Category Archives: Behavioral Economics

The economics of Generation Hate

Picture an efficient frontier with labor’s share of GDP – including benefits, safety standards, whatever – on the Y-axis and GDP growth on the X-Axis.

The bottom right side of the curve we’ll call The Panama Canal Era. Something like 30,000 people died building the Panama Canal while making next to nothing in wages. This is indicative of late 19th Century economic and social policy policy that valued “things” and growth over the welfare of people. It was completely inhumane but by the standards of the time, generally acceptable. Confront TR with the human costs of the Canal, or the railroad barons using Chinese slave labor, the response would likely have been a smug smile and “Shit got done, didn’t it?”

This brutality extends into the political realm and thankfully exhausts itself in two world wars. Haunted by memories of mass slaughter, the pendulum swings upwards along our efficient frontier in an entirely welcome humanist direction – civil rights, Great Society, wealth redistribution, all that.

The fact that I chose an efficient frontier shape rather than a Laffer Curve model infers my personal beliefs but before anyone fires up the Outrage Machine, Im not going to guess where we are on the curve – a man’s got to know his limitations.

Where we are on this curve is, I think, the crux of the current economic debate. I suspect the vehemence and insoluble nature of the argument means we’re close to the inflexion point, with growth-related gains in sight in both directions.

The bigger problem is that we’re all narcissistic idiots currently motivated by hate.

“WTF, Interloper? Why did you make us endure that history lesson if this was your point?”

Because the move away from the economic dominance of “Things” has made the debate more subjective. When all a culture cares about are Things, social policy is frightfully easy – How do we get more and better things? The argument is over means, not ends. We have,  rightly and with the best intentions, added a far larger degree of complexity into political discourse.

Backtrack for a second. Let’s posit that the greatest social achievement of the 20th Century was empowerment – generally through media technology (remember that I think tv was the primary cause the social unrest of the 60s and 70s) – and politically for women and minorities.

It was inevitable that the combination of broad empowerment and complexity would create Generation Hate. Empowerment breeds narcissism, complexity breeds anxiety and fear. Bigger ego + fear = hate.

My slobbery adulation for The Last Psychiatrist derives from this more than anything else:


Splitting– reducing the other person to a binary abstraction of all good or all bad, is a primitive, or regressive, defense mechanism used when the emotional level and complexity is greater than a person’s capacity to interpret it.  For example, once your boyfriend cheats on you, he becomes a jerk, completely.  Even things he had done that were good– like give money to the poor– are reinterpreted in this light (“he only did that to get people to like him.”) Who splits?  Someone with a lot of unfocused rage and frustration, i.e. the “primitive” emotions.


Splitting says: Bush is all bad, period.  Nothing he does is good, and if it is good, it is from some malicious of selfish motivation, or an accident related to his incompetence to even be self-serving.  Similarly on the other side, liberals are weak, corruptible, treasonous.


So hatred of, say, liberals is thought to be independent of your preference for Bush, but in reality it is only because you hate liberals that you like Bush.  The hate comes first.


Sub in Krugman for Bush if it makes you happier but either way this excerpt encapsulates the current tenor of economic debate – primitive, narcissistic and unproductive.

“But my side is right!”. Whatever. The entire field of economics can’t even agree on first principles and, as Mark Thoma points out, all this posturing and certainty is based entirely on 40 years of data. Macroeconomists remind me of the 17th Century Royal Society. Working on mathematic proofs – 90% of which will be disproved eventually – then sipping claret during a live dog dissection after dinner.  Does anyone think even half of the current ECO 101 textbooks will survive the next 100 years of study?

I still think we’re living through a period that, over the course of human history, will turn out as important and transformational as The Reformation (and for the same media-related empowerment reasons – then it was mass literacy). It’ll work out for the better eventually, but likely after the hate burns out.

i don’t think you invest the way you think you invest

Sometimes you read or hear something and for a long period of time you’re like Kubrick’s chimps around the monolith. You don’t know what it is, but it’s big and you can’t leave it alone. Bashing at it doesn’t help.

Usually its @interfluidity’s fault but in this case the problem is neurobiological. Epicurean Dealmaker linked to a quick interview with neurologist Robert Burton who thinks even brain researchers are still monkeys:

because we have an innate sense of agency and yet simultaneously believe that mental states must have preexisting physical causes, we are left debating free will versus determinism. If we didn’t have a sense of agency, I’m not sure that the free will question would even arise.

I take this to mean that we’re nowhere near the point where any researcher has enough perspective to understand something by using that same thing to analyze it.

Add to this the findings of another neuroscientist, David Eagleman, who wrote a book concluding that:

Brains are in the business of gathering information and steering behavior appropriately. It doesn’t matter whether consciousness is involved in the decision making. And most of the time it’s not. Whether we’re talking about dilated eyes, jealousy, attraction, the love of fatty foods, or the great idea you had last week, consciousness is the smallest player in the operations of the brain. …, most of what we do and think and feel is not under conscious control. Our brains run mostly on autopilot, and the conscious mind has little access to the giant and mysterious factory that runs below it.

I’m not thrilled with this.  I’ve lived my whole life thinking my conscious brain was the quarterback and the subconscious was a combination of reference library and haunted house.

In corporate terms, what it sounds like now is that what I consider “me” is actually a satellite office taking vague orders from an all-powerful HQ based in Liberia or an underground lair or somewhere else deeply foreign and unsettling.

Instead of corporate profits and legal compliance, the subconscious imperatives would include –  basically in this order – physical security, sustenance, acceptance at the highest rung of social status possible because it leads to widest mate selection.

Quick example and, although I cringe, it actually pretty much happened:

You’re in 10th grade. There’s a very cute but quiet girl who sits next to you in math class but you’re obsessed with a girl on the cheerleading squad. At some level, you even know the math class girl is not only cuter more physically attractive – rounder [redacted] and bigger [redacted]. But you want the cheerleader and you don’t know why.

Well, you think you don’t know but your subconscious sure as fuck does. Social status. Bragging rights.  These are head office initiatives, you’re just following orders.

No wonder everyone sucks at investing. Corporate policy is out of date by 20,000 years. What we convince ourselves is a good investing idea – buying Apple at $600 say – is mostly conforming to the HQ’s corporate initiative for acceptance and belonging. The 5 per cent chance of a ten bagger in junior mining is associated with dreams of wealth that will get us laid and provide security for our genes offspring. The bulls versus bears battle of the tape gets the same lights up the same dopamine pathway as protecting the tribe from an onrushing lion.

I’m not saying re-programming isn’t possible and biology is destiny. There are at least hundreds of professional investors who have hacked the mainframe and changed the code – or at least deactivated it. But Eagleman says that for most of us, our conscious minds don’t have security clearance for the vast majority of the calculations and policy decisions being made – in our own heads. How the fuck are we going to push out the old management?

Requiem for Investing Twitter

I don’t have a lot of specific investing thoughts lately which is ironic because there’s been more activity than usual in my PA. Two full positions have been added – a brewer with big emerging markets exposure and a maker of giant bespoke valves for oil pipelines. Decisions will be made this week on a big winner in biotech and a big loser in telecom equipment.


One thing I’ not doing is trying to beat the index because I’m more than a little concerned that its infected by twitter or, to be more precise, infected by the same things that have made my timeline so depressing lately.


The big problem in market prognostication currently is that the action has moved beyond the view of most investors. Central bank involvement in yield curves has made currencies the more accurate gauge of regional macro health.  Currencies are notorious for trading away from fundamentals for years at a time and unlike debt, there is no CDS market for a second opinion. To make mattes worse, the world’s second largest economy – the primary driver of commodity prices – has largely pegged its currency while under the surface a misguided Manhattan Project builds a massive bad debt bomb.


With equity performance determined by central banks in a big way – God-like, infinitely wealthy exogenous entities – the MarketTwitter has taken to squabbling like medieval clerics. Every data point is held up like pieces of the true cross: You fools! I HAVE THE TICKET TO YOUR INVESTING SALVATION!


The degree of this triumphalism seems to be metastasizing rapidly. There has always been a maddening segment of twitter who’s whole existential value (an extension of academic life, one supposes) was realized by a desperate search for political heresy, after which the trumpets could be blown and the forces of righteousness led to vanquish the heretic.  In investing, this practice was previously confined to the gold bugs.


The predictable danger in market twitter was the acceleration of investing time frames but at first it seemed like the medium was too open, too conducive to correction, to allow a new one per cent to dominate the discussion. But at least in my timeline bullying, both in politics and investing, has become the norm. Being right and living your life the way you see fit is no longer enough – “macro tourists”, “bearshitters” and any random political thoughts not conforming to the orthodoxy must be humiliated and driven off.  Twitter, once a place to connect and ask questions, has given way to the exercise of follower power.


Tadas at Abnormal Returns linked to a piece on the isolation involved in being a value investor and I’ve written about the same thing. It’s odd how well this phenomenon applies to MarketTwitter at the moment.


Nobody wakes up in the morning and thinks “You know, I really feel like herding today. Just joining up with the biggest, most popular group I can find to make myself feel psychologically safe.” But as always our subconscious is driving the bus while letting our conscious minds think they’re in charge. The subconscious will feed the herding instinct to us in delicious, bite-sized portions like “if I say tweet something really funny and someone with 10,000 followers RTs it, then I’ll really belong with the hitters.” The impulse is in no way different then holding a widely-held stock that doubled last year and now trades at 25 times sales.


Ever thus, I guess. Like television, those looking for answers rather than affirmation could desert as Twitter devolves into utter dreck but hopefully not. As long as new centers of influence keep arising, things are likely to stay reasonably healthy. But

I have no idea where the market’s going to be in 12 months and for all the sneering neither does anyone else.  Hopefully all this shit is temporary – everyone’s just Vitamin D-deprived and irritable – and spring finds a more constructive community.

Why Intuition Can be Better Than Analysis

There is an investing Rule of Thumb formerly used by prominent strategists called “The Law of 20” (sometimes 22) that assumed over time that the combined market PE ratio and primary interest rate would return to a sum of 20. The Fed having put its foot on the neck of rates since 2008, any investor depending too heavily on this rule is out of business. VaR was viewed as gospel in terms of measuring credit risk after being tested by brilliant minds with exponentially more grounding in statistics and applied math than I have. Energy traders, as recently as the early 2000s, made huge bets based on US gasoline consumption until Chinese imports became the dominant determinant of oil prices. The rule in each case is that things change, and  the practice of reducing market strategy to individual indicators or relationships is, no matter how well back tested, subject to a likely-painful best-before date.

The impetus for these thoughts is a recent post by economist Nick Rowe emphasizing the non-linearity of economic forecasting, a thought which I am extending to asset markets. Rowe writes (read the whole thing though):

students really really wanted a linear story of the monetary transmission mechanism. And when I gave them a linear story they thought they understood it. They didn’t. They misunderstood it. They misunderstood it just as badly as a student who thinks “an increase in supply causes a decrease in price causes an increase in demand causes an increase in quantity” misunderstands demand and supply.

My students were like the people from the concrete steppes. The people from the concrete steppes want a linear story of the monetary policy transmission mechanism. Sorry, but you can’t have it. If you think you understand monetary policy through a linear story, you don’t understand it. The true story is non-linear. There is simultaneous causation, so endogenous variables are co-determined in equilibrium. Expectations matter, so the story has flashforwards and flashbacks, where the future affects the present. Those expectations are self-referential, because the characters in the story know the author who works at the central bank, and can anticipate the future plot he plans to write, which affects their actions today. That means a loosening of monetary policy could mean that interest rates rise, not fall. You cannot reason from an interest rate change (Scott Sumner), because interest rates are endogenous variables.

What professor Rowe is suggesting is that every relationship is subject to its context and that reductive analysis into tidy equations, while psychologically satisfying, often results in a weaker understanding of economic conditions. Deeper understanding, according to this theory, is derived using holistic, “whole picture” thinking. Easy to say, but what does this actually mean?

A practitioner of scientific, Rationalist thought will, when faced with a complicated system, immediately begin dissecting and organizing into component parts and this process encompasses the majority of market and economic research. Balance sheets are “broken down”, multi-trillion economies are encompassed by five letters, C+I+G +(X-M). A holistic view would have no real starting point beyond observing the entire system as it functions, which doesn’t seem like productive work at all, certainly nothing worth paying someone who isn’t Jane Goodall for.

As it turns out, however, our brains are doing a ton of calculations and analysis that it doesn’t bother telling us about, as neuroscientist David Eagleman describes in his book Incognito (a Kedrosky suggestion I’m currently reading, slowly).The author’s general view is that our conscious minds, far from running the show, don’t have security clearance for much of what our brain does. The depiction of vision was particularly fascinating. Researchers initially could not figure out why the process of walking down the street used up so much brainpower, in particular the areas associated with memory. Experiments uncovered that the conscious mind was barely functioning during mundane visual tasks, what was actually occurring was that our subconscious was busily comparing visual stimulus to expectations (born of memory) and only alerting our conscious selves when something surprising happened. This explains the “zoned out” feeling during long drives where time seems to have disappeared – our conscious brains were shut down because our subconscious didn’t see anything worth alerting us about.

Taken together, professor Rowe’s post and Eagleman’s research have fascinating potential implications for investors. Situations where the intuition of an experienced trader, drawing on subconscious calculations based on memory that we usually term “intuition”, could trump the data-driven analysis of an Ivy League economics professor are easily envisioned.

This is a blog post and I am over-simplifying. Intuition alone will never be sufficient for investing success. Professor Rowe’s thoughts, for example, are the outgrowth of decades of rational calculation and entirely conscious “Thinking Slow” (in Kahneman terms) effort, underscoring the idiocy of suggesting disbanding the rigorous study of economics departments in favor of everyone just trading and “feeling their way around”.  The financial crisis did, however, uncover embarrassing weaknesses in previously-revered methods of financial modeling and economic forecasting. The pervasiveness of this failure casts understandable doubt on the entire reductionist process by which the theories were derived, leaving both room for new methods of thought and a new respect for the intuition of traders.


The Flaws in My Character are the Flaws in My Trading

I’ve done some things I’m not proud of during my unemployed walk in the desert, unseemly things for an allegedly mature, married man in his mid-40s. Video games, one called Dark Souls in particular, began as a distraction from alcoholic temptation (the most seductive of time-wasting options for obsessives) and became the cause of extended, hand-cramping fugue states of extended concentration. The resulting guilt from this adolescent fixation was exacerbated by the games added “feature” of showing the number of hours played with each developed character. I decline to provide those numbers.

I’m not an idiot and there’s no way I’m going to prescribe a couple hundred hours of virtual swordplay, but the point remains that the game did teach me a valuable investing lesson – that the primary weakness in my character was also the weakness in my investing.

To understand how this happened it is important to note that Dark Souls is an intentionally, soul-crushingly difficult game, even for long-term gaming enthusiasts which I am not. The more difficult sections of the game (check HERE if interested –NSFW voiceover language) are more or less impossible to get through without the help of online videos and other forms of help. Even then, you can expect these sections to take anywhere from 25-50 attempts before success.

Every time I had trouble and went for YouTube help, the issue was impatience. The fact that I should have known this, impatience having been an Achilles Heel since gestation, shows a remarkable lack of introspection, an embarrassing blind spot in self-analysis. It is telling, though, that it took hours upon hours of frustration to realize what should have been obvious – I actually needed to be bludgeoned over the head again and again to learn the lesson. The psychological effort we expend to avoid recognizing our faults is incredible.

I took a vague swipe at a market outlook for 2012 in November’s “Cop Logic” and despite the Q1 rally; the environment is broadly what I expected. (I am not patting myself on the back here, any more than if I had doubled down on 11 and got hit with a face card – you play probabilities knowing anything can happen). The second that Chinese markets started falling and Spanish bond yields hit 2012 highs, I was tempted to jump in on the long side as a contrarian rather than let things play out. In a hubris-enriched attempt to get three months ahead of the market again, I would have made a highly costly, impatient, stupid decision. I checked up, realizing my investing tragic flaw was apparent.

Video games are a shameful waste of time, at least to the extent I was involved over the winter. My point in documenting the experience is to suggest that the most destructive tendencies of traders are likely apparent elsewhere in their lives, and that unsuccessful trades can offer a window into personality limitations that we all broadly share. Moreover, accepting and confronting these weaknesses is intensely counter-intuitive and our own subconscious will have us squirming away from uncomfortable conclusions.  It is not necessary to fruitlessly commit to a video game using the tagline “Prepare to Die”, but a closer examination of our tendencies outside of the financial world could provide useful, corrective guidance on trading and investment styles.

Wherein Finance Arbs Out the Better Angels of Our Nature

Most people who live or work in an urban center have had the disheartening experience of trying to help out a homeless person only to find track marks up their arm when reaching for your dollar. The fact that the money will likely end up in the hands of a local heroin impresario instead of food is one thing, but at this point we are used to being lied to. I submit that the real discomfort comes from the erasure of what we believed was a humanitarian gesture, that an impulse we were secretly proud of has been used against us. In deciding not to help out the next homeless person, our attempted affiliation with the Good Samaritan has been “arbed out”.

At its Utopian best, capital markets are designed to attract savings towards worthwhile investment to the benefit of the economy as a whole (stop laughing, I’ll get real in a second). In this perfect Platonic world, a small number of traders would step in on the occasions where short term sentiment pushed assets to levels well above or below some concept of longer-term Buffett-y value. This is not, however, the world we live in for rational reasons too numerous to recount. HFT combined with the widespread successful use of technical analysis has created an environment where traders and automated scalpers, measured by daily volume, outnumber long term investors by a significant margin. The resulting increase in volatility has “arbed out” a good part of the impulse to invest for the long term, particularly among retail investors.

I swore I would not allow the word Facebook on this blog, but in abandoning that pledge I promise in turm to keep this section short. The NASDAQ’s technical problems and the potential for improper dissemination of information aside, FB’s IPO went largely to type in the sense that MS priced the deal at the highest point the market would stand. This is their fiduciary duty and the fact that the Supply/Demand curves met at $38, if only temporarily, implies that the price was fair according to classical economics. Because FB’s fundamentals do not support the price, however, means that lottery-induced dreaming and ignorance among retail investors went a long way to getting the deal off. Retail optimism, in this sense, has been partially arbed out.

In the efforts to keep things concise, I wont extend this thought into the broader economy beyond noting that Madison Avenue are the uncontested kings of leveraging or arbing any consistent psychological trait, good or bad, into changes in consumer behavior. To date, admittedly, there is not a lot of revulsion beyond grumbling at the constant Orwellian barrage but at some point some kind of Laffer Curve Peak Advertising will be reached. Despite recent positive comments on advertising from Conor Friedersdorf, my belief that advertising in a capitalist society performs the same function as Soviet propaganda – the sanctioned, unconsciously-accepted-through-mind-numbing-repetition lies that keep the wheels turning – remains pretty much unshakeable.

I’m not at the “End of the World” sandwich board stage yet, but do think we’re playing a dangerous game if this trend keeps up longer term. The pervasive testing of the boundaries of our collective gullibility-politically, socially and economically – feels cumulative, a heavier weight over time if collective cynicism (coughJonStewartcough) is any yardstick. The money pouring out of equity funds could definitely represent an ongoing indicator that mom and pop have had enough of playing Charlie Brown with the investment banks holding the football. The Facebook deal’s certainly not going to help – the next time a broker calls a client with a once in a lifetime IPO opportunity, the client’s likely going to remember the junkie’s track marks.

Bull/Bear = GOP/Dem and Why Being a Good Teammate is a Bad Investing Strategy

Framing market behaviour as a battle between bulls and bears has always made me cringe, appealing as it does to some of our least productive psychological tendencies. Our first, automatic response to finding out that a confrontation is underway is to self-identify with one side or the other, a hardwired subconscious process arising from the herding impulse developed deep in our evolutionary past. Psy-Fi blog does a typically brilliant job describing the negative aspects of herding on trading performance HERE, saving me from elaboration.

Imposter that I am, I don’t just write shit down and expect people to believe me, I co-opt respectable people without their permission for support. Thankfully, in this case there exists what I think as the best general-focused blog post ever written on how to think healthily (you read that correctly), The Wrong Lesson of Iraq by The Last Psychiatrist written in 2007. Ostensibly about the masses’ response to the alleged manipulation of popular opinion by the Bush administration, the post is much more about the dangers of “splitting” –  the broad brush psychological tendency to choose sides –  and the resulting laziness and poor analysis that logically results. Conveniently, the GOP/Independent/Democrat trialectic has a close market analog in Bullish/Neutral/Bearish which will make comparisons easier.

The Last Psychiatrist writes as follows:

Splitting says: Bush is all bad, period.  Nothing he does is good, and if it is good, it is from some malicious of selfish motivation, or an accident related to his incompetence to even be self-serving.  Similarly on the other side, liberals are weak, corruptible, treasonous.

Splitting is always polar; once something is declared “all bad,” an opposite is necessarily declared all good.  Importantly, this isn’t a comparison between the two– he is bad, but she is better; it’s perceived to be two independent, unconnected, assessments, even though to anyone else looking from the outside, they are so obviously linked.  So hatred of, say, liberals is thought to be independent of your preference for Bush, but in reality it is only because you hate liberals that you like Bush.  The hate comes first.  And this splitting makes it nearly impossible to acknowledge any of Bush’s faults.


Yes, this will take some unpacking. A decent start would be the equivalence of the terms “permabull and permabear” with “far left and far right” as in each case the namecalling is simultaneously a statement of affiliation and an invitation to dismissal. If I’m bullish, there’s no way I need to read Dylan Grice because the term “permabear” identifies his reports as a market strategist version of Mein Kampf, the ravings of a lunatic. The same is true in reverse of China sceptics and Jim O’Neill (*raises hand sheepishly*). Note the defensive nature of these decisions – branding an opposing view as insane or misguided saves us from testing our own theories, market or policy-oriented. Paragraph two of the excerpt suggests also that the basis of our market outlook may be intensified, or even formed from, a general, personality-based dislike of either optimism (“that idiot always has the pom poms out”) or pessimism (“the bond market has predicted 45 out of the last 3 recessions so i don’t follow it”).

Now the key part:


But splitting is rarely about the target, it’s a convenient heuristic to get the subject out of having to accept the complexity and totality of the other, and of their own emotions about their environment.  In short, when things get heavy, it’s easier to just label black and white and work from there.

Splitting is the reaction to intense anger and frustration in those people who discover themselves to be powerless.

Since it’s all Bush’s fault, there isn’t actually any underlying problem to deal with.


Change “other” to “market” in the first sentence and we can pretty much print out and frame it as one of the best pieces of trading/investing advice ever written. Psychologically it is much, much easier for unsuccessful traders to claim the market is fixed rather than recognize that it is merely (at that stage of their trading career) beyond their comprehension, that more boring, tedious studying must be done and that ignorance is “the underlying problem to deal with”. The emphasis on “their emotions about the environment” is also clearly applicable to trading and investing, as numerous commentators detailing the unproductive nature of investing emotionally have pointed out.

No metaphor is perfect and there are limits to the GOP/Dem Bull/Bear comparison. The limiting aspects of labelling and framing, however, are evident in both areas. Knowledge of how markets actually function will be limited by self-identifying with any group – bull, bear, inflationista – in the same way that ideologues will always be incapable of producing effective foreign policy beyond bombing the living crap out of people until they submit, likely temporarily, to force. Persistent success in investing and trading requires a nuanced, detailed understanding of factors affecting asset performance that is not generally possible by just being a good teammate with fellow bulls or bears.

Standing By for the China Growth Hiccough

One of the favorite tactics of the more Gricean, scaremongery strategists in the early 2000s was a chart comparing the post-peak performance of the Nikkei and the S&P 500. There was never a lot of effort spent on the “why” of the seemingly inexplicable correlation between the two, the Japanese and US economies being so structurally different. Japan, with a giant, manufacturing-based trade surplus using the adapted technology of other nations (early 1990s patent reform remains a vastly underrated factor in the tech bubble) was faced by issues, the inbred keiretsu structure most prominently, that Teddy Roosevelt had taken care of for us (or so we thought). The persistence of the Nikkei/SPX correlation was, and is to a great extent, considered a statistical anomaly.

Investor psychology and the profit-driven (but not insidiously evil) influence of the finance industry are the two factors, which are demonstrably unchanged between the bull markets of Tokyo in the 80s and Silicon Valley in the 90s. The pattern is likely repeating itself in China.

My argument, roughly that China is following the same bull and bust pattern found throughout history, is dependent on distinguishing between the two types of market rallies. In the first, the Manic Type most widely associated with the Tulip Bubble craze, is an adolescent version where most professionals are aware that they are just dicking around, playing Greater Fool. Retail-related fads – Krispy Kreme, Crocs, Beanie Babies, Hoola Hoops and likely LULU sometime in the next ten quarters – feature prominently here. Everyone knows there a “best before” date on the whole thing, it’s just a matter of trading it and finding the exit before a fickle public gets bored.

The adult, Structural Economic version of the bull and bust cycle is a much more serious operation. It involves real, tangible change that dislocates economies across the entire planet for the richer: think steam engine, Internet, cotton gin, Ford’s assembly line, global trade (and the insurance business that made it financially feasible at the initial New World stages), China.

Examples of market reaction to the latter, major trends are remarkably consistent and numerous: well over 80% of Britain’s 19th century rail network was built after the collapse of rail stocks in 1846. The hundreds of American auto manufacturing companies active in the mid 1920s bankrupted their way to three. The same pattern will inevitably hold true for post-bubble technology networks in this century. In this light, using a more macro interpretation and a longer time arc, it is not difficult to see the Great Depression as the awkward adolescent stage of America’s technology-driven march to global economic dominance. The Asian Currency Crisis is a quicker version of the same process for the Asian Tigers. The pattern is evident in each case – a legit, undeniably powerful trend attracts far more investment than it can efficiently digest in a short period, inflated asset bubbles collapse, the actual sustainable trend takes hold.

In all likelihood China will eventually become the world’s largest economy but that’s not the point, at least for developed world investors. Economic changes to the degree being experienced in China have never occurred in history without a serious hiccough that makes every investor wet their pants for a considerable period. And currently, each passing month brings signs of structural stress in the Chinese growth engine – NPLs, inflation, social unrest, property price deflation, corruption, suspicious accounting – that make it increasingly difficult to argue that somehow China will be the first entity ever (and the largest by a wide margin) to transition smoothly from mammoth investment bubble to sustainable growth. This argument involves a New Paradigm.

Sell-side China bulls frequently imply that to be bearish on China-related investments is somehow analogous to long-term bearishness on the Chinese economy, an interesting rhetorical flourish designed to sustain investment in the short term. It would be far more interesting to hear the ways in which China will avoid the “investment bubble/collapse/then steady growth” process that economic history teaches us to expect. Indiscriminately shoveling money at legitimate trends until they break is just what we do. The odds, particularly in light of recent data, that we will have another chart to place alongside the 1980s Nikkei and 1990s S&P 500 appear much higher than an extrapolated straight line growth path into the Chinese century.  I’ll wait for the hiccough and buy with both hands.

Following Bunk Moreland on Gold, Monetary Policy

There is something about monetary policy that drives significant portions of the investing populace insane. As a guess, it’s possible that the physical act of printing dollar bills, and the virtual act of money creation in the banking sector, is enough like magic to tap into the medieval part of the brain to generate the “BERNANKE’S IN LEAGUE WITH LUCIFER!” reaction so common from those compelled to comment on any story involving aggregate liquidity.

People done digging dog face in the banana patch. I can safely write sentences like that because half of this post’s readers have already closed their web browsers and have started composing 2500 word responses to paragraph one. They will marvel at how I can be flip about an issue that is clearly at the core of our democracy. My answer is: I don’t care. Yet.

The simple fact is that for the next week and next month, the value of global currencies will be largely determined by cross-border asset flows. Political news from Southern Europe will be offset by ECB transfers to maintain bank liquidity levels. As with the yen and the yuan, these are policy questions not theological ones. The veracity of MMT theory or the “hocus pocus” of fiat currency will not enter into it. The believers being fully invested already and any notion of intrinsic value being tossed out the window already, gold will rise or fall based on sentiment and technicals. Again, I don’t care. Yet.

Bunk on Money

The forces of hipsterdom have decreed that any discussion of The Wire as the greatest show in broadcast history are cliche. Nonetheless, I am still following the advice inherent in Bunk Moreland’s  Season 5 admonition to McNultey with respect to monetary theory, “That will teach you to give a fuck when it ain’t your turn to give a fuck”. Until bond yields move in some inexplicable degree in one direction, or any signs of a 70s wage/price spiral pop up, monetary theory will have little or no effect on my investing decision making. If either of those things do happen, however, Mosler is going to make some money off me, along with a giant host of other published experts.

Fidelity and Predicting Currency Values

In the mid to late 1990s the consensus economic view was that the US dollar was significantly over-valued, by between 20% and 40% depending on the year and measuring device. At the time, Fidelity Investments built a decent-sized team of macro specialists looking to “add alpha” to the company’s then-famously index hugging portfolios by predicting changes in global currency values. The team was disbanded in five years not due to lack of effort or expertise, but because global currencies trade with complete disregard to economic fundamentals for years at a time. These were all experts in the field, remember, and although I never saw CVs, since we’re talking Fidelity there’s a 98% chance that all of them came from extra-fancy Ivy League schools. They were not, in other words, retail investors attempting to benefit from reading a couple books from the non-fiction bin at Barnes and Noble published by the Smith and Wesson Literary Fund. For me, the primary lesson from this parable is that currencies are not predictable.

Knowing What You Don’t Know

Knowing that you don’t know is among the most important aspects of investing, for both professional and non-pro investors. The most financially dangerous response to an information vacuum is to reach desperately for a framework that makes things intelligible. It is particularly dangerous to grab at one that just happens to fit your personal politically ideology. (Your most vicious associates will brand you an economist if you do this too often).

Take it for what its worth, but my advice would be to watch and consider. Read Cullen Roche on MMT. Watch the exchanges between Senator Paul and the Fed Chairman. Look for signs and accept those that are contradictory to your current understanding. Don’t, in other words, paint yourself into an ideological cul-de-sac that may cost you a lot of money to climb out of. It is time to learn, but there will be plenty of opportunity to become a believer when its time to give a fuck.

Interloper: End of Chapter One

True to the pervasive obsessiveness of financial industry employees, I wrote a list of topics to cover with Interloper at the outset. This list, which was surprisingly unchanged as the months progressed, has now been covered.  Alarmingly, as a result of this, the last posts began to exhibit the two temptations that, in the beginning, I swore I would never succumb to – beating on near-dead rhetorical horses (the industry in playing on your imperfect psychology) and attempting to wring pearls of wisdom out of the work of others (notably Epicurean Dealmaker for some reason).

The urge to write combined with a lack of anything new to say is a time-honored recipe for masturbatory crap, so its definitely time for a hiatus. There are also practical reasons for this – I still need to find employment to take some pressure off Mrs. Interloper, who desperately needs a vacation.  Writing blog posts and hitting F5 every 90 seconds is not conducive to a sustained effort in that regard.

At the risk of going all Altucher on the people nice enough to read this, I want to also explicate a strange emotional risk that also informs the decision to take a few weeks off from blogging. I couldn’t, first of all, be happier with the way things turned out for Interloper and the five-or-so people most deserving of gratitude for this know who they are. Having readers focus on your opinions, and occasionally agree with them, has been incredibly rewarding. At the same time it also gives birth, for me at least, to an unhealthy ambition for further recognition – what was an initial, highly gratifying surprise morphs into a weird existential need. Twice during the past two weeks (and this is truly embarrassing) I’ve been on the verge of picking a fight with another blogger only to discover, with a modicum of introspection, that the root cause for the impulse was a desire for attention. Acting on this would have disqualified me from ever calling out anyone else’s behavior as infantile which, as it happens, is one of my favorite things in life.

End of therapy session. I’m not done; I just need time to make a new list. Hopefully the few very nice emailers asking what was up with the lack of writing now have some idea.

To end Interloper: chapter 1, I’ve re-framed the issues covered to date into three broad industry/investing tenets as follows:

Cui bono: Whenever you’re confused about anything involving the finance industry, look to how it benefits the investment banking department. If, for example, analysts from three large BDs all raise ratings and targets on the same stock that hasn’t moved in 5 years, first assess the potential for an M&A transaction or secondary offering.

Don’t trust your gut: The industry knows your brain better than you do, how to appeal to its less rational, emotional elements. Going with a gut feeling and winning is undoubtedly exhilarating and you’ll want to do it again. This is, however, the same thought process that built Vegas. The corollary is to be very careful when you see what you want, or expected to see. Try and practice thinking like other, successful investors with a different style, if only as a test drive.

The finance industry has its own interests, not yours, first: View every research report and every speaker on business television with the same skepticism you’d bring to Super Bowl commercials. This is not inherently cynical – good products need advertising almost as much as bad products. But don’t expect full disclosure.




End of chapter 1


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