The Itinerant Economist

Memoirs of a Dismal Scientist

Russell Jones

• Publisher: London Publishing Partnership
• Year: 2014
• ISBN:
  9781907994333
• Edition: 1
• Topic: Business
• Subtopic: Business Biographies
• Index: Business

Economists and bankers have long been much maligned individuals, but never more so than in the wake of the Global Financial Crisis. Working as an economist for various financial institutions for more than twenty-five years Russell Jones had a foot in both camps. He plied his trade in a number of global financial centres – including London, Tokyo, Sydney, New York and Abu Dhabi – experiencing at first hand the extraordinary ebb and flow of an industry that came to exert a disproportionate influence on the lives of almost everyone on the planet. This is the story of his journey.

Chapter 1

A Random Walk

My career as a financial markets economist has spanned more than a generation: the period from the euphoria of the City of London’s ‘Big Bang’ in 1986 until the trials, tribulations and recriminations of recent years, when we have been reminded just how much everyone loves a morality tale. Over that time I have been employed by a number of famous (some would say infamous) banks and other institutions and have, at different times, been based in several of the world’s financial hubs.

It was a period during which the financial services industry expanded dramatically and exerted a disproportionate influence, for good or ill, on the lives of almost everyone on the planet, from senior politicians and policymakers to the humblest bank depositor and beyond. With this ‘age of finance’ came successive booms and busts and ultimately a calamitous economic crisis, the likes of which had not been seen since the thirties. It was a time of enormous flux and upheaval in the balance of global political and economic power. It was an era during which any number of fortunes were made and lost; while some accumulated obscene amounts of wealth, others languished in abject poverty. Individuals and institutions, even countries, that had once seemed unassailable suffered precipitate and ignominious falls from grace. It was a period of innovation and discovery, of arrogance and hubris, of elation and despair, of fundamental lessons forgotten and painfully relearned.

Despite one or two moments in the sun, my own direct role in all this has, in truth, been little more than a walk-on part. Indeed, looking back, in many ways my career has been somewhat random and chequered, if not one of less than heroic failure. But I have worked with some truly exceptional people. I had a ringside seat for a lot of extraordinary events. I saw and experienced at first hand the seemingly arbitrary absurdities of how financial firms were managed: all the egotism, the overconfidence, the bizarre mergers and acquisitions, the haphazard changes of strategy, the nepotism, the brazen dispensation of personal patronage, and the downright stupidity for which the industry is renowned. I witnessed some of the individual excesses that have on occasion driven the tabloid press into a frenzy and given the industry such a bad reputation with the general public. I saw my company’s US headquarters destroyed on 9/11. I met some of the world’s foremost movers and shakers. I travelled the world from Bogotá to Reykjavik and from Oman to Windhoek, and in between I was able to explore many of the most exciting and exotic cities on the planet. And, unlike many others who beat a similar path, I have managed to survive and exit of my own volition, at the time of my choosing, with my health and reputation intact. The fact is that I know any number of people who were less fortunate: people who lost wives, lost careers, lost fortunes, lost the plot, lost their sanity – some who even lost their lives.

In this sense I have been lucky. Lucky to earn the comfortable living I have for the length of time I have. Lucky to enjoy the luxury and pampering that have often gone with it. Lucky, for the most part, to be able to gloss over my own intellectual (and other) shortcomings. Lucky to do a job where no two days were the same and where boredom was rarely a factor. Lucky never to be sacked (although I came desperately close on more than one occasion). Lucky to have had a stable and happy family life that kept my feet on the ground and reminded me of life’s more enduring values and rewards.

I worked in an industry that can in many ways be compared to the human body’s cardiovascular system. Just as the heart and lungs enable the body to function, so the financial sector allows the economy to function and grow. When the financial sector works well, it exerts vital discipline on governments and companies. It facilitates sound investments (not least in infrastructure), encourages innovation and entrepreneurship, enables retirement planning and home ownership, and even broadens further education. However, if it works poorly it is degenerative. When it breaks down altogether, the effects are, as we have been reminded in recent years, catastrophic.

The financial system is an extraordinarily complex beast, and the motivations and objectives of the myriad savers and investors that underlie it are constantly adapting and evolving as society itself progresses. There is therefore a fundamental requirement for continuous interpretation of how this process is developing and will continue to develop. That is where people like me come in.

Putting things in more practical terms, my job amounted to the application of macroeconomic analysis and forecasting to financial markets with a view, in particular, to predicting how different classes of investment would perform over future periods. Over the years I have at one stage or another focused on all the major financial markets: bonds, equities and foreign exchange. The forecasts that are made can be very narrow and apply to a single piece of high-frequency economic data (such as industrial production or consumer price inflation) and its potential impact, or they can be very broad, stretching out to several years (or even longer) and encompassing any number of aspects of an economy’s performance and the various markets that will be influenced by that performance. A key element of this process involves trying to understand the future direction of economic policy. Economic policy has three components: fiscal – what the government spends, what it raises in taxes and what it borrows; monetary – the level of interest rates, the growth of the money supply and credit aggregates, and the attitude towards the exchange rate; and the supply side – the evolution of an economy’s basic institutions, its regulatory environment and its incentive structure.

Understanding the future direction of economic policy in turn requires knowledge of the latest theoretical debates among academic economists and an understanding of the social, cultural and political environment within which a country or countries may be operating. This knowledge requires a strong sense of historical context. History may not often repeat itself, but it certainly resonates, and I would assert that it is all too often an underweighted, if not ignored, consideration in my profession. This is especially so among the young and inexperienced, but also more widely, including among those who should know better – not least the policymakers themselves. My view has long been that economics students would do well to learn more history and politics and less mathematics.

However, the job is not just about assembling a series of projections of questionable value for different macroeconomic indicators and investment vehicles. What one cannot afford to be is some wonkish back-office computer nerd intermittently sending out into the ether one’s latest set of unexplained numbers. The job has a much more wide-ranging, practical and human element. Indeed, in many ways it is about communication.

As a financial markets economist, you are required to gather and process an extraordinarily large, and ever-expanding, portfolio of information. You never quite know what the markets and those functioning in them will focus on next and what will therefore become pertinent. It might be an obscure monetary aggregate, the offshore ownership structure of a country’s government bond market, demographic profiles over the next fifty years, the potential make-up of a new government, the voting record of a particular member of a central bank policy committee, the regional breakdown of a set of unemployment statistics, or the response to an economic crisis that happened eighty years ago. I was even once asked what the average number of electric power sockets in a recently built Chinese home was. Don’t ask why.

One is also a summariser, an interpreter and a conduit for the transmission of that information. This role applies first to the traders (those individuals who actively deal in certain financial assets), the salespeople (those who act as intermediaries between the firm’s ultimate clients and the traders), the risk managers (those who try to ensure that the firm’s exposure to different asset markets is sensibly controlled), the investment bankers (those who advise the firm’s clients on their financing options) and the senior management of one’s own firm. But it also applies to the firm’s client base, both big and small, at home and abroad. In fulfilling this second role, one may be addressing that client’s own economists or other researchers, its asset allocators, its portfolio managers or its management.

Furthermore, you are encouraged to play a public relations role for your firm, speaking at conferences and appearing in the media. All of this means that not only are you constantly developing and refining your ideas, but you must also be able to articulate those ideas in one forum or another. You have to be able to communicate coherently, both verbally and in print, quickly and concisely.

The pieces that you write may be an assessment of a fragment of high-frequency data, they may be an essay on the outcome of a future event, or they may be long and detailed reports on some important aspect of the macroeconomic or financial landscape. There is an audience for all of these variations, but I have found that there is nothing better for establishing your credibility than writing the definitive study of a critical question. A huge premium is also attached to an ability to offer a succinct and insightful analysis of a particularly complex issue.

This is an extensive job description and no one could possibly master this kind of comprehensive remit overnight. Indeed, to be an economist in the financial markets is to occupy a completely thankless position. After all, if explaining the past and understanding the present are difficult enough – and an awful lot of the job is spent trying to do just that – then predicting the future with any consistent degree of accuracy is harder still. However, forecasters do not make life easy for themselves. They repeatedly fall into the same methodological and presentational traps, while there are other unavoidable considerations that render difficult the precise judgement of how good a forecast actually was. A fascinating analysis of macroeconomic forecasting conducted by the OECD just before I began my career drew the following broad conclusions, which remain pretty apposite.1

•Single-country forecasts frequently contain implicit inconsistencies. For example, the sum of individual-country forecasts of exports often exceeds the sum of forecasts of imports – which is logically impossible at the level of the world economy and imparts an upward bias to single-economy forecasts. Inflation forecasts often suffer similarly.

•The variance of forecasts is typically less than that of the outcomes, i.e. forecasters tend to shave the tops and bottoms off their forecasts.

•Forecasters tend to ‘cluster’, or to group around one another, presumably for fear of looking unwarrantedly extreme.

•There is size-of-organisation bias. ‘Clustering’ tends to be an inverse function of the size of the institution making the forecast. Forecasters in small organisations tend to be more outlandish. If they are wrong, few people notice, whereas if they are right, they gain publicity.

•It is difficult to assess how accurate economic forecasts have been. A year-ahead forecast may change fundamentally following a budget or a development such as a major increase in oil prices. Forecasts made a few days apart may therefore differ substantially for good reason.

•Economic forecasts are less accurate than is implied by the way in which they are presented. Forecasting to within a tenth of a percentage point for GDP growth, which is often the habit among financial market economists, is absurdly precise given the uncertainties involved.

The attitudes that prevail across financial market firms towards forecasts and economists are not exactly forgiving, and in saying this I would most definitely extend the judgement to my fellow workers. Part of the problem is that because the vicissitudes of the business cycle and the economy constantly affect the entire population, ‘everyone is an economist’. Or at least everyone considers themselves qualified to opine on economics in a way that a layman would never do in relation to, say, physics or chemistry. Something else that has revealed itself over the years is that externally generated forecasts and views seem to enjoy a greater degree of initial credibility than those produced in-house. Familiarity, or proximity, tend to breed contempt.

When you are wrong – and you will be wrong an awful lot of the time – at best you are likely to be the butt of one of the numerous jokes about economists of which one’s colleagues never tire (believe m...

Table of contents

• Foreword
• Preface
• Chapter 1 A Random Walk
• Chapter 2 Initial Stirrings
• Chapter 3 A False Start
• Chapter 4 A Marriage of Inconvenience
• Chapter 5 A Dead End
• Chapter 6 The Rising Sun
• Chapter 7 The Lowest Common Denominator
• Chapter 8 Unfinished Business
• Chapter 9 A Square Peg in a Round Hole
• Chapter 10 A Window Seat
• Chapter 11 Hedged Out
• Chapter 12 Banished to the Desert
• Chapter 13 Temporary Resurrection
• Chapter 14 The Crisis
• Chapter 15 From Hero To Villain
• Chapter 16 Resurrection Down Under
• Chapter 17 Just Macro…
• Endnotes