I am currently having a hard time making sense of the world.
Intellectually I think I am able to make peace with the way things are these days. However, I find myself reverting to my old ways of thinking the moment I stop forcing myself to think in a certain way. Why am I having such a tough time adapting to a new way of thinking?
It turns out I am not such a dumbo and that changing the way ones brain has been wired is not such a trivial task.
In 2016 an engineer Destin Sandlin did an experiment with some friends where they made a bicycle turn the opposite way you intended it to. So if you turned left it went right and vice versa. Destin thought it would be easy to learn how to ride this bike. It turns out it wasn’t easy at all, it took him 8 months of practicing every day before he got it. What amazed him was his young son learned how to do it in just 2 weeks. You can watch a great short video of how it unfolded here.
Destin realized through this experiment that knowledge does not equal understanding and that we are all looking at the world with a bias.
In February this year the Australian Treasurer was preparing to present the March budget with a surplus, something that is not very common in the current era of budget deficits. The budget was delayed due to Covid-19 and was presented last week with an expected A$213 billion deficit or 11% of GDP.
I understand that due to a one in a 100yr pandemic, government is forced to help with extraordinary spending. I get it and support it (within reason). The problem I have been observing though is that nobody is talking in a language that suggests that we are digging very deep into the cookie jar to help us out of our current crisis and the spending is becoming part of every day talk.
I am sure many of you will remember that on the back of the 2009 Global Financial Crisis; Greece and a number of other European countries entered into a debt crisis. During this time the word Austerity became a major theme across the continent. The world is currently expanding debt at a historic rate, there is no talk of Austerity if you look at this chart of Google Trends I pulled this morning.
I hear countless arguments that it will be fine because interest rates are low. It is true that interest rates are extremely low, however there is no way governments can repay these loans as there are no surplus’s forecast for the near term. This means that debt will need to be continuously rolled. The average length of US government debt is 62 months. When it comes time to roll the debt in 5yrs time where will interest rates be then? We could be in for a rough time 5yrs from now.
In conclusion, it is important to realize that unlearning what you have learned a long time ago is really difficult. The brains neural pathways don’t simply give up their rigid hardened grooves.
I started this newsletter off describing the hard time I was having understanding the world at the moment. I was reflecting more from a trading perspective. Today losing money seems to be good for your share price, especially if you lose a lot of money and you do it quickly in a very uncertain world. For me and most of you old habits die hard, so its not easy to accept this new way of thinking.
But I also share an insight how the Keynesian economic world of government stimulated aggregate demand that we have become accustomed to over the last 80 years is the way most of us have been taught to ride our bicycle.
Don’t expect big changes any time soon to the way governments continue to solve a debt problem with more debt.