The Year of the Horse Goat?

Jon Ronson’s 2004 book ‘The Men Who Stare at Goats’ was subsequently turned into a film starring George Clooney, Ewan McGregor, Kevin Spacey and Jeff Bridges which opened with a slide that read, “More of this is true than you would believe”.

The book, which details the adoption of unorthodox ‘new earth’ strategies by the US military, derives its title from a US military experiment in which agents tried over several years to develop the power to cause de-bleated, crippled, shackled goats to die just by looking at them. The book claims that maybe one goat might have been killed during all that time and that maybe the heart rates increased of hamsters that were subject to similar experiments.

So what’s that got to do with global markets in 2014 – especially when the pre-occupation in the Chinese New Year of the Horse is likely to be with bulls and bears?

Well, economic policy since the Global Financial Crisis seems to have been driven by the central banking equivalent of men (and women!) who stare at goats. The entire quantitative easing (QE) programme is every bit as ridiculous a leap of misplaced faith as anything in Ronson’s book. Just because people believe that they can use bizarre powers to make things happen doesn’t necessarily make it so.

Since 2009-10, we’ve seen a stall in the very limited global recovery, glossed over by the performance of equity markets. Real indicators, however, show the global economy to be both very weak and deteriorating. Meanwhile, economic fundamentals, primarily the debt problem, continue to worsen.

The stock markets’ strong performances come mainly from America, China and latterly Japan’s frantic printing of money.  More than 100% of the gains on the S&P 500 index since 2008 have been racked up during periods when there were QE programmes running. In the non-QE periods, markets fell.

Forcing equity markets higher by force-feeding them liquidity is a central banker’s equivalent of staring at goats – they believe that by forcing asset prices higher they can encourage debt-strung economies to rebound despite all the evidence to the contrary.

It may well be that central banks prove to be more effective than the military were at hiricide – after 5 years, we should at least get closer to the answers in 2014. If the experiment does work, then we’ll all have to recalibrate our thinking to accommodate a totally new economic and investment paradigm, one in which staring at economic goats does work.

My gut feeling is that 2014 won’t be the year when the experimental monetary and fiscal policies of the last 5 years are vindicated any more than it’s shown that we can kill goats just by staring at them in the right way. However, the men who stare at goats may not be ready to throw in the towel, no matter how badly they fail.

The book makes it clear that when their counterparts failed, they decided that it was something to do with the wrong stare or even the wrong goats and not that the premise was in and of itself ridiculous. The likeliest outcome in 2014 is continued and increasingly obvious economic malaise, accompanied with ever more creative reasons as to why the economic goat hasn’t died yet but, with a few tweaks, will do so.