It Seemed Like A Good Idea At The Time...

Submitted by Eric Peters of Rabobank

Let’s face it, there are some pretty dumb ideas out there in markets right now. The economic assumptions that underpin the macro view of how the world works, and hence where value is likely to sit in the long run, is a great place to start.

For example, aggregate demand curves don’t exist, as was shown by Sonnenshein-Mantle-Debreu decades ago: yet almost all economics still relies on aggregate demand curves regardless. For another, economic theory says firms stop producing goods when diminishing productivity means marginal cost of production equals marginal cost: except that is demonstrably untrue, as has been known since Sraffa (1926), and underlined every time actual firms are asked what their actual marginal cost of production is (fixed after a certain point) and when they actually stop production (when there is no demand). Or how about efficient markets hypothesis - that asset prices fully reflect all available information and it is impossible to "beat the market" consistently on a risk-adjusted basis? Forget the debunking work of psychologists like Kahneman and Tversky: has anyone who agrees with that theory ever worked in a market? (I vividly recall one former salesman in another bank in the early 2000s asking me for my views on the Hungarian Florin.) The simple point, dear readers, is that markets can be built on intellectual foundations of sand. It might be a while before everyone realizes that and prices adjust violently, but we get there in the end. (And then the same silly economic theories keep being taught in universities regardless.)

But then we get examples rammed in our faces. For example, bond issuance by an energy-producing company so incredibly profitable it somehow needs to tap international capital markets for billions, the pricing for which then trades inside the sovereign which owns it. Or a major transportation company that loses money with every journey it makes whose IPO is massively over-subscribed and then slumps…to be followed by the IPO of a rival firm with exactly the same money-losing business model. Or how about sovereign bond yields that are negative and yet highly sought-after? Or Chinese bank perpetual bonds at 4.5% that never give you your principle back? Or a cash-strapped Chinese firm that had to repay bond holders in ham, not cash, then ran low on pigs, and whose shares are up 78% YTD? Or USD/CNH flat as a pancake at 6.70 and volatility collapsing when the political backdrop, economic fundamentals, and CFETS currency basket all say CNH should be closer to 7? One could make an argument that all of the above also belong in the ‘It seemed like a good idea at the time…’ file.  

However, the latest news simply takes the breath away: Chinese scientists have put human brain genes in monkeys—and yes, they may be smarter. Yes, the story is exactly as printed. Chinese scientists --and not the same ones who have permanently altered the DNA of babies with unforeseen future impacts on the human gene pool in what is either dangerous ‘mutant’ or, even worse, eugenics territory-- have deliberately altered monkey brains to try to increase simian intelligence.

Can I politely suggest that it is the Chinese scientists whose intelligence needs to be raised? Technologyreview.com quotes James Sikela, a geneticist who carries out comparative studies among primates at the University of Colorado: “The use of transgenic monkeys to study human genes linked to brain evolution is a very risky road to take. It is a classic slippery slope issue and one that we can expect to recur as this type of research is pursued.” He is concerned the experiment will soon lead to even more extreme modifications. And how could that end badly?!!! Haven’t we just had a series of Hollywood movies pointing out in detail what kind of horrible scenarios could play out there – and, yes, they were even released in China. (Though the classic episode of The Simpsons with super-intelligent space chimps probably wasn’t.) And, of course, the idiot-savant human-genome-editing/monkey-genome-editing crowd is joined by scientists trying to bring back dinosaurs. Again, it’s not as if we haven’t been saturated with movies telling us what an appalling-stupid idea that would be. As Jeff Goldblum’s character Dr Ian Malcolm says in the first Jurassic Park adventure: “Your scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should.” Folks, that applies not only to X-Men, Superman, and Planet of the Apes scenarios in China, but to so, so much that one sees around you in the markets daily. Frankly, as I’ve said before and will say again:

Stop the Planet of the Apes, I Want to Get Off. From Chimpan A to Chimpan Z, you’ll never make a monkey out of me.