Economy Flips The Script; What That Means For Fed, S&P 500
In the blink of an eye, the global economy’s most pressing problems have surprisingly gone away.
In October, as the S&P 500 was plumbing bear-market lows, rapid-fire Fed rate hikes and a soaring dollar stoked fears the sickly global economy would crash. Then the unexpected happened — again and again.
Now the all-but-certain 2023 global recession has been called off, and the rest of the world should help cushion the landing for the U.S. economy.
So what does this revamped outlook for the global economy mean for investors? A soft U.S. landing should limit the downside for corporate earnings and the S&P 500. The Federal Reserve shows no inclination yet to relax its inflation fight, but cooling wage growth suggests they may not have to inflict as much pain.
Investors need to stay flexible and likely cast a wider net. If there’s no recession, inflation may not subside as quickly. Long-term Treasury yields, instead of collapsing in an economic downturn, might act as a headwind to growth stock valuations. Yet international stocks, long out of favor, might extend their recent run as growth recovers overseas.
China Makes ‘Mother Of All U-Turns’
China’s economy, until recently locked down, is now off to the races. President Xi Jinping took the “mother of all U-turns,” as Jefferies strategist Christopher Wood put it, ditching his zero-Covid policy late last year and hitting the fiscal accelerator. Europe’s economy, at risk of going into a deep freeze this winter without Russian fuel, is instead heating up after natural gas prices unexpectedly plunged.
In the U.S., Fed officials had been dead-set on driving up unemployment, risking recession, to cool off the hot wage growth they feared could make high inflation the new normal. Despite their best efforts — and 425 basis points in rate hikes — unemployment has kept sliding to the lowest point since 1969. But despite strong job gains, wage growth has cooled to a level close to the Fed’s comfort zone.
The U.S. economy still faces a slog in 2023 as the Fed hikes rates further to depress growth. But the jobless rate shouldn’t have to rise as much as feared before the Fed pivots.
Moderating wage growth means that Fed policymakers “don’t need to kill the economy,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.
How Long Will Fed Rate Hikes Continue?
After January’s surprisingly strong jobs report and retail sales data, Fed officials are on alert for a reacceleration in growth that could keep inflation elevated. That sealed the deal for quarter-point rate hikes at the next two Fed meetings in March and May and put the recent S&P 500 rally on pause.
Markets are now pricing in better-than-even odds of one additional rate hike in June or July. But the apparent burst of economic momentum to start 2023 isn’t likely to last.
The nation’s savings rate, after falling to a rock-bottom 2.4% of income, began rising at the end of last year, taking some of the wind out of household spending. Despite January’s 3% retail sales jump, which was helped by an 8.7% Social Security cost-of-living increase, sales over the three months through January slipped vs. the prior three months.
Global Economy Vs. U.S. Economy
Historically warm weather likely boosted activity last month, including an estimated 125,000 lift to payrolls, says the San Francisco Fed. A University of California strike resolution added back 48,000 postgrad teaching assistants and researchers. Soft seasonal retail and temp hiring in Q4 reduced the need for post-holiday layoffs, which gave the appearance of stronger hiring on a seasonally adjusted basis.
Comparisons also were probably skewed because the two biggest Covid waves peaked at the start of the prior two years. In January 2022, 6 million people said they were sidelined or had hours cut amid the omicron surge, doubling from the prior month.
The clearest indication that the labor market isn’t as overheated as it appears is the continued moderation in wage growth. The past two employment reports show the 12-month rate of average hourly wage growth slowed to 4.4% from 5%, even as the unemployment rate fell to 3.4% from 3.6%. That combination “is even better than Goldilocks,” wrote Jefferies Chief Financial Economist Aneta Markowska. Taken at face value, it suggests “a utopian scenario” in which stronger growth produces lower inflation, she wrote.
While that’s far-fetched, the reality is still pretty great: Wage growth has been cooling without significant labor market weakness. Average hourly earnings growth has fallen 1.5 percentage points since peaking at 5.9% last March. The Employment Cost Index, the Fed’s favorite read on wage trends, shows compensation for private-sector workers rose just 0.9% in Q4, excluding incentive-paid occupations with volatile sales commissions. That 3.6% annual rate is just a hair above the 3.5% wage growth that Fed chief Jerome Powell says is consistent with the Fed’s 2% inflation target.
Changing Tones On Fed Policy
Tamer wage growth, despite solid hiring, explains Fed chief Powell’s optimistic tone during his Feb. 1 news conference, which sent the S&P 500 surging to a five-month high. Powell notably declined to rule out the possibility of rate cuts later this year if inflation falls faster than expected.
Fed talk quickly turned less-hopeful after January’s jobs report. A parade of officials have raised the possibility of additional rate hikes to cool the labor market.
Tuesday’s CPI report, which hit pause on the S&P 500’s latest push higher, won’t help. Services inflation shows no letup, while three months of core-goods price deflation came to an end as prices firmed in categories like apparel and household furnishings.
It’s no coincidence that the current stock market rally peaked Feb. 2, a day after the latest Fed meeting and Powell’s soothing words and just before the January jobs report. The dollar and Treasury yields also have rebounded from early February. However, the S&P 500 and other major stock indexes haven’t given up much ground.
No Need For Unemployment Spike?
Yet despite the reversion to a hawkish tone, softer wage growth has changed the Fed’s destination in its battle against inflation.
The latest Fed projections from December showed that policymakers thought the unemployment rate would have to hit at least 4.6% before they approached an exit ramp from tight monetary policy. And the exit ramp was expected to be long, with unemployment holding near that level for two full years as inflation only gradually receded toward the 2% target.
Behind those projections was a view that the labor market had fundamentally changed. Before Covid, the Fed struggled to boost inflation even to 2%, despite unemployment falling as low as 3.5%.
Then the pandemic and its side effects dealt a shock to the labor market. While government stimulus and inflated unemployment benefits went away in 2021 and Covid disruptions faded, the shock seemed to persist. In November, Powell highlighted 2 million excess retirements during the pandemic, helped along by the wealth effect from the rise in the S&P 500 and soaring home prices. Meanwhile, the housing shortage only complicated the challenge of finding scarce workers in hot real estate markets.
Those factors, economists figured, had raised the noninflationary rate of unemployment to around 5%. That meant that inflation couldn’t be whipped without a recession.
Current Job Market
But recent wage data and corporate earnings calls suggest that the labor market has begun to function more smoothly.
Waste Management (WM) CEO James Fish noted he sees “improvements in our labor cost as inflationary wage pressures are easing (and) turnover trends are improving.” Chipotle (CMG) CEO Brian Niccol said December was “one of our best months in the past two years for both hourly and salary turnover rates.”
The labor situation began improving in Q3, Northrop Grumman (NOC) CEO Kathy Warden told analysts. “Our hiring had improved. Our retention had dramatically improved, and we saw that trend continue in the fourth quarter.”
By December, the share of private-sector workers quitting their jobs had reversed more than half its rise vs. pre-Covid levels. Julia Coronado, president of MacroPolicy Perspectives, noted on Twitter that the household survey component of January’s jobs report revealed a nearly 1 million population boost, mostly due to net international migration.
The newly discovered population, she wrote, “comes in with a hot (labor force) participation rate of 91.3%,” vs. 62.4% for the nation as a whole. Coronado expects more of the same in 2023, which should contribute to noninflationary growth.
Evidence that the noninflationary rate of unemployment is “still only 3.5%-4% is becoming quite compelling,” said Pantheon’s Shepherdson.
The upshot: Instead of a Fed pivot after unemployment rises to 4.6%, it could happen when the jobless rate reaches 4%.
But until the job market is clearly weakening and disinflation broadens out to services such as health care, haircuts and hospitality, the Fed will err on the side of keeping monetary policy too tight.
Global Economy Boost To Inflation?
Meanwhile, the sudden upturn in global economic growth is supporting commodities prices, adding to the risk that high inflation may stick around.
In a Feb. 7 Q&A, Powell highlighted the “risky world out there” as among his concerns, noting that the war in Ukraine and reopening of China “can affect our economy and the path of inflation.”
One wild card will be whether the end of three years of rolling Covid lockdowns and the slowest growth in a half-century revives the confidence of China’s middle class and reinflates the property bubble, wrote Jefferies’ Wood. The risks in China “are massively to the upside,” he said.
Many economists, however, expect China’s recovery to be underwhelming. As in the U.S., Chinese households have stored up extra savings during the pandemic. But whereas U.S. consumption benefited from stimulus checks and a boost in housing and stock market wealth, Chinese households spent less and saw housing wealth deflate.
Pent-up demand in China will primarily lift spending on services like health care, education and transportation that are depressed vs. pre-Covid levels, wrote UniCredit economist Edoardo Campanella. These categories of spending “are intrinsically domestic and are therefore unlikely to benefit the global economy in a substantial way.”
China, Emerging Markets To Drive Global Economic Growth
Yet even the IMF’s base case has China combining with India to drive half of global GDP growth. The U.S. and Europe will only account for one-tenth of global growth combined, the IMF says. The European Central Bank, like the Fed, is still aggressively tightening to rein in inflation.
Meanwhile, other emerging market economies are expected to pick up speed, the IMF says. A weaker dollar lowers the cost of dollar-priced commodities such as oil and reduces the cost of servicing dollar-based debt. The dollar has tumbled in recent months, though it’s bounced a little in February.
What Outlook For Global Economy Means For Investors
The juxtaposition of better economic growth overseas and a Fed determined to step on growth at home presents an unusual backdrop for investors.
Ed Yardeni, chief investment strategist at Yardeni Research, who has long advised investors to “stay home,” has tilted to a “go global” stance through the first half of 2023.
“The valuation multiples are significantly lower overseas,” he told IBD, highlighting “opportunities in banks and energy in Europe.”
Still, he expects the U.S. to avoid recession, and sees some opportunities at home. “A lot of money is pouring into infrastructure and onshoring, and that benefits industrials,” Yardeni said. “Energy still looks fine and financials are in great shape.”
While Wood sees upside risk in China, he sees U.S. risks as being “clearly to the downside” as the Fed keeps tightening.
“Slowing inflation into a slowing economy also means declining nominal GDP growth,” Wood wrote. That means U.S. stocks face a risk of earnings downgrades, he says.
Last month, Wood’s Greed & Fear newsletter unveiled a global long-only portfolio of 23 stocks that reflects global economic trends. The portfolio is overweight China, including e-commerce plays Alibaba (BABA) and JD.com (JD), as well as India and European banks. It also makes plays on rising commodities prices, including U.S.-based copper giant Freeport-McMoRan (FCX) and oilfield services leader SLB (SLB). Dutch chip-equipment maker ASML (ASML) is a play on the chipmaking expansion as the U.S. decouples from China.
Going global has worked pretty well. London’s FTSE 100 index and the CAC 40 in Paris have hit record highs in the past week. Hong Kong’s Hang Seng Index, after crashing to a 13-year-low in October, has rebounded more than 40%.
Global Economy And Growth Stocks
Plays on global economic growth have a big presence in the flagship IBD 50 list of top growth stocks and the IBD Leaderboard portfolio. The latter includes travel-related stock Airbnb (ABNB) and the U.S. Global Jets ETF (JETS), as well as MercadoLibre (MELI), Latin America’s largest e-commerce company. The KraneWeb CSI China Internet ETF (KWEB) is on the Leaderboard Watchlist.
Yet U.S. growth stocks also began the year on a tear. The S&P 500 information technology sector’s 15.6% gain year to date has nearly doubled the 8% rise for the blue chip index. Lately, more speculative plays are catching fire, including Bitcoin and Ethereum.
Federal Reserve Has Upper Hand
Strong jobs data, firming inflation and surging stock prices may make it seem like the Fed is losing control.
In reality, the Fed has just gained the upper hand. Bond traders had been pricing in fewer hikes and a quick pivot to rate-cutting. Now they are suddenly betting that the Fed may raise rates even higher than its own projections show. That’s sent the 2-year Treasury yield surging about 60 basis points over the past two weeks to 4.63%. The six-month T-bill has topped 5% for the first time since 2007. Meanwhile, the 10-year yield, key for pricing auto loans, has jumped a half point. The 30-year mortgage rate, after falling to near 6%, surged 70 basis points over the past month.
Higher borrowing costs for consumers and the small businesses key to job growth will deliver the slowdown policymakers want. Yet stock investors are still fighting the Fed and that might continue for a little while. Financial conditions remain easy, partly because the Treasury has stopped issuing new debt ahead of a debt-ceiling showdown with the GOP.
But the economy and S&P 500 are likely approaching an inflection point. After a strong start to 2023, the near-term outlook for stocks could be difficult. However, a significant economic slowdown now should smooth the downward path for inflation and a soft landing that creates the conditions for a sustainable stock market rally.
Be sure to read IBD’s The Big Picture column every day to stay in sync with the market direction and what it means for your trading decisions.
What to expect from budget 2023 as ‘storm clouds’ gather over Canada’s economy – Global News
Canada’s Liberal government is in a tight spot heading into the 2023 federal budget.
A year of surging prices and rising interest rates has put fresh stress on Canadian households struggling to make ends meet.
Landmark investments in the green transition from the United States have turned up the heat on the Canadian government as it looks to stay competitive with the economic juggernaut south of the border.
And after years of higher spending and a surging recovery from the COVID-19 pandemic, storm clouds are gathering in the economy, putting new scrutiny on government coffers.
Chrystia Freeland, the government’s finance minister and deputy prime minister, has pledged that the 2023 budget will include “targeted” support to help vulnerable Canadians but will not “pour fuel on the fire of inflation.”
Can Ottawa thread the needle through the competing pressures and economic uncertainty while still meeting Canadians’ ends?
Here’s what economists think.
Budget planning in a ‘challenging time’
The federal budget comes at a “challenging time” for Freeland and Prime Minister Justin Trudeau, says Sahir Khan, vice-president at the University of Ottawa’s Institute of Fiscal Studies and Democracy.
Now in their third term of governing, Khan tells Global News that the Liberals’ second budget of their current mandate is set to arrive amid a “change in context.”
He says the Liberals have had the “good fortune” of inheriting large revenue surprises in previous budgets, which has helped the government spend more while staying fiscally sustainable.
But government revenues are set to dry up with the economy slowing, Khan warns, even as spending priorities mount.
Among the pressures facing the government are commitments already made on a new health-care accord with the provinces, defence spending both at home and in Ukraine and the green energy transition.
Freeland gives detailed outline of funding in proposed health-care plan
“Storm clouds” are gathering for a possible recession on the horizon, Khan notes, and the federal government will feel pressure to “keep some of their powder dry” for emergency spending to resuscitate the economy if the worst-case scenarios come to pass.
Randall Bartlett, senior director of Canadian economics at Desjardins, says that even with the first quarter of the year off to a stronger start than most economists anticipated, the government still finds itself in a bind with uncertainty about how much the economy slows this year.
“It’s a challenging environment to do budget planning overall,” he tells Global News.
How will inflation impact the budget?
A surging economy through the COVID-19 recovery helped push government revenues higher and Ottawa spent much of this money on support for Canadians hit hard by the pandemic.
While those programs have largely wound up, a recent analysis from the Bank of Montreal showed that government spending per capita is still 11.3 per cent higher than in the pre-pandemic era.
Bartlett says that while government revenues generally see a boost amid high inflationary periods, the federal government is about to experience the “insidious” nature of rising price pressures on the downturn.
Canada’s inflation rate cools to 5.2%
Government spending supports that are indexed to inflation, such as Old Age Security (OAS), are now costing more, just as subsiding inflation and a cooling economy are set to slow government revenue growth, he says.
“We’re going to continue to see those knock-on effects of high inflation on the spending side, even as those tailwinds to revenues start to fade,” Bartlett says.
But Bartlett adds that the government is facing “a lot of political pressure” to continue to spend to support vulnerable households.
Some economists worry that too much direct financial support from the federal government will end up fuelling inflation, as Canadians use their contributions to buy more goods and services and end up stimulating the economy all over again.
More on Money
Top officials at the Bank of Canada, which has raised its benchmark interest rate aggressively over the past year to cool the economy and tame inflation, have said that letting up on pandemic-era stimulus sooner could have limited inflation.
In order to avoid driving inflation higher with government support, Ottawa will need to be “well-targeted” in its spending plans, says Lindsay Tedds, associate professor of economics at the University of Calgary.
Rather than sweeping tax cuts, which would lessen the burden on households but could inadvertently spur more spending, Tedds tells Global News that the Liberals could again double the GST credit or top up guaranteed income supplements.
More students turning to food banks as inflation shrinks already tight budgets
Doing it this way would ensure government spending goes more towards Canadians who need it to make ends meet on the basic necessities, she says.
“We’re talking about just trying to get them through being able to pay rent and buy groceries and things like that. So it doesn’t have an inflationary impact,” she says.
Khan says the government could also “stagger” its promises, with spending ramping up in years three, four and five of its budget horizon. Doing so could allow the Liberals to keep money back to respond to emergencies while also showing Canadians they’re listening to affordability concerns, he says.
Pressure from the U.S. demands action
Economists who spoke to Global News say the federal government is feeling pressure to respond to the U.S.’s Inflation Reduction Act, which rolled out a number of incentives for companies to make investments in the green economy south of the border.
Despite restrictions on the government coffers, the Liberals will need to put a “down payment” on some of the clean energy priorities it has talked about for years, Khan says.
If Ottawa does not roll out its own incentives to compete with the U.S., Canada risks losing jobs and investment from large-scale companies in the green economy, he argues.
“They will suck that capital and those jobs out if we don’t look like we’re doing the same for our industry,” Khan says of the U.S.
“There’s going to have to be something actually quite tangible in this budget. It can’t just all be narrative.”
Tedds agrees and notes that announcements on measures like carbon capture and storage will be attractive in Alberta.
Ottawa can’t necessarily go toe-to-toe with American capital, however, and Bartlett says the government should focus spending on industries where Canada has a “comparative advantage.”
He highlights critical minerals as one such area where Canada could position itself in the green economy.
‘Champagne taste’ and a ‘beer bottle budget’
Tedds says Canadians should “moderate their expectations” for the upcoming budget.
While it’s possible Canada avoids the worst of the economic downturn, the outlook is “too unpredictable” for the Liberal government to offer significant relief or big-ticket items in this budget, she says.
Tedds notes she’d like to see an overhaul of the employment insurance program to ensure that when and if Canada’s jobless rate starts to rise, the government is ready to support Canadians through the downturn.
“We really should be recession-ready. There are some sectors that are really hurting, tech being one of them. We’ve seen massive layoffs, especially here in Calgary. And so there are people hurting,” she says.
Despite all the pressures facing the Liberals in their third term in office, Khan says the Trudeau government will need to demonstrate that it’s still “got some fire in its belly” and can deliver results for Canadians.
“I think this time it’s going to be less about aspiration and more about perspiration,” he says.
As opposed to a newly elected government delivering a budget of change in its first spending plans, the Liberals will have to prove they still have ideas and can make progress on projects that matter to Canadians, Khan says.
He expects the Liberals will devote a fair bit of the budget text to the already announced health-care spending announced in February as a “victory lap” of sorts.
If the government wants to hit every spending priority while maintaining the federal debt-to-GDP ratio — a key fiscal guardrail watched not only by the government but by credit rating agencies and international observers — it may have to find new sources of funding.
Canadian banks are stable, but ‘something is going to break’ in economy: experts
Bartlett says that with the revenue sources drying up and the Liberals under pressure to maintain their fiscal guardrails, tax hikes could be on the table, likely aimed at corporations or higher-income earners.
Otherwise, he says the Liberals might have “champagne tastes,” but they’re working with a “beer bottle budget.”
“They’re not going to get everything on their wish list,” he says. “And so they need to they need to be mindful of that and exercise some genuine prudence.”
— with files from Global News’ Touria Izri
Swedish Housing Market Crash Exposes Economic Divisions: Big Take – Bloomberg
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Swedish Housing Market Crash Exposes Economic Divisions: Big Take Bloomberg
Climate Change, Deglobalization, Demographics, AI: The Forces Really Driving Our Economy
Our economy today has been described variously as “weird,” “really weird” and “very, very weird.”
Weird because this is a yo-yo economy where gas prices shot up to more than $5 a gallon and then settled back down. The inflation rate for used cars dropped, then accelerated at a 40 percent rate before deflating at a record rate. Housing has gone from boom to bust, then to boom again. Economic indicators have been described as “a Jackson Pollock painting of data points and trends.”
Economists can’t figure it out. Economic models are only getting us as far as separating top-flight economists into Team Stagflation and Team Soft Landing. Alan Blinder, the Princeton economist, talks about the prospects of the Federal Reserve nailing a soft landing like he is handicapping a team’s Super Bowl prospects: “I think they still have a chance, but it’s a tougher chance than it was.”
Economists tried to deal with the twin stresses of inflation and recession in the 1970s without success, and now here we are, 50 years and 50-plus economics Nobel Prizes later, with little ground gained. The Fed and the Treasury Department buttressed the banking structure in the aftermath of the 2008 crisis. Fifteen years later, we are seeing it breached.
There’s weirdness yet to come, and a lot more than run-of-the-mill weirdness. We are entering a new epoch of crisis, a slow-motion tidal wave of risks that will wash over our economy in the next decades — namely climate change, demographics, deglobalization and artificial intelligence. Their effects will range somewhere between economic regime shift and existential threat to civilization. The risks to the economy, to the stability of our society and to civilization are enormous if we don’t get the economic models right for what’s coming.
For climate, we already are seeing a glimpse of what is to come: drought, floods and far more extreme storms than in the recent past. We saw some of the implications over the past year, with supply chains broken because rivers were too dry for shipping and hydroelectric and nuclear power impaired.
For demographics, birthrates are on the decline in the developed countries. China’s population is in decline, for instance, and South Korea just set a mark for the lowest birthrate in the developed world. As with climate change, demographic shifts determine societal ones, like straining the social contract between the working and the aged.
We are reversing the globalization of the past 40 years, with the links in our geopolitical and economic network fraying. “Friendshoring,” or moving production to friendly countries, is a new term. The geopolitical forces behind deglobalization will amplify the stresses from climate change and demographics to lead to a frenzied competition for resources and consumers.
We can see the impacts of climate change, demographics and deglobalization coming. The fourth, artificial intelligence, is a wild card. But we already are seeing risks for work and privacy, and for frightening advances in warfare.
These risks are going to accelerate and affect us for decades. If our economic models can only get as far as Team Stagflation versus Team Soft Landing — if we can’t get a firm hold on pedestrian economic issues like inflation and recession — the prospects are not bright for getting our forecasts right for these existential forces.
The problem here is not that our economic models don’t work at all. The models seem serviceable when things are simple and stable, when we are in a steady state with tons of past data to draw on. The problem is that the models don’t work when our economy is weird. And that’s precisely when we most need them to work.
Economists have admitted as much. At the height of the 2008 financial crisis, Queen Elizabeth II asked the question that no doubt was on the minds of many of her subjects: “Why did nobody see it coming?” The response, some months later, by the Nobel laureate economist Robert Lucas, was blunt: Economics failed with the 2008 crisis because economic theory has established that it cannot predict such crises.
A key reason these models fail in times of crisis is that they can’t deal with a world filled with complexity or with surprising twists and turns. For example, the mathematical models of economics analyze a representative agent — be that an individual or a firm — and assume the overall economy will behave the way that this one agent behaves. The problem here, and a problem broadly with complex and dynamic systems, is that the whole doesn’t look like the sum of the parts. If you have a lot of people running around, the overall picture can look different than what any one of those people is doing. Maybe in aggregate their actions jam the doorway; maybe in aggregate they create a stampede.
Economists fancy themselves as the physicists of the social sciences, wielding mathematical models to bring solutions to the economic world. But we are not a mechanical system. We are humans who innovate, change with our experiences, and at times game the system. Reflecting on the 1987 market crash, the brilliant physicist Richard Feynman remarked on the difficulty facing economists by noting that subatomic particles don’t act based on what they think other subatomic particles are planning — but people do that.
What if economists can’t turn things around? This is a possibility because we are walking into a world unlike any we have seen. We can’t anticipate all the ways climate change might affect us or where our creativity will take us with A.I. Which brings us to what is called radical uncertainty, where we simply have no clue — where we are caught unaware by things we haven’t even thought of.
This possibility is not much on the minds of economists. Charting Fed policy or forecasting consumer demand might have surprises here and there but operate with a well-worn vocabulary. It’s with the longer-term risks that “unknowable” has force.
How do we deal with risks we cannot even define? A good start is to move away from the economist’s palette of efficiency and rationality and instead look at examples of survival in worlds of radical uncertainty. Take the cockroach: It has survived for hundreds of millions of years as rainforests turned into savannas and savannas turned into deserts. And it has done this with a coarse escape system, simply running from puffs of air on its cercal hairs. Not very elegant. It will never win the Insect of the Year award but has done well enough to survive a world of radical change.
In our time, savannas are turning into deserts. The alternative to the economist’s model is to take a coarse approach, to be more adaptable — leave some short-term fine-tuning and optimization by the wayside. Our long term might look brighter if we act like cockroaches. An insect fine-tuned for a jungle may dominate the cockroach in that environment. But once the world changes and the jungle disappears, it will as well.
Rick Bookstaber has served as chief risk officer at major banks and hedge funds. His 2007 book, “A Demon of Our Own Design,” warned of the coming financial crisis. His latest book is “The End of Theory.”
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