HyperNormalTimes

Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

June 25, 2023

Titanic Risks in Threadneedle Street

Titanic,In,Ocean,At,Night.,Full,Moon,And,Stars.,Watercolor

A ship in a harbour is safe, but that is not what ships are built for. John A. Shedd

When anyone asks me how I can best describe my experience in nearly forty years at sea, I merely say uneventful. Edward Smith, Captain of RMS Titanic, 1907.

We expect this rise in inflation to be a temporary feature of the bounce back.  … It is important not to overreact to temporary strong growth and inflation to ensure recovery is not undermined by premature tightening in monetary conditionsAndrew Bailey, Governor of the Bank of England, Mansion House Speech July 2021. (UK M2 Money Supply Aggregate had grown 20% in the prior 18 months).

Risk

Misunderstanding the nature and implications of risk is widespread. Last week’s submersible tragedy would not have happened if the safety first principle was applied and the Titan was prevented from operating. Maybe it should have been. However, those of us whose idea of an adventure holiday is skiing on the piste edge are probably not the ones to judge.

Informed

The curiosity that compels someone to voyage nearly 4km below the Atlantic involves clear and apparent risk. At such depths, the water pressure is equal to 400 atmospheres or 200 times the pressure of an inflated car tyre. I feel uneasy diving below 100ft. It is unimaginable that any of those who perished were not aware of the risks they were taking.

Breaking Things

However, there is a line demarking fraud from innovation. “Fake it until you make it” was a successful strategy for Steve Jobs and Elon Musk, but resulted in Elizabeth Holmes being sentenced to 11 years in prison. Moving fast and breaking things is an acceptable innovation route for consumer electronics and EVs, but not for healthcare devices.

Perfect Hindsight

In the grand scheme of things taking informed billionaires on adventure trips into outer space or the bottom of the ocean should not be high on policymakers’ regulatory agenda. However, after extraordinary events, commentators who predicted them with perfect hindsight abound and possess the gift to weave them into their chosen narrative. Ash Sarkar suggested in the Guardian that the tragedy was the result of rich people not being taxed enough. While other suppliers of adventure travel to the super-rich have derided the Titan’s owner’s cavalier attitude and for ruining the reputation of their lucrative market.

Nautical Hubris

RMS Titanic, meaning exceptional strength and power, epitomised the hubris of British early 20th Century imperialism. When Captain Edward Smith spoke of his uneventful forty-year career, he went on to say he had never experienced a shipwreck and that he had only ever seen one vessel in distress. Before setting sail on the Titanic’s maiden voyage, he claimed that the improvements in technology witnessed since he started his career onboard commercial sailing ships in the 1870s meant that he could “not imagine any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that.” The Captain’s attitude represented the groupthink and recency bias of The White Star Line (his ship’s owner) and the wider pre-Great War British Establishment.

Financial Hubris

Britain’s mortgage-holding homeowners were made painfully aware of a current example of groupthink and recency bias failure last week. While this event will involve fewer deaths than the sinking of the Titanic, its reach will be felt by millions. The Bank of England raised its policy rate by a further 50 bps, and mortgage rates pushed through 6%. The financial burden placed upon younger indebted homeowners will result in stress and hardship. All of which was avoidable if we had monetary policymakers with open minds and longer memories.

Lessons Learnt

The sinking of the RMS Titanic on April 15th1912 resulted in an inquiry which began just 17 days later on May 2nd. The inquiry questioned White Star Line officials, government officials, surviving passengers and crew, rescuers, and shipping unions. One hundred witnesses testified, answering 25 000 questions. The final report was published on July 30th1912, less than 100 days after the tragedy. The recommendations from the report covered four areas: the provision and inspection of sufficient lifeboats, 24-hour radio watch and mandatory use of distress rockets, international ice flow patrols, and ship design changes, including the extension of double hulls.

Titanic Groupthink

Andrew Bailey and his team of Monetary Policy Committee experts are all drawn from the professional sub-discipline of Keynesian economics. The UK macroeconomic model derived for their policy setting meetings is mono-theoretical based on the Keynesian determinants of aggregate demand. It represents groupthink of titanic proportions. The existence of central bank groupthink is all the more surprising given that it was the Monetarist Milton Friedman who rose to prominence after the last period of elevated inflation, stating that inflation is everywhere a monetary phenomenon.

Past Performance

Furthermore, as the MPC members gather to make their impactful monthly decisions, they, like about 85% of the UK population, have no adult memories of anything other than benign inflation and long periods of uneventful interest rate policy. (There are several factors why inflation and interest rates have been so benign over recent decades, none of which are due to the impact of Keynesian macroeconomic policy). We all suffer from recency bias. But our financial overlords, who correctly implore investors that past performance is no guide to the future, are just like the rest of us, and ignore its profound implications.

Fail & Learn

The reality, so alien to safety-first policymakers, is that failing fast and learning is the quickest route to success. (See SpaceX versus NASA for details). Despite being avoidable, there are important lessons to be learnt from the failure of the Bank of England UK’s interest rate policy. However, the fear must be that, like the UK’s glacially paced COVID inquiry, the learnings are some years away.

Jeremy

This communication is provided for information purposes only, and is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. Investors should seek advice from an Independent Financial Adviser or regulated stockbroker before making any investment decisions. Progressive Equity Research Ltd (“PERL”) does not make investment recommendations.

Opinions contained in this communication represent those of PERL and/or our affiliates at the time of publication and PERL does not undertake to provide updates to any opinions or views expressed. PERL does not hold any positions in the securities mentioned in this communication, however, PERL’s directors, officers, employees, contractors and affiliates may hold a position,  and/or may perform services or solicit business from, any of the companies or related securities mentioned.

Any prices quoted in our research are as at the previous day’s close.