This is Bloomberg Business Week with Carol Messer and Tim Stenebeck on Bloomberg Radio.
Tim, no doubt about it. We're living in interesting economic and market times. We're coming off a pandemic unprecedented, and we're going to talk about that word, unprecedented. Stimulus and easing to ensure the function of the financial system and really to help protect the livelihoods of many.
The end result an.
Economy that stopped short then was revved up again big time. But we got persistent inflation which has come down. But nonetheless, it was an interesting time. It was the backdrop certainly for the FED the last couple of years. But it's a recovery too that wasn't felt by all, and that was something that was coined the case shaped recovery by our next guest.
And so with all of that going on and more, we are so delighted to have with us in our Bloomberg Interactive Broker's studio. Peter Atwater. He's adjunct Professor of economics at William and Mary. He's a former banker and someone who spent many years in financial services and in the securitization of assets. He's been a financial consultant, and he's also got a way forward for all of us thanks to his brand new book. Out brand new book. It came out this week. It's called The Confidence Map,
Charting a Path from Chaos to Clarity. It's a book that our very own Mike Reagan says is a great beach.
Read, which is a big endorsement.
Welcome, Peter. It's good to have you in the studio, and congratulations on the book.
Thanks so much, Tim and Carol. Great to be here.
Well, it's so great to have you here.
First up, we would be remiss if we didn't ask you about the FED meeting and what you make of it, anything unusual or telling, especially as you think about your book.
Yeah, it was the lack of unusual today. This was like a dive that hit the water and there was no splash. You know, Normally after a FED announcement there's a lot of battling in social media and different takes. There were no takes today.
It was kind of boring, right, it was beyond boring.
This was nothing about nothing today. And it's been interesting because in the last couple of weeks we've seen investors take everything off the worry list, and I think came off the Worryless two. There is a sense that everything is going to be okay. We're not worried about a recession. Inflation looks like it's going to keep coming down or is coming down to a reasonable level. And if I have a take from today, it's this sense of where's the shoe that's going to drop next?
Yeah, it's sort of like a complacency. I think it was Tom Keen who was asking Diane Swank about parallels to what we saw before the Nasdaq crash in the early two thousands.
Yeah, this is what's been interesting on the NASTAQ front is we've seen investors racing into all these abstract stocks two years ago, the SPACs and that that NFT mania. This year, they're charging into the stalwarts, the thoroughbreds that are well tested, you know, Apple, the Magnificent seven, And that to me is an indicator that we're not as risk taking as we were a couple of years ago.
That were looking for certainty in the companies that we're investing in, and too much possibility scares us.
Take us to the confidence quadrant.
Then all right, this is your book and explain this, because there's stress center versus comfort zone, passenger seat versus launch pan. But I love this and you, as you write, can kind of apply to anything and everything. So take us to is should we be in the stress center a comfort zone right now? Because it does feel like there's so much growth in terms of optimism, whether it's S and P strategists or economist saying no recession to help us out.
Yes, So for the benefit of your listeners, this is a book that looks at the impact of certainty and control and the choices we make because we use the word confidence all the time and we don't know what it means. And so what I tried to do was to really dig into it. And those two things are really important. I need to know what's coming and I need to feel like I'm prepared for that. That's what creates confidence. And I would say that if I.
Look at it, so a lot of musk confidence, No.
That's confidence theater, that's that's and that's you know, and we see a lot of that and maybe too much of it, and I and I worry that a lot of people think that that's what you need to be confident. It's like no, no, no, that that's an act that's a show that people put on really well.
So can you explain the framework that you developed here and what to do if you find yourself basically in the wrong quadrant.
Yeah, So the framework takes confidence and or takes certainty and control and puts them on two axes. It's a simple four box chart, and none of them is inherently good or bad, but they but we feel very different in them. And I would say today most investors feel like they're in the comfort zone. Things feel easy, it's like they've been they're driving on a clear highway on
a clear day. And that's both good and bad. Because the more confident we are, the less we think, the less we pay attention, and so that's a big risk, and we also take more risk than we should and that's the potential consequence that we need to consider. But I also then look at the consumer and there are a lot of consumers in the stress centry today, particularly those who are trying to buy a house or buying a car, because interest rates have been very punitive to
those at the bottom. Those at the top, it's been wonderful. Cash is now earning four percent five percent, But for those at the bottom, there's been a real, a real headwind that's come about because they're on a payment they paid by month, and these heights and interest rates have made their lives far more expensive.
So why is it important, though, to understand kind of where you are, whether you're too complacent or you're comfortable, or whether you're stressed out?
Like why is it important?
And I think about you know, when you think about stress, we've been there a lot, as in a market environment, in an economic environment where it's the pandemic nine to eleven, the Great Financial crisis.
Right, like help me out here.
Yeah, So we forget that. Real life moves us around so we can be in the stress center in one moment and then be in the comfort zone the next. But we forget that when we're in the stress center. If you go back to the COVID, we were catastrophizing that the end of the world was here, and we forget that as we're moving into the stress center and
panics occurring. Panic is almost God's way of telling us the worst is behind us, and certainly that's proven over and over in the markets, but we fall victim to it, and we respond impulsively and emotionally rather than stepping back to say, oh, panic means we're nearing a low in confidence, and rather than throwing the baby out with the bath water, we should be preparing for what's coming next, because it's going to surprise everybody.
So how do we do that right now in the context of this run up that we've seen in the markets? How does an investor use these tools?
I think investors need to look and see that our preferences have changed. We're getting more conservative behind the scenes,
even though the indices are moving to record highs. So you want to recognize that while we're in the comfort zone, we're nowhere near as craving possibility and abstraction as we were two years ago, and also appreciate that there's an enormous disconnect between market confidence today and main street confidence, and with wealth so concentrated in so few hands, that tension will certainly play out if the economy turns down.
You know, I always think if we're in the comfort zone, we don't anticipate a recession, and that becomes really dangerous when we all think that moment has passed.
Well, it's so interesting that you say that, because I think about how much we talk about consumer sentiment, our consumer confidence, our business sentiment and business confidence. Right, these things can certainly shape our actions, and certainly as investors are expectations of kind of where assets should go.
Yeah, they how we fine, how we feel shapes our actions also shapes the stories we tell. And so the narrative, the narrative. The narrative is simply a reflection on how we feel. And here again the narrative today is the coast is clear, relax If there's going to be a recession, it's going to be shallow, if at all. Inflations come down considerably from where we were, And so we're investors are looking out ahead and not appreciating that risks come out of nowhere.
Well that's what I was going to say, And well we've got to do a little bit of news. But you know, when you're in the comfort zone and you're kind of relaxed, I mean, this is when all of a sudden there's a regional bank problem or there's a cryptic collapse, right like those are. So it feels like what you're saying is we can kind of anticipate, maybe not exactly what's going to go wrong, but that's so things.
Going to wrong go wrong, absolutely and we can kind of figure it out.
Could we anticipate that a burning made off was gonna happen?
Yeah, because the more confident we are, the less we scrutinize, and we fall a victim to content at both extremes financial fomo fomo and at loads in confidence, we follow the wrong people.
I want to get right back to Peter Attwater his new book The Confidence Map, Charting a Path from Chaos to Clarity. A professor at William and Mary so I said, unprecedented events being unprecedented, you know that they are entirely predictable.
Is that true? Even black swans are entirely predictable.
If you look at the backdrop of how people feel, they're much more predictable than we realize. The means may change, but extremely vulnerable people always do the same five things. People who are extremely confident have a similar series of things that they do. And so if I know how people feel, I'm not not going to be nearly as surprised by what they do. And I live this with my class. As COVID was beginning to take hold, and we would every week we would say is confidence higher
or lower? And if we got lower and lower and each week they would say, so if since it's lower, what are people going to do next? And as we approached March, they were the ones who told me, professor, you need to pack everything up for spring break, and because we're not going to come back if confidence continues to fall. And so we tend to overlook that is
confidence is changing. Our choices change, and there are clear connections between what we want and what we feel, and we look at events as being the event, not the decisions made moment before the event. If I think about nine to eleven, we would say that caused American confidence to fall, But if you look at the back drop, confidence in them add least was really low, and so you could understand why people who are feeling hopeless might undertake that. Samely with the Arab spring.
So a skeptic of your framework might say, it's very easy to connect the dots when you look back, but how do we look forward and use this framework to predict the future.
So that's what I try to do with investors in real time, with corporate executives, in trying to help them to realize that the choices are changing quickly based on how we feel. And I found myself in COVID working with corporations trying to rejigger their messages because when we lack confidence, we need simplicity, We crave nostalgia, and so you can if we can watch as people are changing their mood, we can better anticipate what to do in response.
And that was one of the things that emergency room doctors and first responders really showed me that these are things you can prepare for and train to anticipate how to behave in a crisis.
Right there.
Many of them were prepared for trauma, right so in that when it came so okay, I'm thinking people are at home, or they're driving, or they're going to download this podcast or download this later as a podcast, and they're like, okay, So how do I apply that to investing and how should I be thinking it about it in today's market environment.
So one of the things I think investors need to be careful about today is the historical relationship between stocks and bonds seems to have broken down. That we think of this in terms of a diversified pool, that owning stocks helps you because they do better when stocks do worse. And the reality is that not that long ago confidence
in both stocks and bonds was staggeringly high. We had trillions of dollars worth of negative yielding bonds at the same time time we're stampeding into crypto and all of these crazy things, and we didn't realize that every piece of that pie, that diversified pie, was piping hot. So you need to think about not historical correlations, but how
do investors feel about what you own? Because you want to own people, you want to own hopeless at the same time, you want to own things that we're excited because it's tomorrowland and having a mix of moods in your portfolio, because that's where the real benefit of diversification comes from, a.
Mix of moods.
A mix of moods.
It's interesting like that.
I mean, what does a mix of moods look like? Obviously it depends on your age and your risk tolerance. But how do you take a mood and apply that to an ETF or to a fond or to a stock.
Well, price is a great way to discover it, because I think prices market prices are a barometer of mood. So you could have looked at the of natural gas last summer and scene that you know, we were we were terrified that there was going to be enormous scarcity, and now there's immense complacency in that in that sector that there's views of abundance forever. And so you want to be thinking about where is there intense scarcity, where are people stampeding in and where they stampeding out?
All right, I'm going to go dark for you, charting a path from chaos to clarity. I feel like climate change is one of those This is an existential question for all of us in situation.
So how do you think about that?
So climate change is a very abstract concept, and if you look at our eagerness to address climate change, it migrates with our level of confidence. And what you'll find is that when confidence is high, we want to tackle climate change proactively, that our focus is prevent the problem, and and confidence falls our response to climate changes we need to deal with the consequences of having not dealt
with it. And so if confidence falls, I think you'll start to see that our interest in solving it is swapped out for our need to address the fact that we didn't. And so that's that's a behavioral change, because we move from abstract possibility to immediate need and vulnerability.
I just because it's just it's all I think about, but that a.
Lotability affects different people depending on where they live, if they live. And I think maybe one thing that changed was when you know, the skies over so much of this part of the country turned red a few months ago because of Canadian wildfires. I mean, we're in an area that's not traditionally affected by wildfires, but we're seeing the effects of that.
Yeah, So we need abstract vulnerabilities to become real. Think about COVID. COVID did not become real for most Americans until March eleventh, the night that Tom Hanks and Rudy Gobert were the.
Headlines and the NBA.
Yeah yeah, and suddenly that was the tipping point and boom, we all felt it and you could see it. It was like a wildfire of a shift in sentiment.
It's so true.
For so long, we're like, it's not going to be our problem. It's not going to be our problem.
It's all the stories went along with that.
Yeah, And I have to say, as a journalist or you know, it felt kind of stupid, like on the other side, like.
How did we miss this when we're thinking.
How could this not impact us? Thank you so much, Peter Atwater, Thank you so much. Such a treat to have you in studio. The book is the Confidence Map, charting a path from chaos to clarity. I'm actually heading to a beach, so I'm taking this with me because I've just done a little bit of reading.
But I want to read it.
Well, it just came out, Carols.
I know.
Peter, thank you, good luck with it. Come back soon. This is Bloomberg