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According to this morning’s Job Openings and Labor Turnover Survey (JOLTS), the ratio between the number of open jobs and the number of unemployed US workers fell dramatically in October, helping drive yields and the greenback lower. 

The “everything rally” that powered most asset classes higher through the month of November is back on, with investors betting on a historically-unusual scenario occurring – one in which a softening labour market clears the way for an aggressive course of rate cuts in 2024, even as the economy skirts recession.

This is, admittedly, quite possible. The evolution of the post-pandemic business cycle has proven incredibly difficult to predict, and lightning could strike the same place repeatedly.

But investors seem to be falling victim to “base rate neglect,” ignoring the much higher odds on a recession implied by incoming data in favour of an extremely detailed “soft landing” scenario—advanced by policymakers and market bulls alike—in which a series of events plays out perfectly. 

The Swiss author Rolf Dobelli explained the concept in his “Art of Thinking Clearly”: 

“Mark is a thin man from Germany with glasses who likes to listen to Mozart. 

Which is more likely? That Mark is A: a truck driver, or B: a professor of literature in Frankfurt?

Most will bet on B, which is wrong. Germany has 10,000 times more truck drivers than Frankfurt has literature professors. Therefore, it is more likely that Mark is a truck driver. So what just happened? The detailed description enticed us to overlook the statistical reality. Scientists call this fallacy base-rate neglect: a disregard of fundamental distribution levels”. 

History suggests that if a trade ignores past cycles and requires a bunch of conditional probabilities to work out in a market participant’s favour, the odds of success are much lower. As such, it might be best to hope for a soft landing in 2024 – even as you plan for something worse. 

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