PROJECT M

How is it that almost everyone missed the financial crisis, the Arab Spring, the slowdown in China, the recovery in the United States, Brexit, Donald Trump and … we could go on?

Philippa Malmgren

Because we are so wedded to the idea that the answer lies in numbers. We love our analytical approach, we love models, we love algorithms, but it is a fact that the quantitative analysis covers only a part of the way. One needs to look at qualitative aspects as well. My book Signals is about hints that are not yet in the data, that you can only see qualitatively.

PROJECT M

Please provide an example.

Philippa Malmgren

Well, Donald Trump just won the US election. The day before, I said he is going to win and win by a lot. I said the same about Brexit. Why? Every photograph of a Trump rally featured queues of people with more being turned away. At Democratic rallies there were empty seats, so I thought the polls were wrong. If you look with your own eyes you can see signals that give you a hint about the future.

PROJECT M

Do you also believe in the Hemline Index, that is in good times women’s hemlines rise and drop when stock prices fall?

Philippa Malmgren

There is historical evidence of this and I find interesting what Melania Trump wore on the day her husband was elected President. It was a swag cut, which was long on one side and short on the other. It was both a miniskirt and a full length dress. What the fashion industry seems to be signalling is a high degree of uncertainty about the future. When people ask me which direction should I go, I say buy volatility. Skirts tell you it is a volatility play, not a directional play. Now skirts are not the only indicator, artists channel the zeitgeist. So when you see artists, like fashion designers, show you dresses going both directions at the same time, combining that with traditional economic analysis can be helpful.

PROJECT M

You argue in the book that economics has been dominated by masculine concepts.

Philippa Malmgren

Yes, it has all been about steel and auto parts, but economics is also about lipstick and lip gloss. Both are valid parts of GDP as people spend billions on them. Central banks keep a basket of goods as a proxy for average living costs. In, the Bank Of England supplemented lip gloss for lipstick in this basket. This sounds insignificant but lipstick is more expensive than gloss. With that change made, the data point tells you the cost of living is falling. Yet in every major city everyone is talking about the rising cost of living. Why is there a gap between what central banks are telling us versus what we feel? Part of the answer is that by substituting lip gloss for lipstick they revise the numbers down. But if you are buying both in 10 different colors, your actual cost of living is rising. This raises the question can we trust the official data?

PROJECT M

You are implying that we can’t, especially in light of inflation.

Philippa Malmgren

Yes, every central bank is doing their best to create inflation. Now that we have gone from roughly 0.5% inflation to almost hitting the central bank target of 2%, Janet Yellen says the target is too low. Going from 0.5 to 2% inflation has massive implications for pension funds. If you are poor, it also changes how much protein you can afford. This means poor people go into cheaper calories which by definition are emptier calories. Suddenly, society splits between the rich who live longer and the poor whose health begins to deteriorate. This is materially important to retirement saving because societies could end up being split by the inflation central banks have strived to create.

PROJECT M

And where does, as promised in your book title, the geopolitical fit in?

Philippa Malmgren

The argument is that the Chinese in particular, but emerging markets in general, have lent the US and Western Europe tons of money that have allowed us to spend far more than we earned. They have bought our treasuries, our bunds, our gilts and they are not happy about inflation because inflation is bad for the bond holder.

PROJECT M

That is possibly the least of their problems.

Philippa Malmgren

Even if they take a loss, the big issue is that inflation will hit the population hard. Inflation always hits the poor the hardest and the poor in the world today are emerging markets. In China, the cost of living has been rising astronomically – the average price of rent in Beijing is 1.2 times the average income. The price of pork, their single most important food, has gone through the roof in the last five years. Chinese workers respond by demanding pay increases and they had five increases in three years, making themselves uncompetitive.

PROJECT M

Yes, you make the point of Mexico being the new China.

Philippa Malmgren

Right, Mexican wages are now 20% lower than those in China, there is better quality control and it is better integrated into the US. One way to fix this is for China to reach for all the food, energy and critical assets required to keep their population stable, hence they take the South China Sea where we find 10% of the world’s fish supply, that is protein. Now which economist watches fish prices? No one, but they are critical in directing the national policy for the most important emerging markets.

PROJECT M

Are you saying the financial industry is monitoring the wrong signals?

Philippa Malmgren

The world of investment banking and pension fund advisors looks at aggregate food data from the UN, but no real person cares about that. In Russia, fish are the most important protein. Russians are paying 50% of their income on food alone and the value of an average sized salmon is more than a barrel of oil, so we shouldn’t be surprised that the Russians keep pitching up in Baltics waters. We have had many signals that both the Chinese and Russians are concerned about their ability to feed their people.

PROJECT M

So what is your advice to the financial industry?

Philippa Malmgren

Open your eyes, see the signals and you won’t be surprised by the next Brexit, the next Trump or, possibly, the next Marine La Pen.