Anti Fragile

What we can learn from Chidambaram's turkey problem

turkeyVivek Kaul

“The rupee depreciation of June, July was quite unexpected,” said finance minister P Chidambaram on August 1, 2013.
What does Chidambaram mean here? He probably means that the government was caught unaware on the depreciation of the rupee against the dollar over the last two months. They were not prepared for it.
And if the government had realised that the rupee would lose value against the dollar as fast as it has, then it would have done a few things to control it, like it is trying to do now.
When one looks at the economic reasons behind the rupee’s fall against the dollar they were as valid then, as they are now. The current account deficit for the period of 12 months ending March 31, 2013, had stood at 4.8% of the GDP or $87.8 billion. The current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances.
During the period of twelve months ending December 31, 2012, the current account deficit of India had stood at $93 billion. In absolute terms this was only second to the United States.
As Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management point out in a report titled Don’t Take Your Eye of the Ball “At $93billion, India’s current account deficit in 2012 was second only to the US in absolute terms, and higher than the UK, Canada and France.”
A high current account deficit meant that India’s demand for dollars to pay for imports should have been higher than the supply. The dollars that India earned through exports and the dollars that were being remitted into India were not enough to pay for the imports.
Hence, this meant that the rupee should have lost value against the dollar. But that did not happen because foreign investors kept bringing dollars into to invest in stocks and bonds in India. At the same time Indian corporates were borrowing in dollars abroad and kept bringing that money back to India. The Non Resident Indians were also bringing dollars into India and converting them into rupees to invest in bank deposits in India because interest rates on offer in India were higher.
All this effectively ensured that there was a good supply of dollars. This in turn meant that the rupee did not lose value against the dollar, even though the current account deficit had gone through the roof.
But a high current account deficit should have been warning enough for the government that rupee could snap against the dollar, at any point of time. The dollars coming in through foreign investors in bonds and stocks and NRIs deposits, could go back at any point of time. Also, money being borrowed by the Indian companies in dollars, would have to be repaid. And this would add to the demand for dollars.
Hence, steps should have been taken to control the high current account deficit by controlling imports. And at the same time steps should have been taken to ensure that dollars kept flowing into India. The government got active on this front only after the rupee started to lose value against the dollar since the end of May, 2013.
But why did the government and the finance minister not figure out what sounds a tad obvious with the benefit of hindsight? As I have explained here, here, here,here and here, most of the factors that have led to the rupee depreciating against the dollar, did not appear overnight. They have been work-in-process for a while now.
So why did Chidambaram find the rapid depreciation of the rupee against the dollar “unexpected”? The basic reason for this is the fact that between January and May rupee moved against the dollar in the range of 54-55. It was only towards the end of May that the rupee started rapidly losing value against the dollar.
Chidambaram and others who had thought that the rupee will continue to hold strong against the dollar had become of what Nassim Nicholas Taleb calls the turkey problem. As Taleb writes in his latest book Anti Fragile “A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So, with the butcher surprising it, the turkey will have a revision of belief—right when its confidence in the statement that the butcher loves turkeys is maximal … the key here is such a surprise will be a Black Swan event; but just for the turkey, not for the butcher.”
Chidambaram expected the trend ‘of a stable rupee’ to continue. What was true for the first five months of the year was expected to be true for the remaining part of the year as well. But sadly things did not turn out like that, and the rupee like Taleb’s turkey got butchered.
By May end, foreign investors were falling over one another to withdraw money from the Indian bond market. When they sold out on bonds, they were paid in rupees. Once they started converting these rupees into dollars, the demand for dollars went up. As a result the rupee rapidly lost value against the dollar, and only then did the government wake up.
As Taleb writes “We can also see from the turkey story the mother of all harmful mistakes: mistaking absence of evidence (of harm) for evidence of absence, a mistake that tends to prevail in intellectual circles.”
Just because something is not happening at the present time, people tend to assume that it will never happen. Or as Taleb puts it, an absence of evidence becomes an evidence of absence. Chidambaram was a victim of this as well.
There is a bigger lesson to learn here. People expect any trend to continue ad infinitum. For example, before the financial crisis broke out in late 2008, Americans expected that housing prices will keep increasing for the years to come. In a survey of home buyers carried out in Los Angeles in 2005, the prevailing belief was that prices will keep growing at the rate of 22% every year over the next 10 years. This meant that a house which cost a million dollars in 2005 would cost around $7.3million by 2015. This faith came from the fact that housing prices had not fallen in the recent past and everyone expected that trend to continue.
The same phenomenon was visible during the dotcom bubble of the 1990s. Every one expected the prices of dotcom companies which barely made any profits, to keep increasing forever. The great investor Warren Buffett stayed away from dotcom stocks and was written off for a while when the prices of dotcom stocks rose at a much faster pace than the value of investments that he had made. But we all know who had the last laugh in the end.
The Japanese stock market and real estate bubble of the 1980s was also expected to continue forever. A similar thing has happened with gold investors this year. Just because gold prices had rallied for more than 10 years at a stretch, investors assumed that the rally will continue even in 2013. But it did not.
Hence, it is important to remember that just because a negative event hasn’t happened in the recent past, that doesn’t mean it will never happen in the time to come. In India, currently there is a great belief that real estate prices will continue to go up forever. Is that the next ‘big’ turkey waiting to be slaughtered?

The article originally appeared on www.firstpost.com with a different headline on August 2, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

 

Don’t count gold out: it may be the last man standing

goldVivek Kaul
At the very outset let me confess that this has been a difficult piece to write. When everyone around you is shouting the same thing from their rooftops, it is very difficult to say something which happens to be exactly the opposite.
Gold over the last one week has turned into a four letter word. Last Thursday (i.e. April 11, 2013) the closing price of the yellow metal was $1564.2 per ounce (one troy ounce equals 31.1 grams). A week later as I write this gold is selling at around $1375 per ounce. The price has fallen by around 12.1% over the period of just one week.
And this fall has suddenly turned investment experts (at least the ones who appear on television and write and get quoted in newspapers) all bearish on gold. They have been giving different reasons to stay away from it. But if they were so confident that the price of gold would fall, as it has, why didn’t they warn the investors before fall? Everything is obvious after it has happened.
But as the Nobel Prize winning economist Daniel Kahneman writes in Thinking, Fast and Slow “The ultimate test of an explanation is whether it would have made the event predictable in advance”. Those offering the explanations now, clearly did not predict the massive and sudden fall in price of gold. What is interesting is that before the price of gold started to fall the Bloomberg consensus forecast for gold by the end of 2013 was at $1752 per ounce. Hence, the broader market did not see this coming.
So why is the price of gold falling? One conspiracy theory doing the rounds has the investment bank Goldman Sachs at the heart of it. As John Cassidy of the New Yorker magazine puts it “Last December, Goldman’s economic team turned bearishon gold, saying the multi-year upward trend in gold prices “will likely turn in 2013.” And last Wednesday,(i.e. April 10, 2013) the bank’s commodities team advised its clients to start shorting gold.” Short selling refers to a scenario where investors borrow gold and sell it with the hope that as the price falls they can buy it back at a lower price and thus make a profit.
Goldman Sachs was not the only big bank turning negative on gold. On April 2, the French bank, Societe Generale, the also issued a report titled The end of the gold era, and turned bearish on the yellow metal.
This many believe is a conspiracy on part of the big banks to drive down the price of gold. As Paul Craigs, a former assistant US Treasury Secretary told Kings World News “This is an orchestration. It’s been going on now from the beginning of April…Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance. Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold. So what they are trying to do is scare the individual investor out of bullion. Clearly there is something desperate going on.”
Nevertheless, conspiracy theories are easy to talk about but difficult to prove. There are several other reasons being offered on why the price of gold will continue to fall. A major reason being offered is the improvement in the American economic scenario and that leading to the Federal Reserve of the United States, the American central bank, printing lesser money in the days to come.
The Federal Reserve currently prints $85 billion every month in the hope of reviving the American economy. Societe Generale in its report The end of the gold era believes that this will continue till September and come down to $65 billion after that, until being fully terminated by the end of the year.
The Federal Reserve on its part has guided that money printing will come down if it sees a ‘significant improvement in the outlook for employment’. The latest U3 rate of unemployment in the United States for the month of February 2013 stood at 7.6%. U6, a broader measure of unemployment, was at 13.8%. Both numbers have declined from their peaks. U6 touched a high of 17.2% in October 2009, when U3, which is the official unemployment rate, was at 10%. In December 2012 U6 stood at 14.4% and U3 was down to 7.8%.
So yes things have improved but they are still far away from being fine. U3 in the pre-financial crisis days used to be at around 5%. Also long term unemployment (where people are out of work for 27 weeks or more) has changed little and is at at 4.6 million or 39.6% of the unemployed people(U3).
(There are various ways in which the bureau of labour standards in the United States measures unemployment. This ranges from U1 to U6. The official rate of unemployment is the U3, which is the proportion of the civilian labour force that is unemployed but actively seeking employment. U6 is the most broad definition of unemployment and includes workers who want to work full time but are working part time because there are no full time jobs available. It also includes “discouraged workers”, or people who have stopped looking for work because the economic conditions the way they are, make them believe that no work is available for them.)
Another measure of the US economy turning around is the increase in real estate prices. As per the S&P Case-Shiller 20 City Home Price Index, real estate prices have gone up by 8.1% between January 1, 2012 and January 1, 2013. This after falling by 3.9% between 2011 and 2012.
One of the reasons the Federal Reserves prints money is to ensure that there is enough money going around in the financial system and interest rates continue to remain low. This ensures that people borrow and spend more. Hence, the low interest rates have helped in reviving the real estate sector in the United States.
But lets think for a moment on what will happen if the Federal Reserves stops printing money? Interest rates are likely to go up. People will take on fewer home loans to buy homes and that in turn will mean the real estate sector will go back to the dumps that it was in. So will the Federal Reserve take the risk of going slow or stopping money printing? Also, economic growth for the three months ending December 2012, was at -0.1%. So much for the American economy improving.
In this scenario it is unlikely the Federal Reserve will go stop money printing anytime soon, even though its Chairman Ben Bernanke, its Chairman, may keep dropping hints about doing the same.
As Stephen Leeb writes on www.Forbes.com “The Federal Reserve also wants to beat up on gold, via its drumbeat, suggesting that liquidity may be drying up and monetary easing might end soon. Never mind that recent economic data, on the whole, appears much weaker than expected, or that any halt to U.S. monetary easing could only follow higher inflation and commodity prices.
And as long as United States keeps printing money gold will remain a good investment bet, its current huge fall notwithstanding.
The last bull market in gold ended soon after the legendary Paul Volcker took over as the Chairman of the Federal Reserve in August 1979. As economist Bill Bonner wrote in a recent column “Paul Volcker replaced G. William Miller as chairman in August 1979. A loose money policy became a tight money policy. Volcker jacked up interest rates…But what’s the Fed doing now? Has it reversed course? Has Ben “Bubbles” Bernanke been replaced with a tough-as-nails inflation fighter? Has the Federal Open Market Committee(FOMC) vowed to stop printing money? Has the loosest monetary policy in US history given way to a tight policy?”
And the answer on all the above counts is a big no.
Moving on, another reason given for the gold price falling is that Cyprus is selling gold worth $500 million in order to raise cash to pay its debt. As Peter Schiff president of Euro Pacific Capitalwrote in a recent column “Concerns quickly spread that other heavily indebted Mediterranean countries with large gold reserves like Greece, Portugal, Italy and Spain would follow suit. The tidal wave of selling would be expected to be the coup de grace for gold’s glory years.”
The stronger countries of the euro zone (the countries which use euro as their currency) led by Germany have been rescuing the heavily indebted weaker ones for a while now through multi billion dollar rescue packages. In case of Cyprus the rescue came with terms and conditions which included seizing a part of its banking deposits and selling its gold.
This experts feel is likely to be repeated in the days to come with other countries as well. What they forget is that if the euro zone makes a habit of seizing deposits and selling gold, countries are likely to opt out of the euro and move onto their own currencies. As James Montier writes in a recent research paper titled Hyperinflations, Hysteria, and False Memories “If one were to worry about hyperinflation anywhere, I believe it would have to be with respect to the break-up of the eurozone.” Another reason to keep holding onto gold. If there is even a slight whiff of a euro breakup gold is going to fly.
Another logic being bandied around (especially by some of the Indian analysts) is that with the price of gold falling the investment demand for gold is likely to go down. Fair point. But a falling gold price can also push up the jewellery demand for gold. In 2011, gold jewellery consumed around 1972.1 tonnes of gold. This was down to 1908.1 tonnes in 2012, as prices rose.
A slowdown of Chinese growth has been offered as another reason for gold prices falling. As Cassidy of New Yorker writes “Many of today’s news storiesabout the gold price emphasized disappointing economic figures from China, which showed economic growth slowing down slightly in the first three months of 2013. China is a big consumer of virtually all natural resources, and gold was but one of many commodities that fell sharply after the report from Beijing.”
But this theory doesn’t really hold either. “The purported slowdown in the Chinese economy was very slight. First quarter growth came in at 7.7 per cent, compared to 7.9 per cent in the last three months of 2012. Allowing for the vagaries of the statistics, the difference is inconsequential,” writes Cassidy.
Also the gold bears who have suddenly all come out of the closet are not talking about what is happening in Japan. Japan has decided to double its money supply by printing yen to create some inflation. The hope is hat all this new money will create some inflation as it chases the same amount of goods and services, leading to a rise in prices. When people see prices rising, or expect prices to rise, they are more likely to buy goods and services, than keep their money in the bank. This is the logic. And when this happens businesses will do well and so will the overall economy.
A side effect of this money printing which is expected to be thrice as large as that in the United States, is the Japanese yen losing value against other major currencies because a surfeit of yen is expected to flood the financial system.
A weak yen also makes Japanese exports more competitive. (For a detailed argument click here). But it puts countries like Taiwan, South Korea, China and even Germany in a spot of bother. As Societe Generale analysts write in a report titled How to make profits from the Sushi-style QE in Japan “In effect Korea, Taiwan and China are losing competitiveness while Japan regains it.”
Printing money is not rocket science, if Japan can print money, so can the other countries in order to weaken their currency and thus keep their exports competitive. Hence there are chances of a full fledged global currency war erupting. And this is another reason to own gold.
The final argument against gold has been that central banks have been printing money for more than four years now. But all that money has not led to high inflation, as the gold bulls had been predicting that it would. So central banks have managed to slay the inflation phantom. “After more than four years of quantitative easing in the United States, the inflation rate, as measured by the consumer price index, is running at just two per cent…In Britain, where the Bank of England has followed policies similar to the Fed’s, the inflation rate is 2.8 per cent—a bit higher, but hardly alarming,” writes Cassidy.
But just because money printing hasn’t led to inflation till now doesn’t mean we can rule out that possibility totally. There is huge historical evidence to the contrary. Let me quote Nassim Nicholas Taleb here, something that I have done in the recent past. As Taleb writes in Anti Fragile “Central banks can print money; they print print and print with no effect (and claim the “safety” of such a measure), then, “unexpectedly,” the printing causes a jump in inflation.” James Rickards author Currency Wars: The Making of the Next Global Crises says the same thing “They can’t just keep printing…All major central banks are easing…Eventually so much money will be printed that this will lead to inflation.”
And in a situation like this, gold will be the last man standing.
To conclude, this is how I feel about gold. I maybe right. I maybe wrong. That only time will tell. Hence its important to remember here what John Kenneth Galbraith, an economist who talked sense on most occasions, once said: “The only function of economic forecasting is to make astrology look respectable.”
Given this it is important that one does not bet one’s life on gold going up. An allocation of not more than 10% in case of a conservative investor is the best bet to make. And if you are already there, stay there.
The article originally appeared on www.firstpost.com on April 18, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Gold price falling? Why it’s still okay to buy the metal

goldVivek Kaul
Gold prices fell below Rs 30,000 per ten grams for the first time in seven months on February 21, 2013. Data from www.goldprice.org shows that the yellow metal has fallen by around 6.5% in dollar terms over the last 30 days. In rupee terms the fall has been a little lower at 5.7%.
This fall has meant that everyone who has been recommending gold (including this writer) have ended up with eggs on their face. But every forecast cannot be right all the time. There are situations when a forecast is wrong till it is proved right.
Allow me to explain. Every bull market has a theory. So why has the price of gold gone up over the last few years? The answer is very simple. Central banks around the world have printed a lot of money. This money has been pumped into the financial system with the hope that banks will lend it to people and businesses, who will then spend this money and thus help in reviving the economy.
The fear was that with all this extra money chasing the same number of goods and services, there would be a great rise in prices. To protect themselves from this rise in price and loss of purchasing power, investors around the world had been buying gold. This pushed up its price. Unlike paper money gold cannot be created out of thin air by the government and thus is looked upon as a hedge against inflation.
But the inflation is still to come. And so this theory which drove up the price of gold doesn’t seem to be working. As a result the price of gold has taken a beating. With no inflation there is really no reason for people to buy the yellow metal and protect themselves against loss of purchasing power.
As Gary Dorsch, Editor, Global Money Trends points out in a recent column “So far, five central banks, – the Federal Reserve, the European Central Bank, Bank of England, the Bank of Japan and the Swiss National Bank have effectively created more than $6-trillion of new currency over the past four years, and have flooded the world money markets with excess liquidity. The size of their balance sheets has now reached a combined $9.5-trillion, compared with $3.5-trillion six years ago.”
But even with so much money being printed there has been very little inflation. So money is being diverted to other asset classes rather than buying up what John Maynard Keynes referred to as the barbarous relic.
Also this lack of inflation has made central bank governors and politicians around the world victims of what Nassim Nicholas Taleb calls the great turkey problem. As he writes in his latest book Anti Fragile “A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.””
With the butcher feeding it on a regular basis, the turkey starts to expect that the good times will continue forever and the butcher will continue feeding it. That is what seems to be happening with central bank governors and politicians around the world. The fact that all the money printing has not produced rapid inflation till now has led to the assumption that it will never produce any inflation. Ben Bernanke, the Chairman of the Federal Reserve of United States, the American central bank, has even gone to the extent of saying that he was 100% sure he could control inflation.
And using this conclusion central banks are printing even more money. This is like the lines from La Haine, a French film released in 1995 “Heard about the guy who fell off a skyscraper? On his way down past each floor, he kept saying to reassure himself: So far so good… so far so good… so far so good.”
But the person falling from a skyscraper has to hit the ground at some point of time. The good days of every turkey being reared by a butcher also comes to an end. As Taleb writes “The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief – right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey.”
Or as the line from La Haine goes “How you fall doesn’t matter. It’s how you land!”
Similarly all the money printing has to end up somewhere. As Taleb puts it “central banks can print money; they print print and print with no effect (and claim the “safety” of such a measure), then, “unexpectedly,” the printing causes a jump in inflation.”
Or as James Rickards author Currency Wars: The Making of the Next Global Crises puts it “They can’t just keep printing…All major central banks are easing…Eventually so much money will be printed that this will lead to inflation.”
There is a reason to why the inflation is taking time even with governments around the world printing money rapidly. Henry Hazlitt has an explanation for it in his brilliant book, The Inflation Crisis and How to Resolve it.
In the initial stages of inflation, the man on the street does not know that the government is printing money and hence he has confidence in the paper money he is using. He does not think that the paper money is going to lose value anytime soon, and does not rush out to spend it. Gradually news starts to get around the government is printing money and this is when there is some rush to spend money before it loses its value. This is when prices start to go up at the rate at which money is being printed. In the final stage, as the central bank backed by the government of the day, continues to print money, people start to feel that this will continue indefinitely. And hence they try to get rid of paper money, as soon as they get it. This in turn leads to prices rising at a rate even faster than the rate at which money is being printed.
This is how most inflations evolve whenever governments print money at a very rapid rate.
Once the market starts discounting the idea of inflation, the price of gold will rise at a very rapid rate. But till that happens, people like me, who have and continue to recommend investing in gold, will look stupid. Also it is important to remember that every bull market has its bear runs. In the middle of the bull run in gold prices in the seventies gold prices fell by nearly 44%. The price of gold as of end of December 1974 was at $186.5 per ounce (one ounce equals 31.1 grams). By end of August 1976, it had fallen to $104 per ounce, or nearly 44.2% lower. But prices rallied again from there and peaked very briefly at $850 per ounce on January 21, 1980.
So as I said at the beginning forecasts can be wrong for a long time, till they are proven right. And when they are proved right, even for a brief period, its then when the ‘real money’ gets made.
Taleb talks about people who had been predicting a financial crisis in the developed world. There predictions were wrong for a very long till they were proven right. As he writes “You were wrong for years, right for a moment, losing small, winning big, so vastly more successful than the other way.”
Hence, I would still recommend buying gold, limiting it to around 10% of the overall portfolio or even lower, depending on how much money you are willing to back what is a particularly risky trade. Investment in gold has to be looked upon as a speculation on the continued printing of money and the eventual arrival of rapid inflation. This strategy can prove to be tremendously beneficial. As Taleb writes “If you put 90 percent of your funds in boring cash…and 10 percent in very risky, maximally risky, securities, you cannot possibly lose more than 10 percent, while you are exposed to massive upside.” Gold has to be played like that. 
The article originally appeared on www.firstpost.com on February 22, 2013
(Vivek Kaul is a writer. He can be reached at [email protected]. Nearly 14% of his investment portfolio is in gold through the mutual fund route. He continues to buy gold through the SIP route) 

Why Montek has a turkey problem while forecasting

Deputy-Chairman-Planning-Commission-Montek-Singh-Ahluwalia
Vivek Kaul
How the mighty fall.
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, is now talking about the Indian economy growing at anywhere between 5-5.5% during this financial year (i.e. the period between April 1, 2012 and March 31, 2013).
What is interesting that during the first few months of the financial year he was talking about an economic growth of at least 7%. In fact on a television show in April 2012, which was discussing Ruchir Sharma’s book Breakout Nations, Ahluwalia kept insisting that a 7% economic growth rate was a given.
Turns out it was not. And Ahluwalia is now talking about an economic growth of 5-5.5%, telling us that he has been way off the mark. When someone predicts an economic growth of 7% and the growth turns out to be 6.5% or 7.5%, one really can’t hold the prediction against him. But predicting a 7% growth rate at the beginning of the year, and then later revising it to 5% as the evidence of a slowdown comes through, is being way off the mark.
And when its the deputy chairman of the Planning Commission who has been way off the mark with regard to predicting economic growth, then that leaves one wondering, if he has no idea of which way the economy is headed, how can the other lesser mortals?
Forecasting is difficult business. The typical assumption is that those who are closest to the activity are the best placed to forecast it. So stock analysts are best placed to forecast which way stock markets are headed. The existing IT/telecom companies are best placed to talk about cutting edge technologies of the future. Political pundits are best placed to predict which way the elections will go and so on.
But as we have seen time and again that is not the case. Surprises are always around the corner.
One of the biggest exercises on testing predictions was carried out by Philip Tetlock, a psychologist at the University of California, Berkeley. He asked various experts to predict the implications of the Cold War that was flaring up between the United States and the erstwhile Union of Soviet Socialist Republic at the time.
In the experiment, Tetlock chose 284 people, who made a living by predicting political and economic trends. Over the next 20 years, he asked them to make nearly 100 predictions each, on a variety of likely future events. Would apartheid end in South Africa? Would Michael Gorbachev, the leader of USSR, be ousted in a coup? Would the US go to war in the Persian Gulf? Would the dotcom bubble burst?
By the end of the study in 2003, Tetlock had 82,361 forecasts. What he found was that there was very little agreement among these experts. It didn’t matter which field they were in or what their academic discipline was; they were all bad at forecasting. Interestingly, these experts did slightly better at predicting the future when they were operating outside the area of their so-called expertise.
People get forecasts wrong all the time because they are typically victims of what Nassim Nicholas Taleb in his latest book Anti Fragile calls the Great Turkey Problem. As he writes “A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief – right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey.”
When Ahluwalia insisted in late April 2012 that the economy will at least grow at 7% he was being a turkey. He was confident that the good days will continue, and was not taking into account the fact that things could go really bad. As Ruchir Sharma writes in Breakout Nations a book which was released at the beginning of this financial year “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
In fact, expecting a trend to continue, is a typical tendency seen among people who work within the domain of finance and economics. As a risk manager confessed to the Economist in August 2008, “In January 2007 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.”
Given this, it is no surprise that people who were working in the financial sector on Wall Street and other parts of the world, did not see the financial crisis coming. This happened because they worked with the assumption that the good times that prevailed will continue to go on.
Taleb calls the turkey problem “the mother of all problems” in life. Getting comfortable with the status quo and then assuming that it will continue typically leads to problems in the days to come. That brings me to Ahluwalia’s new prediction. “I would not rule out 7% next year”. He continues to be believe in the number ‘seven’. How seriously should one take that? As hedge fund manager George Soros writes in The New Paradigm for Financial Markets — The Credit Crisis of 2008 and What It Means “People’s understanding is inherently imperfect because they are a part of reality and a part cannot fully comprehend the whole.”
For the current financial year Ahluwalia as someone who closely observes the economic system could not comprehend the ‘whole’. Whether he is able to do that for the next financial year remains to be seen.
The article originally appeared on www.firstpost.com on February 18, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])