WEBVTT - Mastering Confidence to Make Better Decisions

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<v Speaker 1>This is Bloomberg Business Week with Carol Messer and Tim

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<v Speaker 1>Stenebeck on Bloomberg Radio.

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<v Speaker 2>Tim, no doubt about it. We're living in interesting economic

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<v Speaker 2>and market times. We're coming off a pandemic unprecedented, and

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<v Speaker 2>we're going to talk about that word, unprecedented. Stimulus and

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<v Speaker 2>easing to ensure the function of the financial system and

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<v Speaker 2>really to help protect the livelihoods of many.

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<v Speaker 3>The end result an.

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<v Speaker 2>Economy that stopped short then was revved up again big time.

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<v Speaker 2>But we got persistent inflation which has come down. But nonetheless,

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<v Speaker 2>it was an interesting time. It was the backdrop certainly

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<v Speaker 2>for the FED the last couple of years. But it's

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<v Speaker 2>a recovery too that wasn't felt by all, and that

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<v Speaker 2>was something that was coined the case shaped recovery by

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<v Speaker 2>our next guest.

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<v Speaker 4>And so with all of that going on and more,

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<v Speaker 4>we are so delighted to have with us in our

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<v Speaker 4>Bloomberg Interactive Broker's studio. Peter Atwater. He's adjunct Professor of

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<v Speaker 4>economics at William and Mary. He's a former banker and

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<v Speaker 4>someone who spent many years in financial services and in

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<v Speaker 4>the securitization of assets. He's been a financial consultant, and

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<v Speaker 4>he's also got a way forward for all of us

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<v Speaker 4>thanks to his brand new book. Out brand new book.

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<v Speaker 4>It came out this week. It's called The Confidence Map,

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<v Speaker 4>Charting a Path from Chaos to Clarity. It's a book

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<v Speaker 4>that our very own Mike Reagan says is a great beach.

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<v Speaker 3>Read, which is a big endorsement.

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<v Speaker 4>Welcome, Peter. It's good to have you in the studio,

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<v Speaker 4>and congratulations on the book.

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<v Speaker 1>Thanks so much, Tim and Carol. Great to be here.

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<v Speaker 3>Well, it's so great to have you here.

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<v Speaker 2>First up, we would be remiss if we didn't ask

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<v Speaker 2>you about the FED meeting and what you make of it,

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<v Speaker 2>anything unusual or telling, especially as you think about your book.

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<v Speaker 1>Yeah, it was the lack of unusual today. This was

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<v Speaker 1>like a dive that hit the water and there was

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<v Speaker 1>no splash. You know, Normally after a FED announcement there's

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<v Speaker 1>a lot of battling in social media and different takes.

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<v Speaker 1>There were no takes today.

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<v Speaker 3>It was kind of boring, right, it was beyond boring.

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<v Speaker 1>This was nothing about nothing today. And it's been interesting

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<v Speaker 1>because in the last couple of weeks we've seen investors

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<v Speaker 1>take everything off the worry list, and I think came

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<v Speaker 1>off the Worryless two. There is a sense that everything

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<v Speaker 1>is going to be okay. We're not worried about a recession.

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<v Speaker 1>Inflation looks like it's going to keep coming down or

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<v Speaker 1>is coming down to a reasonable level. And if I

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<v Speaker 1>have a take from today, it's this sense of where's

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<v Speaker 1>the shoe that's going to drop next?

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<v Speaker 4>Yeah, it's sort of like a complacency. I think it

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<v Speaker 4>was Tom Keen who was asking Diane Swank about parallels

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<v Speaker 4>to what we saw before the Nasdaq crash in the

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<v Speaker 4>early two thousands.

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<v Speaker 1>Yeah, this is what's been interesting on the NASTAQ front

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<v Speaker 1>is we've seen investors racing into all these abstract stocks

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<v Speaker 1>two years ago, the SPACs and that that NFT mania.

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<v Speaker 1>This year, they're charging into the stalwarts, the thoroughbreds that

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<v Speaker 1>are well tested, you know, Apple, the Magnificent seven, And

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<v Speaker 1>that to me is an indicator that we're not as

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<v Speaker 1>risk taking as we were a couple of years ago.

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<v Speaker 1>That were looking for certainty in the companies that we're

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<v Speaker 1>investing in, and too much possibility scares us.

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<v Speaker 3>Take us to the confidence quadrant.

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<v Speaker 2>Then all right, this is your book and explain this,

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<v Speaker 2>because there's stress center versus comfort zone, passenger seat versus

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<v Speaker 2>launch pan. But I love this and you, as you write,

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<v Speaker 2>can kind of apply to anything and everything. So take

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<v Speaker 2>us to is should we be in the stress center

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<v Speaker 2>a comfort zone right now? Because it does feel like

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<v Speaker 2>there's so much growth in terms of optimism, whether it's

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<v Speaker 2>S and P strategists or economist saying no recession to

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<v Speaker 2>help us out.

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<v Speaker 1>Yes, So for the benefit of your listeners, this is

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<v Speaker 1>a book that looks at the impact of certainty and

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<v Speaker 1>control and the choices we make because we use the

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<v Speaker 1>word confidence all the time and we don't know what

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<v Speaker 1>it means. And so what I tried to do was

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<v Speaker 1>to really dig into it. And those two things are

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<v Speaker 1>really important. I need to know what's coming and I

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<v Speaker 1>need to feel like I'm prepared for that. That's what

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<v Speaker 1>creates confidence. And I would say that if I.

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<v Speaker 3>Look at it, so a lot of musk confidence, No.

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<v Speaker 1>That's confidence theater, that's that's and that's you know, and

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<v Speaker 1>we see a lot of that and maybe too much

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<v Speaker 1>of it, and I and I worry that a lot

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<v Speaker 1>of people think that that's what you need to be confident.

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<v Speaker 1>It's like no, no, no, that that's an act that's a

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<v Speaker 1>show that people put on really well.

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<v Speaker 4>So can you explain the framework that you developed here

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<v Speaker 4>and what to do if you find yourself basically in

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<v Speaker 4>the wrong quadrant.

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<v Speaker 1>Yeah, So the framework takes confidence and or takes certainty

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<v Speaker 1>and control and puts them on two axes. It's a

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<v Speaker 1>simple four box chart, and none of them is inherently

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<v Speaker 1>good or bad, but they but we feel very different

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<v Speaker 1>in them. And I would say today most investors feel

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<v Speaker 1>like they're in the comfort zone. Things feel easy, it's

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<v Speaker 1>like they've been they're driving on a clear highway on

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<v Speaker 1>a clear day. And that's both good and bad. Because

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<v Speaker 1>the more confident we are, the less we think, the

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<v Speaker 1>less we pay attention, and so that's a big risk,

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<v Speaker 1>and we also take more risk than we should and

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<v Speaker 1>that's the potential consequence that we need to consider. But

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<v Speaker 1>I also then look at the consumer and there are

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<v Speaker 1>a lot of consumers in the stress centry today, particularly

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<v Speaker 1>those who are trying to buy a house or buying

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<v Speaker 1>a car, because interest rates have been very punitive to

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<v Speaker 1>those at the bottom. Those at the top, it's been wonderful.

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<v Speaker 1>Cash is now earning four percent five percent, But for

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<v Speaker 1>those at the bottom, there's been a real, a real

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<v Speaker 1>headwind that's come about because they're on a payment they

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<v Speaker 1>paid by month, and these heights and interest rates have

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<v Speaker 1>made their lives far more expensive.

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<v Speaker 2>So why is it important, though, to understand kind of

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<v Speaker 2>where you are, whether you're too complacent or you're comfortable,

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<v Speaker 2>or whether you're stressed out?

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<v Speaker 3>Like why is it important?

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<v Speaker 2>And I think about you know, when you think about stress,

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<v Speaker 2>we've been there a lot, as in a market environment,

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<v Speaker 2>in an economic environment where it's the pandemic nine to eleven,

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<v Speaker 2>the Great Financial crisis.

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<v Speaker 3>Right, like help me out here.

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<v Speaker 1>Yeah, So we forget that. Real life moves us around

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<v Speaker 1>so we can be in the stress center in one

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<v Speaker 1>moment and then be in the comfort zone the next.

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<v Speaker 1>But we forget that when we're in the stress center.

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<v Speaker 1>If you go back to the COVID, we were catastrophizing

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<v Speaker 1>that the end of the world was here, and we

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<v Speaker 1>forget that as we're moving into the stress center and

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<v Speaker 1>panics occurring. Panic is almost God's way of telling us

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<v Speaker 1>the worst is behind us, and certainly that's proven over

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<v Speaker 1>and over in the markets, but we fall victim to it,

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<v Speaker 1>and we respond impulsively and emotionally rather than stepping back

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<v Speaker 1>to say, oh, panic means we're nearing a low in confidence,

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<v Speaker 1>and rather than throwing the baby out with the bath water,

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<v Speaker 1>we should be preparing for what's coming next, because it's

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<v Speaker 1>going to surprise everybody.

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<v Speaker 4>So how do we do that right now in the

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<v Speaker 4>context of this run up that we've seen in the markets?

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<v Speaker 4>How does an investor use these tools?

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<v Speaker 1>I think investors need to look and see that our

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<v Speaker 1>preferences have changed. We're getting more conservative behind the scenes,

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<v Speaker 1>even though the indices are moving to record highs. So

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<v Speaker 1>you want to recognize that while we're in the comfort zone,

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<v Speaker 1>we're nowhere near as craving possibility and abstraction as we

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<v Speaker 1>were two years ago, and also appreciate that there's an

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<v Speaker 1>enormous disconnect between market confidence today and main street confidence,

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<v Speaker 1>and with wealth so concentrated in so few hands, that

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<v Speaker 1>tension will certainly play out if the economy turns down.

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<v Speaker 1>You know, I always think if we're in the comfort zone,

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<v Speaker 1>we don't anticipate a recession, and that becomes really dangerous

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<v Speaker 1>when we all think that moment has passed.

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<v Speaker 2>Well, it's so interesting that you say that, because I

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<v Speaker 2>think about how much we talk about consumer sentiment, our

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<v Speaker 2>consumer confidence, our business sentiment and business confidence. Right, these

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<v Speaker 2>things can certainly shape our actions, and certainly as investors

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<v Speaker 2>are expectations of kind of where assets should go.

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<v Speaker 1>Yeah, they how we fine, how we feel shapes our

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<v Speaker 1>actions also shapes the stories we tell. And so the narrative,

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<v Speaker 1>the narrative. The narrative is simply a reflection on how

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<v Speaker 1>we feel. And here again the narrative today is the

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<v Speaker 1>coast is clear, relax If there's going to be a recession,

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<v Speaker 1>it's going to be shallow, if at all. Inflations come

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<v Speaker 1>down considerably from where we were, And so we're investors

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<v Speaker 1>are looking out ahead and not appreciating that risks come

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<v Speaker 1>out of nowhere.

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<v Speaker 2>Well that's what I was going to say, And well

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<v Speaker 2>we've got to do a little bit of news. But

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<v Speaker 2>you know, when you're in the comfort zone and you're

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<v Speaker 2>kind of relaxed, I mean, this is when all of

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<v Speaker 2>a sudden there's a regional bank problem or there's a

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<v Speaker 2>cryptic collapse, right like those are. So it feels like

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<v Speaker 2>what you're saying is we can kind of anticipate, maybe

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<v Speaker 2>not exactly what's going to go wrong, but that's so things.

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<v Speaker 3>Going to wrong go wrong, absolutely and we can kind

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<v Speaker 3>of figure it out.

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<v Speaker 2>Could we anticipate that a burning made off was gonna happen?

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<v Speaker 1>Yeah, because the more confident we are, the less we scrutinize,

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<v Speaker 1>and we fall a victim to content at both extremes

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<v Speaker 1>financial fomo fomo and at loads in confidence, we follow

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<v Speaker 1>the wrong people.

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<v Speaker 2>I want to get right back to Peter Attwater his

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<v Speaker 2>new book The Confidence Map, Charting a Path from Chaos

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<v Speaker 2>to Clarity. A professor at William and Mary so I said,

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<v Speaker 2>unprecedented events being unprecedented, you know that they are entirely predictable.

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<v Speaker 3>Is that true? Even black swans are entirely predictable.

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<v Speaker 1>If you look at the backdrop of how people feel,

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<v Speaker 1>they're much more predictable than we realize. The means may change,

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<v Speaker 1>but extremely vulnerable people always do the same five things.

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<v Speaker 1>People who are extremely confident have a similar series of

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<v Speaker 1>things that they do. And so if I know how

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<v Speaker 1>people feel, I'm not not going to be nearly as

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<v Speaker 1>surprised by what they do. And I live this with

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<v Speaker 1>my class. As COVID was beginning to take hold, and

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<v Speaker 1>we would every week we would say is confidence higher

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<v Speaker 1>or lower? And if we got lower and lower and

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<v Speaker 1>each week they would say, so if since it's lower,

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<v Speaker 1>what are people going to do next? And as we

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<v Speaker 1>approached March, they were the ones who told me, professor,

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<v Speaker 1>you need to pack everything up for spring break, and

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<v Speaker 1>because we're not going to come back if confidence continues

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<v Speaker 1>to fall. And so we tend to overlook that is

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<v Speaker 1>confidence is changing. Our choices change, and there are clear

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<v Speaker 1>connections between what we want and what we feel, and

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<v Speaker 1>we look at events as being the event, not the

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<v Speaker 1>decisions made moment before the event. If I think about

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<v Speaker 1>nine to eleven, we would say that caused American confidence

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<v Speaker 1>to fall, But if you look at the back drop,

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<v Speaker 1>confidence in them add least was really low, and so

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<v Speaker 1>you could understand why people who are feeling hopeless might

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<v Speaker 1>undertake that. Samely with the Arab spring.

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<v Speaker 4>So a skeptic of your framework might say, it's very

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<v Speaker 4>easy to connect the dots when you look back, but

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<v Speaker 4>how do we look forward and use this framework to

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<v Speaker 4>predict the future.

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<v Speaker 1>So that's what I try to do with investors in

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<v Speaker 1>real time, with corporate executives, in trying to help them

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<v Speaker 1>to realize that the choices are changing quickly based on

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<v Speaker 1>how we feel. And I found myself in COVID working

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<v Speaker 1>with corporations trying to rejigger their messages because when we

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<v Speaker 1>lack confidence, we need simplicity, We crave nostalgia, and so

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<v Speaker 1>you can if we can watch as people are changing

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<v Speaker 1>their mood, we can better anticipate what to do in response.

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<v Speaker 1>And that was one of the things that emergency room

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<v Speaker 1>doctors and first responders really showed me that these are

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<v Speaker 1>things you can prepare for and train to anticipate how

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<v Speaker 1>to behave in a crisis.

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<v Speaker 3>Right there.

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<v Speaker 2>Many of them were prepared for trauma, right so in

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<v Speaker 2>that when it came so okay, I'm thinking people are

0:12:13.920 --> 0:12:16.280
<v Speaker 2>at home, or they're driving, or they're going to download

0:12:16.320 --> 0:12:19.480
<v Speaker 2>this podcast or download this later as a podcast, and

0:12:19.600 --> 0:12:21.880
<v Speaker 2>they're like, okay, So how do I apply that to

0:12:22.040 --> 0:12:24.920
<v Speaker 2>investing and how should I be thinking it about it

0:12:24.960 --> 0:12:26.280
<v Speaker 2>in today's market environment.

0:12:26.640 --> 0:12:28.800
<v Speaker 1>So one of the things I think investors need to

0:12:28.840 --> 0:12:35.000
<v Speaker 1>be careful about today is the historical relationship between stocks

0:12:35.000 --> 0:12:39.720
<v Speaker 1>and bonds seems to have broken down. That we think

0:12:39.760 --> 0:12:42.840
<v Speaker 1>of this in terms of a diversified pool, that owning

0:12:42.920 --> 0:12:46.600
<v Speaker 1>stocks helps you because they do better when stocks do worse.

0:12:47.080 --> 0:12:52.080
<v Speaker 1>And the reality is that not that long ago confidence

0:12:52.120 --> 0:12:56.079
<v Speaker 1>in both stocks and bonds was staggeringly high. We had

0:12:56.080 --> 0:12:59.679
<v Speaker 1>trillions of dollars worth of negative yielding bonds at the

0:12:59.679 --> 0:13:03.440
<v Speaker 1>same time time we're stampeding into crypto and all of

0:13:03.480 --> 0:13:09.520
<v Speaker 1>these crazy things, and we didn't realize that every piece

0:13:09.559 --> 0:13:14.160
<v Speaker 1>of that pie, that diversified pie, was piping hot. So

0:13:14.200 --> 0:13:18.200
<v Speaker 1>you need to think about not historical correlations, but how

0:13:19.240 --> 0:13:24.640
<v Speaker 1>do investors feel about what you own? Because you want

0:13:24.679 --> 0:13:27.680
<v Speaker 1>to own people, you want to own hopeless at the

0:13:27.679 --> 0:13:30.520
<v Speaker 1>same time, you want to own things that we're excited

0:13:30.559 --> 0:13:34.400
<v Speaker 1>because it's tomorrowland and having a mix of moods in

0:13:34.440 --> 0:13:37.560
<v Speaker 1>your portfolio, because that's where the real benefit of diversification

0:13:37.679 --> 0:13:38.240
<v Speaker 1>comes from, a.

0:13:38.240 --> 0:13:38.960
<v Speaker 3>Mix of moods.

0:13:39.240 --> 0:13:40.280
<v Speaker 1>A mix of moods.

0:13:40.400 --> 0:13:42.400
<v Speaker 3>It's interesting like that.

0:13:42.440 --> 0:13:43.800
<v Speaker 4>I mean, what does a mix of moods look like?

0:13:43.800 --> 0:13:46.720
<v Speaker 4>Obviously it depends on your age and your risk tolerance.

0:13:46.800 --> 0:13:49.320
<v Speaker 4>But how do you take a mood and apply that

0:13:49.360 --> 0:13:51.559
<v Speaker 4>to an ETF or to a fond or to a stock.

0:13:51.960 --> 0:13:54.240
<v Speaker 1>Well, price is a great way to discover it, because

0:13:54.280 --> 0:13:57.679
<v Speaker 1>I think prices market prices are a barometer of mood.

0:13:58.280 --> 0:14:01.079
<v Speaker 1>So you could have looked at the of natural gas

0:14:01.160 --> 0:14:04.040
<v Speaker 1>last summer and scene that you know, we were we

0:14:04.040 --> 0:14:06.480
<v Speaker 1>were terrified that there was going to be enormous scarcity,

0:14:07.080 --> 0:14:11.440
<v Speaker 1>and now there's immense complacency in that in that sector

0:14:11.840 --> 0:14:16.320
<v Speaker 1>that there's views of abundance forever. And so you want

0:14:16.320 --> 0:14:20.200
<v Speaker 1>to be thinking about where is there intense scarcity, where

0:14:20.200 --> 0:14:22.560
<v Speaker 1>are people stampeding in and where they stampeding out?

0:14:22.600 --> 0:14:26.000
<v Speaker 2>All right, I'm going to go dark for you, charting

0:14:26.040 --> 0:14:28.880
<v Speaker 2>a path from chaos to clarity. I feel like climate

0:14:28.960 --> 0:14:34.280
<v Speaker 2>change is one of those This is an existential question

0:14:34.360 --> 0:14:35.560
<v Speaker 2>for all of us in situation.

0:14:36.000 --> 0:14:37.280
<v Speaker 3>So how do you think about that?

0:14:38.040 --> 0:14:42.720
<v Speaker 1>So climate change is a very abstract concept, and if

0:14:42.760 --> 0:14:46.640
<v Speaker 1>you look at our eagerness to address climate change, it

0:14:47.080 --> 0:14:50.120
<v Speaker 1>migrates with our level of confidence. And what you'll find

0:14:50.240 --> 0:14:54.000
<v Speaker 1>is that when confidence is high, we want to tackle

0:14:54.160 --> 0:14:59.040
<v Speaker 1>climate change proactively, that our focus is prevent the problem,

0:14:59.760 --> 0:15:03.600
<v Speaker 1>and and confidence falls our response to climate changes we

0:15:03.760 --> 0:15:07.320
<v Speaker 1>need to deal with the consequences of having not dealt

0:15:07.360 --> 0:15:11.440
<v Speaker 1>with it. And so if confidence falls, I think you'll

0:15:11.480 --> 0:15:15.760
<v Speaker 1>start to see that our interest in solving it is

0:15:15.840 --> 0:15:18.880
<v Speaker 1>swapped out for our need to address the fact that

0:15:19.360 --> 0:15:23.680
<v Speaker 1>we didn't. And so that's that's a behavioral change, because

0:15:23.680 --> 0:15:29.720
<v Speaker 1>we move from abstract possibility to immediate need and vulnerability.

0:15:30.000 --> 0:15:32.040
<v Speaker 3>I just because it's just it's all I think about,

0:15:32.120 --> 0:15:32.960
<v Speaker 3>but that a.

0:15:32.880 --> 0:15:36.280
<v Speaker 4>Lotability affects different people depending on where they live, if

0:15:36.280 --> 0:15:38.360
<v Speaker 4>they live. And I think maybe one thing that changed

0:15:38.600 --> 0:15:41.000
<v Speaker 4>was when you know, the skies over so much of

0:15:42.040 --> 0:15:44.160
<v Speaker 4>this part of the country turned red a few months

0:15:44.200 --> 0:15:47.160
<v Speaker 4>ago because of Canadian wildfires. I mean, we're in an

0:15:47.200 --> 0:15:49.600
<v Speaker 4>area that's not traditionally affected by wildfires, but we're seeing

0:15:49.600 --> 0:15:50.280
<v Speaker 4>the effects of that.

0:15:50.640 --> 0:15:55.600
<v Speaker 1>Yeah, So we need abstract vulnerabilities to become real. Think

0:15:55.600 --> 0:15:58.800
<v Speaker 1>about COVID. COVID did not become real for most Americans

0:15:58.880 --> 0:16:02.360
<v Speaker 1>until March eleventh, the night that Tom Hanks and Rudy

0:16:02.400 --> 0:16:04.240
<v Speaker 1>Gobert were the.

0:16:04.200 --> 0:16:05.960
<v Speaker 4>Headlines and the NBA.

0:16:06.040 --> 0:16:10.920
<v Speaker 1>Yeah yeah, and suddenly that was the tipping point and boom,

0:16:11.400 --> 0:16:14.720
<v Speaker 1>we all felt it and you could see it. It

0:16:14.800 --> 0:16:18.320
<v Speaker 1>was like a wildfire of a shift in sentiment.

0:16:18.400 --> 0:16:18.920
<v Speaker 3>It's so true.

0:16:18.960 --> 0:16:20.240
<v Speaker 2>For so long, we're like, it's not going to be

0:16:20.280 --> 0:16:22.120
<v Speaker 2>our problem. It's not going to be our problem.

0:16:21.520 --> 0:16:24.880
<v Speaker 1>It's all the stories went along with that.

0:16:24.960 --> 0:16:26.600
<v Speaker 2>Yeah, And I have to say, as a journalist or

0:16:26.640 --> 0:16:28.200
<v Speaker 2>you know, it felt kind of stupid, like on the

0:16:28.240 --> 0:16:28.760
<v Speaker 2>other side, like.

0:16:29.200 --> 0:16:32.360
<v Speaker 3>How did we miss this when we're thinking.

0:16:32.120 --> 0:16:35.320
<v Speaker 2>How could this not impact us? Thank you so much,

0:16:36.120 --> 0:16:38.480
<v Speaker 2>Peter Atwater, Thank you so much. Such a treat to

0:16:38.480 --> 0:16:40.320
<v Speaker 2>have you in studio. The book is the Confidence Map,

0:16:40.400 --> 0:16:43.280
<v Speaker 2>charting a path from chaos to clarity. I'm actually heading

0:16:43.320 --> 0:16:45.080
<v Speaker 2>to a beach, so I'm taking this with me because

0:16:45.080 --> 0:16:46.600
<v Speaker 2>I've just done a little bit of reading.

0:16:46.440 --> 0:16:47.040
<v Speaker 3>But I want to read it.

0:16:47.080 --> 0:16:48.080
<v Speaker 4>Well, it just came out, Carols.

0:16:48.160 --> 0:16:48.320
<v Speaker 2>I know.

0:16:48.440 --> 0:16:50.280
<v Speaker 3>Peter, thank you, good luck with it. Come back soon.

0:16:50.600 --> 0:16:51.360
<v Speaker 3>This is Bloomberg