Cosmic Kite: The Future is Not Set in Stone

I can’t help crying, forgive me. Maradona in a memorable path, in the best play of all time…Cosmic Kite…From what planet did you come from to leave so many Englishmen along the way, to turn the country into a clenched fist screaming for Argentina? Argentina 2- England 0. Diegoal, Diegoal, Diego Armando Maradona…Thank you God for football, for Maradona, for these tears, for this Argentina 2 England 0.’

Victor Hugo Morales, 1986 FIFA World Cup 

My home country is in mourning.

I’m sure you’ve heard by now that one of the best football players in the world, Diego Maradona, sadly passed away this week.

A young Maradona had said that his two dreams in life were to play at the World Cup and to win a World Cup. He accomplished both.

One of the fondest memories I have of him are from the 1986 World Cup quarter-final game Argentina played against England in Mexico. I was quite young back then but I still remember the excitement and the celebrations.

The first goal had already been one for the history books with Maradona using his fist to score, something that he would later refer to as ‘the hand of god’.

But the second goal was one of the best ones ever. Maradona ran all the way from behind midfield and dodged several English defenders to score a brilliant goal, one that was later crowned the goal of the century.

But the goal also came along with one of the most passionate sports narrations I’ve ever heard by Uruguayan commentator Victor Hugo Morales (excerpt above). One that would leave Maradona with the nickname ‘barrilete cosmico’, which somewhat translates to cosmic kite.

You can watch the goal and listen to Morales here.

But maybe less well known than Maradona’s goal of the century is that years later in 2005, the Bank of England used that exact moment to explain how central banks can achieve their goals by guiding market expectations.

It’s something they called the ‘Maradona Theory of Interest Rates’ or as it was later known, the ‘Maradona Effect’.

You see, as the Governor of the Bank of England Mervyn King explained in a speech, Maradona ran 60 yards and beat several opposing English players before scoring the second goal. But what was truly remarkable was that Maradona did all this by running in a straight line.

As he continued:

How can you beat five players by running in a straight line? The answer is that the English defenders reacted to what they expected Maradona to do. Because they expected Maradona to move either left or right, he was able to go straight on.

Monetary policy works in a similar way. Market interest rates react to what the central bank is expected to do. In recent years the Bank of England and other central banks have experienced periods in which they have been able to influence the path of the economy without making large moves in official interest rates. They headed in a straight line for their goals.

How was that possible? Because financial markets did not expect interest rates to remain constant. They expected that rates would move either up or down. Those expectations were sufficient — at times — to stabilise private spending while official interest rates in fact moved very little.

In simple words, they were able to influence rates without really moving them much.

The point is, psychology and behaviour play a bit part in economics.

There’s a lot of optimism around…even with the hit to the economy from the pandemic.

This week the Dow reached 30,000 for the first time. Here in Australia property prices continue to set records and a Brett Whiteley painting sold for over $6 million, an Australian record.

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The path to the future is set…

So far, the expectation is that there’s a vaccine coming, that we will keep getting stimulus, that interest rates will stay low. That asset prices will continue to rise and that being in cash will lose you money.

It seems the path to the future is set. And it may be so, but my point is that it’s not set in stone.

As we’ve seen this year, things can change quickly.

Property and stocks are rising.

But remember, this growth isn’t coming from economic growth from higher employment and salary growth. Instead it’s coming from economic manipulation…and debt, which is increasing fast.

There’s no telling what could happen if there was a sudden realisation or loss of confidence. But from experience, when this happens liquidity disappears.

My point is, be ready for anything and maintain some liquidity.

You may be expecting things to move a certain way, but they may very well move in the opposite direction.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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