What Hollywood and the markets have in common : "Nobody knows anything..."

Monday 18th September 2017

  

What Hollywood and the markets have in common : "Nobody knows anything ....."

ref :- General

That doyen amongst screenwiters William Goldman shook up the Hollywood establishment with the publication in 1983 of "Adventures in the Screen Trade" .  As a dissertation on his own profession and on the film industry in general, it swiftly came to regarded as a seminal work by those interested in that slightly unreal world. More than just a tutorial on what makes good screenwriting, Mr Goldman had plenty of recollections about Hollywood people and events that may have ruffled a few feathers. But it was his frank and myth-busting approach to the aura surrounding Tinseltown's major players and their perceived talents that attracted most attention.

Foremost among the lessons to be gleaned from the book is the repeated instruction to remember that :  "Nobody knows anything ..... not one person in the entire motion picture field knows for a certainty what's going to work. Every time out it's a guess and, if you're lucky, an educated one". One can see why some of the more narcissistic of the Hollywood bigwigs might have been a little put-out at Mr Goldman's assessment of their skill-sets. Actually, they shouldn't have taken it personally ..... Mr Goldman was just pointing out a basic truth that would apply whoever was making the decisions , even if some are better at it than others. 

In the same way, some market players make more successful decisions than others but nobody really KNOWS what's going to happen when it comes to view-taking. Educated guesswork might sound a flippant way to describe the serious market analysis required before making crucial trading decisions but essentially at the speculative end of the market that's what it amounts to ..... there are even a few "Divas" around to support the analogy.

If you're wondering quite what has sent us down this route, it's the US Federal Reserve's policy meeting tomorrow and Wednesday and the fact that the probability of a hike in rates in December as implied by Fed Funds futures market has jumped from near 30% to 56% over a few trading days. In other words, a significant number of market players who would like to think they have a decent handle on these things have changed their view over the last week  --  which is as good a way as any of saying that they didn't really KNOW anything a week ago just as they don't really KNOW anything now. Their positions with regard to future Fed actions  by definition cannot be based upon known facts, but on opinions ..... and opinions can change as circumstances change, right ?

Absolutely, only a fool would refuse to change his mind if the fundamentals change. So now that we've reminded ourselves that we're dealing with opinions and not certainties, what's happened over the last few days to change those opinions ? Mainly last Thursday's US inflation data, which showed August CPI up to 1.9%, and core CPI (ex-food and energy) up to 1.7%. Finally, some would say, we're seeing the tightness in the labour market translate into upward inflation pressure  --  as long-standing economic theory (the Phillips Curve) argues it must. It may have taken longer to work itself through the system but inflation nearing its 2% target and still-solid growth calls for another rate hike in December.

Perhaps, but just like everyone else we've visited the issue of the relationship between inflation and employment many times and frankly we are little closer in identifying whether the old rules still apply absolutely, or they still apply but may have to be modified somewhat because of changes in work practices etc, or whether some fundamental change has taken place. What we can say with some certainty however that it seems awfully premature to draw too many conclusions from one month's data.

Traders and investors may not know, but then neither do members of the Fed ..... and nor do they all pretend to. Last time we heard from Chair Yellen on the subject, she was sticking with the expectation of one more hike this year even as the market became more sceptical. The recent inflation data will help the hawks on the Fed Open Market Committee who are mildly in the ascendancy, but even NY Fed President William Dudley has said the jury is still out on whether conventional economic theories are still 100% reliable. 

So what to expect from the Fed on Wednesday ? It may well be the case that nobody knows anything, but we can be as close to certain as makes no difference that there'll be no rate rise. We can also assume that we'll hear when the process of trimming the Fed's balance sheet will start. And as for a hike in December ? Pay special attention to the Fed's revised inflation forecasts and in particular to the "dot-plot", the graph depicting the interest rate predictions of individual Fed members, and of course to what Janet Yellen says.

We may get a clearer picture of what the Fed has got in mind, but there are a lot of variables in play between now and mid-December so don't make the mistake of thinking you know something ..... nobody does.