Axios Capital

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June 09, 2022

I come bearing news! Today marks the last Thursday you'll receive this newsletter. Those of you who were sad when we moved from Sunday to Thursday should now be happy: We're now moving from Thursday to Saturday.

  • Just like last time, there's a name change. What started as Axios Edge and then became Axios Capital is now Axios Markets Weekend — the weekend edition of the amazing Axios Markets newsletter put together by Kate Marino, Emily Peck, and Matt Phillips.
  • We'd also like to introduce you to the rest of the Axios Business Suite: Closer, which you might already be receiving, from Hope King and Nathan Bomey; and the brand new Macro, from Neil Irwin and Courtenay Brown. We hope you love them.

This week's newsletter covers all the pitfalls of economic forecasting, and more. It's 1,496 words — a 6-minute read.

1 big thing: The disutility of economic forecasts

Animated illustration of a hand holding a stick poking at a market trend arrow on the ground.
Illustration: AĂŻda Amer/Axios

You might have heard that we're headed for a recession, or possibly even in one already. If you did, then whoever you heard it from — whether it's JPMorgan CEO Jamie Dimon or former SEC chair Harvey Pitt or multi-platinum recording artist Cardi B — is moonlighting as an economic forecaster.

Why it matters: Economic forecasts are ubiquitous, useless, and carry a whiff of the ignoble. If you can ignore them, it generally behooves you to do so.

By the numbers: About 55% of Americans currently believe — falsely — that we're in a recession right now, per YouGov, while only around 22% have the true belief that we aren't.

  • U.S. real GDP is on track to grow at a 2.8% pace this quarter and a 2.5% pace next quarter, per FactSet estimates. The latest OECD forecast shows 2.5% growth in the U.S. this year, and positive growth in all of its 25 member states, as well as the eurozone (2.6%) and the world (3.0%).

The Sahm Rule — a test of whether we're currently in a recession — is in negative territory, implying that we're nowhere near. (It needs to be above 0.5 to indicate a recession has arrived.)

  • Bloomberg's Joe Weisenthal notes: "Talk of recession has been everywhere except in the actual economic data."

The big picture: High inflation and gas prices, falling stock prices, and rising interest rates all make people grumpy. If you feel grumpy, you're more likely to think we're in a recession.

  • Recession forecasts can be bad for the economy: Grumpiness on a wide enough scale can become a self-fulfilling prophecy.
  • The business cycle waxes and wanes based on the "animal spirits" in the economy, and if CEOs cut back on hiring and spending, that will feed through to disposable income and ultimately GDP growth.

The other side: While it's easy to conflate inflation or a bear market with a recession, they're not at all the same thing.

  • It's entirely possible for the economy to grow at a healthy clip while inflation is high. If that causes the Fed to raise rates, that can in turn increase the discount rate used to value equities, causing stocks to fall. In other words, a strong economy can be bad for markets.

Between the lines: Economists have a dreadful track record when it comes to predicting recessions. Even when we're already in one they generally continue to blithely forecast steady growth.

The bottom line: The consensus view that there won't be a recession is generally correct. Recessions are rare things, and if you always predict growth, you'll be right much more often than you're wrong.

2. Picking good forecasters is impossible

Illustration of an earth as a Magic 8 ball with the triangle in the center reading "Reply Hazy Try Again".
Illustration: Annelise Capossela/Axios

If you can forecast the economy with greater accuracy than anybody else, you're going to be in high demand from investors looking for edge in the markets.

  • The catch: There's always someone who got it more right than anybody else. But it's never the same person this year as it was last year.

How it works: According to the FocusEconomics Analyst Forecast Awards, the best forecasters of the U.S. economy were:

  • In 2019: HSBC; National Bank of Canada; and Danske Bank.
  • In 2020: SociĂ©tĂ© GĂ©nĂ©rale; Raiffeisen Research; and Julius Baer.
  • In 2021: Goldman Sachs; BMO Capital Markets; and TD Economics.

The bottom line: Past performance is no guarantee of future results.

3. When economic forecasting goes horribly wrong

Larry Summers
Photo: Chris Ratcliffe/Bloomberg via Getty Images

Between 2001 and 2006, renowned economist Lawrence Summers, winner of the 1993 John Bates Clark Medal, and then president of Harvard University, entered into a series of forward swap contracts with Goldman Sachs, JPMorgan, and other big banks — contracts that eventually cost the university an estimated $1 billion.

Why it matters: Summers' macro forecast turned out to be very wrong. He thought that interest rates were low and sure to rise; in reality, after the financial crisis of 2008, we entered a period of ultra-low interest rates from which we are only now emerging.

  • The financial crisis forced Summers to scrap his plans to build a huge new science complex. According to those plans, Harvard would have to borrow floating-rate debt as far out as 2022; Summers seem to have been trying to make sure Harvard could swap that debt into a low fixed-rate obligation.
  • As early as 2006, Moody's was warning that the bets were very risky. They were right: When the construction plans were scrapped, Harvard took what Vanity Fair's Nina Munk described as "approximately a $1 billion unrealized loss from interest rate swaps."

The bottom line: The bets, which have been described as "rank hubris", are a very good reminder that when it comes to bets on interest rates and other economic phenomena, being very smart can work against you.

4. How stock trading might change

A cowboy riding the Wall Street bull
Illustration: Megan Robinson/Axios

SEC chair Gary Gensler gave an important speech yesterday about where he sees the future of retail stock-market investing. The whole thing is a pretty easy read, but here's the tl;dr:

  1. A lot of stocks trade at sub-penny increments, so there's no real point in having a minimum tick size of one penny.
  2. The worst price a retail investor is allowed to receive — the NBBO, or National Best Bid and Offer — is not based on bids and offers for actual retail bids, but rather for institutional trades. Maybe that should change.
  3. Retail investors can't easily compare different brokers' execution quality right now. That should probably change, too.
  4. The SEC should have a rule about minimum execution quality.
  5. Any given retail order should be fought over by as many potential counterparties as possible, unless the investor is getting a "midpoint or better" price. It shouldn't just go automatically to whichever high-frequency trader pays the most for order flow.

The bottom line: There's a lot of suspicion over how brokers like Robinhood can make money by offering "free" trades. Gensler's proposals would face those worries head-on.

5. How inflation defied forecasts

Data: University of Michigan: Inflation Expectation, Federal Reserve Bank of Cleveland, 1-Year Expected Inflation, FRED; Chart: Erin Davis/Axios Visuals

Americans are congenitally pessimistic when it comes to inflation — surveys of where consumers expect inflation to be in a year's time generally show levels a point or two above the broad market consensus.

Why it matters: Historically, inflation has almost always come in significantly lower than we expected. But when it finally did spike, it rose much higher than even the pessimists had predicted.

What's next: Markets expect that consumer prices in a year's time will be 3.6% higher than they are today, per the Cleveland Fed. Consumers expect they'll be 5.4% higher.

  • Both numbers are well below the current rate of inflation, which means that for the first time in many years, America expects inflation to fall rather than rise.

6. Recession indicator of the week

Data: FRED; Chart: Kavya Beheraj/Axios

The "Rule of 10," as limned by Strategas chief economist Don Rissmiller in 2011, says that the economy is more likely to enter a recession when the average mortgage rate, in percent, plus the average cost for a gallon of gas, in dollars, is more than 10.

  • With a gallon of gas at $5 and mortgage rates at 5.09%, we've now hit that level.

7. The executive chairman lives on

Illustration of C.E.O. name plaque marked out.
Illustration: Eniola Odetunde/Axios

Flexport's Ryan Petersen and Drift's David Cancel yesterday became the latest tech CEOs to transition into cushy executive chairman roles, writes Axios' Dan Primack.

  • This follows similar moves at such unicorns as Instacart, Peloton and Bolt Financial.
  • Petersen will be succeeded by Dave Clark, who just stepped down as head of Amazon's consumer business, while Drift will be led by former Tubular Labs and Macromill CEO Scott Ernst.

How it works: All executives report to the CEO, so on some level an executive chairman should report to the CEO. But because the executive chairman is also the chairman of the board of directors — which can fire the CEO — the job is also that of the CEO's boss.

  • Other high-profile executive chairmen have included Eric Schmidt at Google and Reid Hoffman at LinkedIn.

The bottom line: Being a CEO carries with it an extremely uncomfortable degree of scrutiny and accountability; being an executive chairman, on the other hand, comes with very little of either.

8. Bringing fiscals back

The answer to Tuesday's Knotwords
Screenshot: Knotwords

My new favorite pastime is Knotwords, the latest release from genius game designer Zach Gage.

Why it matters: Tuesday's puzzle featured an odd word — fiscals — that I've never seen before.

  • I'm the only Axios author to have used the word "fisc," when not quoting someone else, and even I've certainly never used "fiscals," or the word "fiscal" as a noun.

I think we should help Zach out and start justifying his use of the word by using it ourselves.

  • Use the existing meaning if you want — it's a kind of prosecutor in Scotland — or, better yet, come up with a cool new meaning for it and use it in a tweet or elsewhere on the internet.
  • I'll do my best to signal-boost the best examples.

9. Building of the week: Museum of Ethnography, Budapest

Museum of Ethnography, Budapest
Photo: Attila Kisbenedek/AFP via Getty Images

Hungary's new Museum of Ethnography (NĂ©prajzi MĂşzeum), designed by Marcel Ferencz, opened on May 23.

  • The collection, which comprises 250,000 items from the Carpathian Basin and beyond, has never had a dedicated home — until now.
  • 60% of the structure is underground; its roof doubles as a 75,000 square-foot city park with great views from the top.

At 1:45pm ET today, Axios Pro's Ryan Lawler will host a live discussion on fintech, featuring Plaid CEO Zachary Perret. Register here.