Peter Atwater - Global Macro Series - September 13th, 2023

[00:00:07] Peter

It seems like at every turn, there’s an advertisement, there’s a story, there’s something that suggests that we live in uncertain times. What’s interesting to me about that is the future is inherently uncertain. It always was, is and will be uncertain. So all of these messages of uncertainty are telling me that the crowd feels inherently vulnerable in some way. So that feeling of uncertainty is leading to lots of highly impulsive, highly emotional behavior. It’s also leading us to be followers.

[00:00:54] Intro

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Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:49] Niels

Peter, welcome back to our show and thank you so much for joining Cem and I today for what I’m sure will be a super interesting and important conversation as part of our Global Macro series. How are you doing? Where do we find you today?

[00:02:01] Peter

I’m doing well. I’m outside of Philadelphia today.

[00:02:05] Niels

Sounds good. Cem, I know you’re on the road today, but I think technology should work hopefully in our favor despite all of that. Now, since we last spoke in June of last year, the world seems to have become even more uncertain. But luckily for all of us, you have just written a new book called A Confidence Map: Charting a Path from Chaos to Clarity, which is a super relevant topic for our audience, as we as investors, we love charts and we all need confidence to be successful.

Since we discussed your background in our last episode, which is episode 19 of our Global Macro series, we’re going to jump right into the heart of your work and help our community to become better at dealing with uncertainty and essentially become more resilient in how they live their lives. But perhaps I could ask you to start out with maybe defining what confidence means to you.

[00:03:01] Peter

Sure. Confidence is one of those words like pornography, that we know it when we see it but people really struggle to explain it. I’ve spent a long time trying to figure out what it really is. I think particularly today, people mistake it for what I call “confidence theater”, which is the appearance of being confident. We see a lot of that today in celebrities, both in business and in culture.

But to me, confidence is the feeling we have when we have both certainty and control in our lives, and those themselves are feelings. But we need both of those in order to feel a level of predictability to what’s ahead and a sense that in that future that we imagine, we have the skills, the resources, the tools, the preparation that we need to be successful. So confidence arises when both of those come together. When they do, they change all sorts of things in our lives from how we think, to what we want, to what we do.

[00:04:15] Niels

Yeah, absolutely. Maybe I should say to our audience that our conversation today will kind of be in two halves. The first part, where I’ll probably be talking most of the time in terms of asking questions, is more about kind of the human side of confidence. and then we’ll pivot into how that relates maybe to the financial world and markets, and Cem will have a lot of things to say about that.

Now, because I’ve followed your work and listened to different conversations you’ve had, you talk about vulnerability as being kind of the opposite of confidence. I’m sure, I’m guessing here, but I’m sure you may be familiar with Brené Brown’s work on vulnerability. I was thinking as I was preparing for this conversation that I couldn’t help thinking that it takes a lot of confidence actually to be vulnerable. But I also know that when you talk about it, you talk about the feeling of vulnerability perhaps. So can you clarify these things a little bit perhaps?

[00:05:22] Peter

When I think about vulnerability, I don’t think about it as being voluntary. I think about it as something that is causing us to feel that what’s ahead is uncertain and we feel powerless as a result. So when I talk to executives and they talk about these programs where they experience vulnerability, I think, no, you really haven’t, because that was a choice of yours to participate. That’s a very different experience than if we’ve been mugged or if we’ve suddenly fallen down a ski slope.

To me, there’s a real difference between having an element of control in that experience versus the real sense of powerlessness. I think what defines traumatic events in our lives is the combination of uncertainty and powerlessness.

[00:06:19] Niels

Yeah, and we’ll come back to that a little bit later. Another thing I was thinking of in terms of confidence or feeling confident is that we often relate this term to the future and not the present. So I imagine when we get stressed, which we all do, that will also be about the future. Then I remember something that a gentleman called Dr. David Paul talked about when he talked about trading psychology. He said the best way that we can lower our stress levels when we invest is to bring our minds back to the present moment.

So I’m curious to know whether you agree with that and if it’s just simply more difficult to feel fear and uncertainty in the present moment.

[00:07:05] Peter

Yeah. Confidence is inherently forward-looking. It’s about what’s coming. So to the extent we can keep, particularly the extremes in confidence, those intense feelings of what’s ahead distant from us, particularly our decision making, we’re more likely to be thoughtful, far less impulsive, far less emotional. Being in the present is hard because we bring a lot of baggage from the past and our anxiety or our excitement about what’s coming. So to be truly in the present is something that requires us to be deliberate and to practice for because it’s not a natural state for us.

[00:07:56] Niels

Yeah. Maybe we will come back to this a little later as well when we talk about maybe some of the techniques or some of the things we can all do to deal with confidence and uncertainty and so on and so forth. Maybe the first thing to do would be to ask you to talk a little bit about, as I mentioned, we love charts, we love maps, and you’ve done a really good one, which is the confidence map, of course. I wonder if you can try and visualize that a little bit and talk to us why this is such an important concept that you’ve been able to map out like this.

[00:08:35] Peter

Sure. What I did was to take certainty and control and to divide them into high and low states. The result is a 2 by 2 box chart. Fairly simple. If I think about each of these four boxes, there’s one where I have high certainty and high control. I put that in the upper right and I call that the comfort zone. That’s where we feel relaxed, we have cognitive ease, where things feel certain, we feel as if we’re in the zone. That’s what athletes talk to me about a lot. That feeling of being in the zone where it’s effortless and time passes quickly, that’s the comfort zone.

The opposite corner, the lower left-hand corner, I call the stress center. This is where we feel uncertain and we feel a sense of powerlessness. As you said, the opposite of confidence is vulnerability. We don’t think of it in that way but vulnerability is a really useful view of how we feel when confidence is low because you can realize why we’re so emotional, why we’re so impulsive when we feel vulnerable. We’re naturally on edge. We see a lot of that in the markets.

So that’s a useful thing to think about, rather than saying investors don’t feel confident, investors feel vulnerable, and that will frame the kinds of choices folks make much more easily. But that stress is hard for us. Things don’t make sense, we’re not our best selves, we’re not nice to ourselves or others. So when we typically think of confidence, we often associate it with those two boxes, the upper right-hand box of the comfort zone and the lower left-hand box of the stress center.

There are two other boxes that we tend to overlook but are really important. One is the box where we have certainty but no control, and that’s the lower right-hand box. I call that the passenger seat. If you’ve been in the backseat of a cab or in an airplane, you know that environment. What’s so interesting about that environment is it can feel very calm and relaxing in one moment and then feel like a prison the next. In fact, maximum security prisons define the intense feelings of certainty but powerlessness, the lower right-hand corner.

The final box is the upper left-hand corner. That’s where we have control but no certainty. If you think about the hero’s journey, they start in the comfort zone, they go to the stress center, and then they have to figure their way out. That figuring it out, that doing it ourselves with uncertainty is what happens in the launchpad. We forget that that’s where all of our financial decisions are made. Financial decisions, borrowing, lending, investing, all involve control now but with an outcome to be determined.

So in that launchpad environment, stories, our imagination of the future, all become critical components to how we make decisions because we have no real facts to judge them on because we’re having to imagine what’s ahead.

[00:12:10] Niels

So if I understand you correctly, what you’re saying essentially, what’s unique about certainty and control is the fact that they are actionable, and in order to be confident, we need to I guess demonstrate to ourselves that we can generate certainty and control and that’s going to give us the feeling of confidence and success.

[00:12:33] Peter

Yes, absolutely. We have to decide it. We are our own judge and jury in that process. I cannot make you confident. You ultimately have to decide that is how you feel.

[00:12:48] Niels

So we as parents, when we say to our kids just be confident, that actually isn’t very good advice, is it?

[00:12:55] Peter

No, it’s terrible advice. A far better thing to say and I would say ask is, what do you need to do to feel more in control? What do you need to feel more certain about what’s ahead in those moments? Because both of those are actionable. I’ve had coaches go from talking to players with lines like, you didn’t look very confident out there to, what do you need to feel more certain, what do you need to feel more in control. That becomes a very useful framework for improvement.

[00:13:31] Niels

One of the things, and I mentioned this to you before we press record, that I’d like to, if we can, is to also try and make this kind of accessible to the younger generation. Of course, you teach a lot of them, you come across them. We see it in our kids and their friends.

If I relate it back just to the country where I was born in Denmark where I do follow still the news flow, and this is of course in particular coming after the whole COVID situation, one of the number one, well, not necessarily the number one topic, but one of the top three topics being discussed is really how the young people struggle from a mental health side and the fragility of that situation. Is there anything you can talk about or put your work in relation to maybe how you would advise young people to embrace these concepts or put them into their own day-to-day lives?

[00:14:39] Peter

Yeah. One of the reasons I wrote this book was the feedback that I got from my students on how this framework helped them in their own lives just to be able to visualize where they felt in terms of their feelings of certainty and control, to realize that those feelings are not weakness, they’re not unusual, that real life moves us around, that we routinely experience uncertainty, we routinely experience powerlessness, and that’s okay.

That’s more normal than we often suggest, particularly to young people. And that rather than trying to feel confident all the time, it’s okay to accept that you’re not. And that better than being confident is being resilient, to realize that you can endure, you can go through these experiences and return back to the comfort zone.

I had a student, she ran into class late one morning and she said, “Professor, I’m in the lower left-hand corner, I’m in the stress center. I had a fight with my roommate last night. I overslept this morning. I’ve got an organic chemistry test this afternoon.” And then she started to smile, and she said, “But I know that when I am done taking the test and things start to calm down, I will be back in the comfort zone.”

We spend a lot of time focused on the reasons that we feel stressed and not on the lessons that we’ve learned in handling stress over and over and over in our lives. And that if we would stop and appreciate that these different experiences have built resilience, albeit involuntarily, I think that young people, I’m actually excited for many of them because they are going to demonstrate ways in which they regain control in their lives that I think will be transformational. I’m excited to see where they take things from here because they are beginning to realize that they’re not alone in their anxiety and their stress and now want to do something about it.

[00:17:02] Niels

Yeah, so true. This is why your work is so important. The other thing I thought was very interesting, not that I would say that I didn’t know it, but it’s a good reminder, this thing about having confidence is just not a constant. It’s something we need to work on.

[00:17:20] Peter

I think this is where the self-help world really does people a disservice. They sort of send this message that read my book, you’ll be confident forever, and that’s just a pile of crap. It’s like no, rather than striving to be confident, strive to be resilient. Appreciate those moments in the comfort zone, be grateful for them, enjoy them, experience them, and accept that life is going to move you around.

[00:17:49] Niels

Now, before we turn to more the financial part of our conversation, I do want to ask you to talk a little bit about something that you found in connection with a traumatic experience that your daughter had, because as people who listen to our conversations will know that this is very relevant for both Cem and I as we’ve had very traumatic experiences in our families. So tell me what you learned from that experience.

[00:18:23] Peter

Yeah. When my daughter was a senior in college, her intestinal system gave out and the result was intense, dramatic surgery for her. My wife and I had gone along in this experience and so I thought I had a pretty good sense of how she felt through it. But being the professor that I am, I asked my daughter, I said, “Would you map that experience on the confidence map? Would you tell me how you felt at different stages?”

One of the things I do with my college freshmen is I have the map their senior year in high school so I can sort of see how did that experience go. What was so eye-opening to both my wife and me was that we thought that her low point was when she had the surgery, that here was a big, an enormous change in her life. What we discovered was that surgery provided relief. She felt better as a result of it.

The moment of greatest stress for her was in the post-surgery experience. They ended up having to pump out her stomach, so they put a tube upper nose and down her throat and she felt like she was choking to death. She describes it as what she envisions waterboarding to be like. This moment was just horrible for her, and we didn’t appreciate that magnitude of that moment, nor interestingly did her doctors. They said, “Oh, yeah, there are lots of things we can do to make that less traumatizing.” It’s like, well, why the heck didn’t you do that in the first place?

So what I’ve discovered is we often presume how people feel. What the mapping experience enables you to see is, how do people really feel. What were the different moments in these life events that mattered most to them? Why those low moments matter is because we will do everything in our power to avoid them again. So in my daughter’s case, this moment of the NG tube became I never want to experience that again, and it had dramatic implications on how she ate, how she behaved, that we didn’t appreciate that that was the source of a whole series of behaviors that we recognized but didn’t understand the reason for.

[00:21:17] Niels

Let’s jump into the world of finance and investing. So Cem, it’s over to you for a while.

[00:21:24] Cem

Yeah, it’s maybe a bit of a leap from that wonderful part of the conversation, which by the way resonates for me as well. You got me thinking for sure. I’ll have to do a little work on the backend and think about what that means for me and my family.

[00:21:41] Peter

Yeah, I would map. Just take it out.

[00:21:45] Cem

I’ll be mapping after this conversation.

[00:21:48] Peter

Yeah, and encourage your children to. One of the things that is so cool to me is how quickly young people (I have neighbors who’ve done this with their kids), how quickly kids get it and can put dots on the map in a flash without any sense of hesitation. There’s no judgement to it. There’s no right or wrong. It’s I felt this way on this day, and it becomes very eye-opening as to oh, wow, I didn’t realize that. I didn’t understand that’s what you were going through.

[00:22:28] Cem

Yeah, and so much of that is about that loss of control or lack of control in those situations too, as you mentioned. But to switch gears just a little bit, I think one of the interesting things were what I do and what you do kind of connect is really in this concept of confidence and sentiments as it relates to markets on your end, and then on my end really how that leads to a physical manifestation in positioning, and what that positioning then may mean for markets and the reflexivity that it has.

I think very often, from what I’ve heard you talk and what I’ve heard you write, you speak about confidence in markets, and the implication a lot of times is things get out of hand, confidence gets too far. It leads to a contrarian… (again, this idea of being a contrarian under those circumstances). I think it’s very fascinating to think about, okay, why is that? How does that work? Why is being a contrarian so important when you understand sentiment?

Under my broad models, positioning leads to the opposite. If you’re positioned everybody’s on one side of the boat, reflexively, that means there’s reverse supply or demand coming back into the market the other way. I think you also mentioned recently that you’ve noted that there’s an increased volatility of confidence happening, that we’re becoming more and more shifting from one side of the boat to the other and vacillating more and more. I think that’s to a big extent because of market structure.

We are seeing the physical manifestation of that actually in markets. We’re seeing historic dispersion, which means that the single constituents of the index are moving more and more away from each other in different ways. The volatility of the indexes or the center is often very different. We’re seeing historic rotations, historic breakdowns in breadth. These are all physical manifestations of the same thing.

It’s more important than ever to understand how are people feeling, how is sentiment affecting positioning, and what is that meaning? Often these days the index or the middle of the market is pinned, which ironically forces if there’s a sentiment that people are too far on one side of the boat and things are moving one way, other things have to move the other way. So things are being exaggerated one way and then exaggerated the other way.

Anyway, to get behind that, I’d love to hear your thoughts a little bit more about why you think sentiment is changing so quickly, why people are moving from one side of the boat to the other so much more, what you’re seeing under the hood, why you think that’s happening, and then maybe we’ll dive in from there.

[00:25:33] Peter

It seems like at every turn, there’s an advertisement, there’s a story, there’s something that suggests that we live in uncertain times. What’s interesting to me about that is the future is inherently uncertain. It always was, is and will be uncertain. So all of these messages of uncertainty are telling me that the crowd feels inherently vulnerable in some way, that the media mirrors mood, advertisers; successful advertisers mirror moods. So they’re just telling us that we feel things are uncertain.

So that feeling of uncertainty is leading to lots of highly impulsive, highly emotional behaviors. It’s also leading us to be followers. I write in the book that there are five natural responses to feelings of high stress. Fight and flight, high vulnerability, they get all the attention. But there’s we freeze, we follow, and then there’s nihilism, it’s the ‘fuck it’ response. So follow is actually our easiest response to vulnerability. All we got to do is get in line. Don’t need skills, don’t need strength, just get in line.

Social media I think has compounded our following tendency. We see it in politics, we see it in culture, we see it in the markets. One of the things that’s so interesting to me is that the speed at which changes in sentiment show up in the market are faster and wider than ever before. We have almost mark-to-market economies and mark-to-mood markets so that you can see these linkages from sentiment to the markets to mood on Main Street, saw it in gas prices last year. But this is becoming a highly impulsive environment in everything.

So listening to you talk about its impact on positioning makes such sense to me because this nature of these preferences are showing up in the actions of individual investors and groups of investors.

[00:28:07] Cem

Yeah, I couldn’t agree more. I think there’s another level that I was really thinking about as you were speaking there. It ties into us talking about our children and this idea that this millennial generation, which is becoming more and more dominant, is I think the youth is always more likely to vacillate and likely to be because there’s less experience, there’s less stability, and they’re becoming more dominant. We’re in this period of transition really from this baby boomer last dominant group as they both retire and eventually pass on and the millennials then taking that mantle. So there’s this massive transition which I also believe is very impulsive.

We all gain in theory more confidence with time, some level of control as well. Whereas, I think actually, one of the defining characteristics of this period is as millennials become more dominant and they don’t feel as confident, they don’t have as much control. They’re 40% of the wealth creation, 40% of the household formation that baby boomers were at this time in the generation that we as a populace and as a people feel a bit less confident and maybe a little bit more vulnerable. So I’d love to hear your thoughts a little bit on that as well.

[00:29:33] Peter

Yeah, there are all sorts of echoes to the late 1960s in terms of this generational change. You look at somebody like Joe Biden who came to politics in that environment. So there is this generational shift that’s taking place, this huge gerontocracy that is at one end, and then this youth that like the 1960s feels enormous senses of change and fear. It’s not the Vietnam War this time, but it’s other elements of vulnerability that they’re experiencing and having to navigate.

Like the generations before them, I have a lot of confidence that they’re going to become entrepreneurial leaders in society because they have to, and that they are going to create networks and grassroots activism left and right, up and down, that transforms who we are as a culture going forward. They’re going to address the vulnerability that they feel in ways that are meaningful to them.

[00:30:50] Cem

It’s so interesting, right? Because in the ’60s and ’70s, the boomers were very different than they are now, as we all are, as we grow and mature and become more confident and have more control. I think one of the most interesting things to explore down that avenue is crypto. Crypto itself is this manifestation, in my opinion, of the millennial on down distrust that exists due to a lack of control, feeling unfair, this inequality that they’ve been exposed to as labor primarily coming out of high school and college, as well as this idea that technology can solve these problems because that’s the generation they grew up with, all this technology fixing things and solving problems as they go.

So I think crypto is really almost this zeitgeist, this religion in a sense of this generation, even though it is in a way subject to these other things we’re talking about, the bubbles, and the overconfidence in maybe that that is the way forward and that positionally that can cause problems and eventually will likely bust in its own way. I do think it’s important to give crypto that credence that it is so important to this generation in some ways.

That being the case, maybe, just maybe, that it might be something that is important to that generation to carry on. So I’d love to hear your thoughts about crypto. I know you have eve- changing thoughts on it, but I’d love to dive into this.

[00:32:36] Peter

Yeah, I think that crypto resonates whether you’re looking at technology, anti-institutionalism, a sense of independent control. This generation is trying to determine what it means to be safe, wealthy, have power in ways that will be different from the way our generation and the generations before us did. So yeah, this crypto resonates. The issue for crypto is I think whether they feel it was corrupted by the institutions, the individuals, those that they are critical of.

When you look at the dominance of hedge funds and money managers and governments now, I’m not sure what it looks like ahead. There’s no doubt in my mind that electronic currencies will be a thing of the future. But what form they take, I don’t know.

[00:33:49] Niels

Maybe a little bit if I can interject something since mentioned crypto here. I don’t know if it’s directly relevant to confidence, but what’s kind of funny to me is that that generation that really wanted something that was decentralized and so on and so forth, but then after a little bit of time, they kind of craved that institutional acceptance, right? They wanted institutions to start buying it. So it’s kind of a little bit contrary to the whole idea, in my opinion.

Also, the other thing is that what we’ve seen is that a lot of it, and I don’t have the numbers, I don’t follow it, but a lot of the crypto is really controlled by very few wallets. So it’s a little bit weird to me. I don’t know if it’s anything to work from in our conversation.

[00:34:43] Cem

I think there’s an important string to pull on there, which is, look, there’s no right or wrong. We all go from this youth and these ideas and this idea of who always says it’s not fair. It’s kind of the little kid at home, right? Over time, you learn to be realize that, guess what? Life isn’t fair, but there’s ways to make it maybe more fair and more just or go down these pathways. I think having lack of cynicism that happens as you’re older and that idealism that comes with youth is so critical to driving and drove the equality we began to see here in the US on a racial basis.

The youth can drive dramatic, important change. We shouldn’t diminish that. But that said, you’re right. At some point, the practical reality, Niels, of these things are still important and still inevitably come into the picture. So I think there’s an important broader conversation around that. I do think this generation, to Peter’s point, will drive important dramatic changes other important generations have, and we should listen to that generation. I think they’re paralleling a very important struggle that we’re seeing otherwise, which is autocracy, broadly globally versus democracy, and a breakdown that has happened in that as money has gone to the top and to corporations, etc., through Federal Reserve dominance, etc.

Anyway, more dive into Peter’s thoughts. I just mentioned the Fed here so an important time to maybe pivot to the Federal Reserve and confidence. The Fed and confidence are two critical ideas that go hand in hand. The Fed has to maintain confidence. It has been able to do that with such strength throughout the last 40 years in particular to a great extent because they’ve had two mandates, which is really price, maintaining price stability and stimulating GDP, whether maximum employment is now the exact definition of that.

But that was easy when they were more dominant, when they didn’t have to worry about the inflationary side, which we really haven’t had in any meaningful way for 40 years. But we’re seeing a breakdown in that, which often happens, with populism and this generational reality that we’re seeing which is making the Fed maybe a little less confident, making people’s belief in the Fed, a little weaker.

So I’d love to hear your thoughts about that dynamic and the Fed’s role and how maybe there’s a lack of confidence in the Fed which we’re beginning to see happen more and more might play out.

[00:37:30] Peter

Yeah, I have a pretty simplistic view on the Fed and confidence. One of the things early on I tried to figure out; what’s a good measure of sentiment in the Fed? If I’m thinking about a CEO, I know that stock prices are the best measure of sentiment in a CEO. Tim Cook is only as good as Apple’s stock. I would offer that interest rates are the best measure of confidence in the Fed.

If I go back to the late 1970s, nobody had faith in the Fed and interest rates were 21%. It’s a very simplistic view, but you look over the past 40 years, our confidence in the Fed has become greater and greater and greater as interest rates have fallen. So I think that we’ve seen the peak confidence in the Fed given that not that long ago, we had trillions of dollars of negative yielding interest rate bonds. So that to me would suggest a peak in fixed income, and with that, a peak and sentiment in the Fed. So the Fed faces a challenge of being less and less credible at a time when interest rates are rising and people feel inherently vulnerable.

To your point, one of the things that vulnerability does is it creates inefficiency. We trade security for efficiency. I want redundancy when I feel vulnerable. I want added protection. I want things local as opposed to global. So our preferences towards vulnerability are feeding inflation. At the same time, interest rates are rising and confidence in the Fed is falling. So the big challenge for the Fed is to prevent this snowball, this flywheel from developing because the more vulnerable we feel, the more our vulnerability-driven choices are going to lead to greater inflation which is going to- you see where I’m going.

But I think quite simplistically, high interest rates are kryptonite to monetary policymakers, and the further they go, the weaker we will perceive central bankers and will demonize them just like we did in the 1970s.

[00:40:11] Cem

I think that parallel to the ‘70s, early on in the ’70s is very relevant. To your point, the Fed came out and called this move a year and a half ago in interest rates and inflation transitory. I actually am of the belief that (everybody was like, oh, they were so wrong), I’m of the belief they actually believed it probably wasn’t. But by stating it was transitory, they were trying to convince, with the rhetoric, the market that it might be because of that (as you mentioned) flywheel starts going, things could get worse.

Everybody always says the bond market is bigger than the stock market. The bond market is generally right is the adult fight the bond market, but yet we’ve seen for now two and a half years, the bond market being very wrong multiple times, which people are very confused by. I think they’re beginning to realize, oh, wait a second, the Fed might not be dominant anymore is what’s driving the bond market to be more and more wrong in the time being and it’s time to transition.

Ironically, I believe it’s very likely that at some point, we begin to lose so much confidence in the Fed as a market that it’s almost inevitable that these inflationary impulses begin to pick up more and more as the Fed has less and less control and volatility itself, there’s that word right, begins to pick up as well as a result.

[00:41:40] Peter

Yeah. I think that if I look at the mindset of many investors, they’ve been in the passenger seat. They’ve taken the view that the Fed is in control. One of the challenges with that is passenger seat environments are incredibly fragile. If we no longer believed the pilot is capable of driving the plane, we will panic. So I worry about panics as being more frequent, easier to execute.

If I look at what happened to the West Coast banks six months ago, that was a panic. I think underappreciated and in that experience was the speed at which the crowd assembled and de-deposited financial institutions en masse. It’s the thing that I come back to a lot is this crowd moves fast and faster than the systems are set up to manage.

[00:42:58] Niels

It’s interesting both of you used the word panic. But I’ve also heard you say that, or written, that when the panic happens, we should actually acknowledge that the worst is behind us. Can you talk a little bit about that?

[00:43:15] Peter

Yeah. So panic only occurs when we are approaching lows in confidence. It’s almost a cognitive inability to grasp the staggering uncertainty and powerlessness that we feel. In that moment, we’re extrapolating that anxiety into the future, things will only get worse. I think it’s useful to look at panic as an objective condition and to realize that we only experience it very close to lows in confidence, and that ironically, it’s God’s way of telling us that the worst is behind us, not ahead of us like we believe.

I will often write when I see panic behavior. I don’t know where the low is, but it’s around here because panics are naturally exhausting. If you’ve ever experienced a panic attack, you know how exhausting that experience is. So I know it’s going to be short-lived and I know it’s going to be intense and emotional, but it’s very likely to be something that marks a major low in confidence.

[00:44:29] Niels

Can we transfer that directly to markets? This is one thing that sort of goes on a little bit in the trend following community that I belong to, and that is we find it more difficult to deal with lows, meaning short positions because as trend followers, we need a little bit of time to pass before our algorithms will pick up a change in direction and change in trend. A lot of these lows tend to happen in one single day or in a couple of days as you rightly point out.

But on the other hand, highs or tops tend to take months to form. We for all I know may be in the middle of one. We just seem to be working our way through this topping process perhaps, and we’ve seen that in the past as well. Can you transfer these things directly to how markets actually end up and play out?

[00:45:27] Peter

Yeah. We abhor powerlessness and uncertainty more than we crave certainty and control. It’s one-sided. Pain feels worse than pleasure, and so those lows tend to be spike-like because they’re exhausting in that way. To your point about manic behavior, we love the party. We don’t want to give it up, and so it has to be disproven to us which is why it lingers and lingers and lingers before it finally gives in.

But we love the comfort zone and we’ll do anything we can, in terms of our own storytelling, to prolong that experience in terms of discounting the naysayers and disregarding obvious red flashing lights. It’s like, oh, no, no, that’s Christmas. We will do anything we can to recast trouble as something to be disregarded.

[00:46:39] Cem

Yeah. The reason it’s not as easy as just saying, okay, the panic has happened, bye, which I think as a short-term indicator by the way is incredibly useful, is because confidence also plays a role in bigger, more structural things as well. I think a great example would be here in the present day, the first realization that inflation wasn’t transitory the first time around led to the 10-year moving to 4.2 the first time around. But then everybody got on to that party, the confidence that this inflation was going to keep going and got on that side, which led to this February, March banking crisis, a quick move down in yields, almost like a panic move back because everybody was caught on that side of it.

This time around, now we’re right back at those highs. There’s less confidence that inflation is going to keep going. There’s a lot more talk about recession and deflation, and that now has actually caught people, despite being in the same place again here, in a place where, well, maybe that positioning, that steepening trade that people were playing and all of that inflationary bet is more balanced, which in my opinion is more likely now to lead to us breaking out now to a higher level.

But it’s an interesting kind of microcosm to think about how in the short-term, sentiment can vacillate very quickly and be very important to short-term trades, but in the long term, there’s another confidence game kind of going on behind the scenes. But incredibly interesting and incredibly important especially I feel like in this market given everything we’re talking about.

Politically, I’d like to shift a little bit from just markets, and they’re very connected, but this idea of populism that’s coming as a result of this younger generation feeling distrust and maybe just not confident is leading to more money coming to that generation. It led to not just Bernie Sanders and AOC and the populism we’ve seen there, but obviously, even the rhetoric from the right and Donald Trump and bringing the right left.

I’d love to hear your thoughts about the political environment that we’re in. Broadly, the role you think that’ll play. I know you’ve talked a lot about also the increasing friction we’re seeing between different parties here in the US and the populace and also some of the realities as commodities become more important, the political mood, the balance. I’d just love to hear your thoughts a little bit about the political situation we find ourselves in and as it relates to confidence and mood as well.

[00:49:42] Peter

Yeah, so I’m going to preface this with a comment that I am politically agnostic. I don’t want anybody to interpret that this is pro-left, pro-right. This is just as I observe it. Followership is a big deal and so it’s not surprising for me to see these dominant authoritarian figures gaining appeal not just in the United States but globally. Environments of low certainty, low control are the feeding ground of authoritarian figures. Whether they be military, cult, political, it’s a trend that you just see over and over again.

Part of that is if we stand in the rain, cold rain long enough, we will get in the car with somebody eventually. So we’re prone to follow the longer we experience this malaise. What’s interesting is the conversation is now changing. Age is becoming a more relevant issue as we near 2024. I would put out that we may not see either Trump or Biden on the ballot. That if age goes from meaning, old goes from meaning wise, experienced, long tenure, to too old, decrepit, out of touch, you could see a groundswell of change on both the left and the right that opens it up to individuals we’ve not met yet. I think that that dynamic is underappreciated because all the changes, all that requires is a change in story.

The other thing that’s been so interesting is the connection between Donald Trump and Elon Musk. If I go back and I look in the media, there were a whole series of articles that said Trump is the Elon Musk of Washington and Elon Musk is the Trump of Silicon Valley. There’s a clear connection in terms of sentiment between those two individuals that, again, I don’t think is broadly appreciated. So I believe that as goes Elon Musk goes the disrupter personality more broadly which would include Trump and others on the left.

What’s so interesting is that Musk is, I call him the Kevin Bacon of every major post-banking crisis trade, EVs, solar space, crypto, AI, I’m probably forgetting four or five. So I can begin to cluster all of these from a sentiment perspective as one great big trade. I expect that we will see all of them rise or fall concurrently as the crowd sentiment either rises or falls. Here, just one final thought is that Elon Musk becoming Time Man of the Year, host of Saturday Night Live, cautions that the peak of that personality type is probably two years behind us.

Now, having said that, to your earlier point, what can look like panic one moment can look like resurrection the next. So this volatility of the late 1960s is something that I’m constantly aware of and acknowledge as, yeah, all of these individuals and groups could rise and have another euphoric resurrection in popularity, but that’s sort of how I lump these all together.

[00:53:59] Cem

Yeah, I think that’s a great way. Incredibly insightful point. I do think it’s important to note, and I try and do this myself, the reality is what’s happening versus the timeline under which it’s actually happening relative to the narrative as well. This idea of populism, even though we really didn’t start focusing on it didn’t become dominant till more recently. It started with Occupy Wall Street and the Tea Party back in 2009 here in the US and others globally, but the generation wasn’t politically dominant enough that was pushing the narrative to make it actually have central effect.

We didn’t have a spark that also kind of set it off. We saw that also politically with Obama. Obama was a change president. He was the first real big change president of this generation from the left and then Trump was the change president now from the right. We have been moving through this for over a decade and it has been growing as again the demographic realities of the voting class as well as the boomers is kind of moving on.

So I think you’re absolutely right, we’re approaching this point where the physical realities of the story in the demographics and all the practical realities are in place for a charismatic young leader who maybe appeals to both sides, brings the two together. We see this throughout history, but that doesn’t mean it’s going to happen today or tomorrow. It means the environment is set, and you need kind of like COVID was the spark for fiscal stimulus, a spark.

That could be a personality, it could be an event. But I do think it’s really important to realize, what is the environment, what is the mood. You talk about prediction, right? This is how you make good predictions. You realize the structure and the reality. You don’t try and say up or down. You say that the table is set, and several paths can lead within that but that limits the amount of outcomes, which I think is so important.

[00:56:09] Peter

Your point about backdrop is so vital to appreciate because every one of those experiences, Occupy Wall Street, the Tea Party, Black Lives Matter, I can put the Arab Spring, I can put the Yellow Vests, they all occurred when consumer confidence in that location was already inherently low. All it took was a relatively insignificant moment that triggers widespread social coalescence, which today, again, social media will fuel and enable far faster than we expect.

[00:56:54] Niels

A couple of other big topics out there that I think people probably could be worried about and probably not feel they have much control over, that’s climate change and it’s UFOs. How does that fit into your framework and maybe the timing of that becoming so dominant in our conversations now?

[00:57:17] Peter

I think climate change, I look at it in this way, Niels. When confidence was extremely high, our objective was to proactively address climate change. It was bold, ambitious, sort of like we’re going to the moon, this very abstract we’re going to accomplish this. As confidence falls, I think what we’re going to see is climate change coming off the table but massive remediation coming onto the table, that we’re going to acknowledge that we failed to address it and now we need to deal with the consequences of it.

Here, there’s some interesting parallels to the 1930s where that remediation becomes the backdrop for massive employment, government employment programs. We’re going to put everybody together to build the Hoover Dam. We’re going to put lots of resources to commit to big defensive infrastructure because we didn’t address climate change. What that looks like, I don’t know, but I think that the bold ambitions of climate change are likely to be replaced by the absolutely realized, we can see this problem here, solutions.

[00:58:56] Niels

A couple of weeks ago, we recorded a conversation with Neil Howe, and I know you’re familiar with his work and The Fourth Turning is Here, his latest work. In many ways, I think that what you’re writing about and studying is very much in sync with what he’s seeing but from a different angle. So if we can kind of extrapolate a little bit on the timing of this, what you’re saying fits into his view, which is, well, in about 10 years from now, the fourth turning will end and what will replace that, as it has always been, is this first turning where everyone comes together. So we need unfortunately to go through the worst part.

We haven’t reached that yet. It’s going to be 10 years of division, conflict, war, external, internal, who knows? But it will be replaced by this unity and let’s work together, let’s overcome these problems. In a sense, what I could see is exactly what you described there, that okay, so we fail to deal with climate change in time and instead, we’re all going to come together and create these massive whatever they will have to be in order to deal with it at that time.

[01:00:21] Cem

Yeah, I think there’s very interesting parallels there. We vacillate in markets over longer time periods from a confidence in markets themselves being the best allocator of capital and then governments actually being a better allocator of capital. When markets crash or they don’t perform or they create inequality in equities, then we ask for a more controlled government allocation of that capital. I think we’ve been moving towards that more recently.

We saw that boom into the 1929 and the bust and then government getting involved, the New Deal, everything there. Similar things in the ’60s and ’70s as well. So I do think government, as we’ve already seen, is going to continue to become more involved and with a younger generation becoming more politically involved as we’ve mentioned and being more idealistic and being more tied to some of these things like climate change and wanting to address these issues. I do think those two things are natural.

We have this thesis on nuclear; why nuclear is the perfect solution there that fix fits practical solution, but the zeitgeist and important addressing of this by this generation. But it is an incredibly interesting time to be looking at confidence in markets broadly. I do think that on a positive note, in the 1930s and the ’40s, people felt like the world was coming apart at the seams.

Obviously, we had World War Two on the back end of that. But the changes that came from it, as you mentioned, ended up being some of the most formative important things that brought us a better world. ’60s and ’70s, you could argue a lot of the same thing. People felt like the world was coming apart at the seams but look at what it brought us in terms of equity and changes driven by that younger generation as well.

[01:02:33] Peter

Yeah, one of the things I tell my students is look at where groups of people feel vulnerable and do something about it. If you think about a 40-year opportunity from here, it’s going to be driven by those who just listen to how people feel vulnerable and do something about it. I think of Jack Bogle.

If you look at the markets in the late 1960s and all the volatility and basically ending up nowhere, passive investing was an attempt to solve that problem, to address the vulnerability that people felt. The development of options and the whole derivatives and interest rates, I was at JPMorgan when this was coming up, it was addressing a vulnerability that people didn’t want to ever experience again.

I think that we can all look at the uncertainty and all the things that are wrong today, but I think that if you look at them in a different light as these are opportunities for entrepreneurs and thoughtful individuals, you’ve got change that’s going to be dramatic, and to your point, is likely to do an enormous job in restoring confidence ahead.

[01:03:58] Niels

I’ve got a couple of topics left before we wind down. I hope that’s okay with you, Peter. We’re going a little bit long. But we are heading into some important elections, Cem already alluded to that. I can’t help thinking about some of the things we’ve probably all become familiar with since the election in 2016, which is fake news. I think in your book, you have a quote from Kahneman that says something like truthfulness matters far less to us than whether something feels true. Can you expand on that a bit?

[01:04:33] Peter

Yeah. So we accept information that is most cognitively easy for us and that is what is relevant to us and what resonates. So we will turn on the channel to the news that feels most comfortable to us. We will open the paper that feels most comfortable to us. I don’t believe that the media transforms how we feel as much as it does simply mirrors back to us how we feel. The media has become very keenly aware of the perils of not following the crowd.

If you looked at Fox’s experience after the election and the development of Newsmax and OAN, they didn’t follow the crowd as effectively as they wished they had. So we have the ability today to have almost pop-up media that fits how we feel. So that news may be factual, it may be false, but it’s going to be resonant and relevant to its audience. The challenge for those that are fact-checkers is they won’t be able to keep up with it. The ability to generate news that Niels watches that’s distinct from the news that Cem watches is unlimited today.

[01:04:34] Niels

Yeah, it’s a very important point. The last section I wanted to hear your thoughts about, which again, I’ve heard you talk about, but it also is quite relevant actually for the world that I come from, and it has to do with process. I’ve heard you talk about how professions that we certainly can link to very stressful environments, like ER doctors, they cope with this by having very good processes and levels of preparedness. This is, of course, very different from trying to avoid a crisis as you talk about.

Within my world, the systematic investment world, I really see this play out. I think that we as managers of other people’s capital, we have a great deal of confidence in our process that we apply when it comes to investing even though we’ll be the first ones to admit that we have absolutely no confidence in being able to tell whether the market is going to go up or down.

So I think this disciplined and rules-based process is such an underrated advantage that we have in the investment world. Can you talk a little bit about what you found in terms of this topic of process?

[01:07:34] Peter

Yeah. I spent a lot of time with first responders in the time that I was writing the book. I was fascinated by the COVID experience and how that was impacting the confidence of folks in the medical world. What I discovered was a mindset that was very different from many investors and certainly corporate executives. If I look at the way businesses handle crises, it is all about avoiding them and doing as much as they can to prevent them, and then they have this shelf that has maybe six or eight crisis manuals for the things that they think are most likely to happen. If they get hacked, they get this. That’s a terrible mindset for a crisis because anything that’s different, you’re completely unprepared for it.

What I learned from the medical profession was, we don’t know whether the next ambulance is going to bring in somebody with a heart attack or a broken leg. So uncertainty is an inherent part of the process that we develop. So it becomes about how do you diagnose, how do you communicate, how do you prepare for the unknown over and over and over? If you go into an emergency room, you see how broadly well-prepared they are. So I think that process allows you to avoid the stress center.

Again, an example I use in the book is an aborted landing. We in the back of the plane are terrified when the plane misses the runway and the engine gone and you’re headed back up. The pilots are all but yawning because for them it’s not an aborted landing, it’s a go around. It’s something that they have talked about, prepared for, trained for. It’s Tuesday to them.

I think that if businesses and investors spent more time thinking about crises as Tuesday, then when they happen, they’re not as emotional, they’re not as impulsive, they’re prepared, they’re far more transparent and open. The whole communication process is vastly different. Corporate crises become about withholding communication, ER practice is all about sharing information and no regard for what happened. What brought the patient in is far less important than where is the patient at this point.

[01:10:31] Niels

Yeah. I appreciate that. Any final words from you, Cem, before we start to wrap up?

[01:10:37] Cem

Not really. Listen, this was an incredible conversation, always is with Peter. I think the practical realities of understanding confidence and how it relates to its effects on markets, on politics, on the world, it’s such a primary driver of everything that happens. So I can’t recommend enough that people go out and read Peter’s book and also that they keep these things top of mind.

[01:11:06] Niels

Peter, of course, there’s so much we could have asked you, so many different avenues we could have gone. Is there anything that you think we’ve missed that you want to highlight towards the end of our conversation?

[01:11:18] Peter

This was a quick one, which is, anytime you’re not feeling confident, go volunteer. Service to others with others is the best adrenaline boost to confidence that I know. It’s so counterintuitive, but it gets you out of your head, it gets you out of your environment, and there’s a level of gratitude that comes along with it. So it to me is the best boost in those moments of low confidence.

[01:11:51] Niels

What a wonderful, positive way of ending our conversation. Peter, thank you so much for spending some of your time with us today. We really do appreciate it and I know all our listeners do as well. You do such important work and I hope that you have great success with your latest book, The Confidence Map, and of course, we look forward to continuing our conversation with you in the future.

By the way, make sure you go and get a copy of Peter’s book and follow Peter’s Twitter or X feed, whatever we call it now, which is fantastic. You could find the links in the show notes because as you can tell from today’s conversation, we’re living in a truly global macro-driven world and it is perhaps more important than ever before to stay well-informed.

From Cem and I, thanks so much for listening. We look forward to being back with you as we continue our Global Macro series. In the meantime, take care of yourself and take care of each other.

[01:12:46] Ending

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