On FT pessimism

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Good morning. Gold passed $4,000 yesterday. Unhedged has speculated that it is now a momentum trade, untethered from fundamentals, and argued that at this price it might offer weak long-term real returns. In the short term, though, with real interest rates falling, geopolitical tensions persistent and “gold-plated Fomo” in effect, the gold train looks set to rumble on (as Katie Martin and I discuss on yesterday’s Unhedged podcast, here). Email us: unhedged@ft.com.

On FT pessimism

I was pleased to see the below comment under a recent Financial Times story (hat tip to my colleague Arash Massoudi for pointing it out). It came from someone going by “Name is already taken”:

I started reading FT in 2009 when [I] got my graduate job in capital markets in London. I also started investing at around the same time. I just want to warn you that reading [the] FT made me miss two huge equity rallies (2010-2014 and one pre-Covid). Every year from 2010 up to 2020, [the] FT would relentlessly argue that equity is too expensive, quote experts, say there is a bubble and there will be a crash. I was waiting for the crash, sitting in cash and bonds, played with some emerging markets . . . do not use FT as your investment guide.

This is a legitimate criticism, and it deserves an answer. 

I have not made a scientific study on the ratio of risk-positive to risk-negative stories and opinion pieces in the FT markets pages overtime, but I would predict that, in my decade and a half at the FT, it has been a landslide win for the negative ones. In my own case, I don’t have to guess, because I know I’m guilty as charged. I write many more pieces about high valuations and signs of economic pressure than on juicy opportunities and economic sunshine. Given that markets go up more than they go down, I’m open to the accusation that I have been worse than useless to my readers.

There are several threads here.

The first thread concerns personal experience. When I left finance and started as a financial journalist in 2009, I had just been doubly scarred by the great financial crisis. First, taking part in that once-in-a-generation event made me risk averse. Second, I was unlucky enough to sell most of my stocks ahead of the worst of the crash. I say unlucky because that experience tricked me into thinking I knew how to time markets, and in the five or six years after the crisis, I lost far more money by being underexposed to risk than I saved by being underexposed to it in 2008-9. I can also say confidently that in those years I wrote too pessimistically about markets. While I still write more stories about risk than opportunities, I try to emphasise that I am talking about risk at the margin. I consistently talk up the irreplaceability of equity exposure, particularly US equity exposure, in any portfolio and in any part of the market or economic cycle. 

The next thread is about financial journalism generally. As we all know, “if it bleeds, it leads”. Readers like scary stories and dire opinions more than happy ones. Is it wrong for journalists to give customers what they want, so long as they are guided by integrity and intelligence while doing so? 

This is closely related to a wider question: what is the job of financial journalism? Specifically, in an industry packed to the teeth with promoters and snake-oil salespeople, is the FT’s job, in part, to offer something more gimlet-eyed and sceptical, rather than an utterly neutral view (however you might define that)?

Even if you think the role of the FT and similar outlets is fundamentally critical (as I do), there is a final thread worth pulling out: the enduring sense that pessimism is more sophisticated than optimism. Murmuring darkly about how we are all in big trouble makes one look and feel clever. I don’t know why this is so, but confusing pessimism with insight is not the same thing as holding that scepticism is part of a journalist’s job. Scepticism is a tool; pessimism is a bias. Unhedged tries to be mindful of the difference. Readers, let us know how we’re doing.

A final word on AI’s contribution to economic growth

Regular readers of Unhedged will recognise this graph of the contribution of the tech industry to GDP growth:

This data made up part of our Chart of the Week newsletter last week. We arrived at it by way of a somewhat circuitous route, while stress testing the claim that AI investment has accounted for almost all US GDP growth this year. Simply comparing the growth in dollars invested in hardware and software to the total increase in dollars of GDP is problematic, in that it doesn’t exclude the dollars that come from imports, which ought to be subtracted from GDP. 

The graph, by contrast, draws on the “value added” tables from the Bureau of Economic Analysis, which subtract intermediate inputs from the gross output (revenue) of each sector. We prefer this approach in theory, and it avoids the implausible conclusion that without AI the US would not be growing. But it is not totally satisfactory either. It covers all of tech, from internet publishing to the sale of personal computers. And it excludes the contribution of AI data centres’ investment to the output of other industries, from construction to energy to real estate.

It is clear that AI is a big deal for the economy — the big swing in the contribution of tech this year, and the staggering investment budgets of the AI super-scalers, tell us that much. But it is surprisingly hard to tell, with precision, just how big a deal. 

A final, depressing note: don’t try to reproduce our graph right now. Since the government shutdown, the most recent value-added data is not available on the BEA’s website. 

One good read

Damodaran on high valuation and market timing.

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