Today I write that while there are reasons to be optimistic about the next 12 months, being psychologically fractured in your thinking is no less important. More specifically, I am currently thinking through three different contingencies and what they mean for the RBA's monetary policy decisions, Josh Frydenberg's budget position, and the prospect of quantitative easing. Click here to read the full column, or AFR subs can click here. Excerpt enclosed:
When you’re running money, you have to constantly occupy parallel universes. Putting yourself in one state of nature, followed by another, and another until you have iterated through all the potential permutations and combinations that make up the mind-bending distribution of outcomes the world could take. And you wonder why so many money managers are odd-balls!
Interestingly, writing this column is a helpful part of the process. Sometimes ideas gush forth. Other times it feels like the cupboard is bare. But every single time my fingers touch the keyboard, it is like engaging the ignition of another part of the brain that is only animated when one writes. Once the engine starts, the words fly-out in a stream-of-conscious flurry. And it is cathartic being forced into the discipline of putting down your ideas in black-and-white, week-in-week-out, in a public fashion knowing that every man and their dog will hold you to account if you get it wrong. It requires a delicate balancing-act between two uneasy bedfellows: conviction and humility.
Coming back to the macro, day-to-day we are absorbed by individual asset-pricing problems and the idiosyncrasies of the investment in question. But the truth is that our macro expectations are incredibly important—even more so than we perhaps consciously appreciate. They end up subtly permeating every aspect of our decision-making process, including the timing, sizing, pricing and selection of any investment.
The last year is a case in point. We have done enormous work on the probabilities around a range of macro puzzles, including the federal election, the prospect of a budget surplus, Trump’s trade war, the capricious president himself, Brexit, the Hong Kong conflagration, house prices, monetary policy in Australia, the US and Europe, quantitative easing, local and global economic growth, responsible lending, and the prospect of Standard & Poor’s upgrading its ratings on the major banks’ senior bonds, subordinated bonds, and hybrids for regulatory and macro reasons, to name a few. So what we are thinking right now? Three core states of nature occupy my mind...