change had reduced inflationary pressure.
- Caveats: Inflation has proven impossible to forecast. Add the uncertainty around climate predictions into the mix and the conviction in specific forecasts must be low. It is the thought process that is more important than the forecasts here.
- Bottom line: More research suggesting climate change could be a significant upward force on inflation.
Overprecision in the Survey of Professional Forecasters – Sandy Campbell, Don Moore
Predicting the future is more difficult than we admit.
The paper looks at a huge number (16,559) of forecasts of economic variables
Several interesting findings, some more surprising than others.
Economists are overconfident in the accuracy of their forecasts
The longer the time horizon, the less accurate the forecast
Economists have been getting better at forecasting over the years
Economists do not have an optimistic bias
Takeaways
Point forecasts of economic variables are not very useful! Put a low weight on them.
Assume others are overconfident in forecasts and will often be wrong.
The process of forecasting is more important than a point forecast.
That means it’s good to have an economics team. The true value is in discussing and debating the forecasts. This is the only way to understand the thought process behind the forecasts and the distribution of outcomes.
Understanding that economists don’t have a bullish bias is important in interpreting their views. No need to take a reality discount off the forecasts like you do with equity analysts/strategists.
Caveat: it would be great to be sure that this applies to sell-side and buy-side economists as much as it does to academic economists.
My unscientific take: equity investors have a bullish bias, economists are neutral and fixed income investors have a bearish bias. In a balanced multi-asset team, that should balance out.