Today there is no black or white, Only shades of grey | MBMG IA
More money has been lost because of four words than at the point of a gun.
Those words are ‘This time is different.”[2]
The well-worn aphorism that provides both the preface and inspires the title of Reinhart and Rogoff’s momentous tome is, like so many of the conclusions contained in the 512 pages that follow, persuasive, but if not completely wrong, then at least dangerously reductive. What really hurts investors is when this time actually is different – different to what is expected, different to what the heuristics or mental shortcuts that underlie almost all of our cognitive processes tell us is right or normal, different to how we understand the investment world.
Nassim Nicholas Taleb, author of ‘Black Swan’, ‘Antifragile’ and ‘Fooled by randomness’ has based a lucrative career on different ways of explaining that people, especially investors are surprised and caught out by the truly unpredictable. [3] He has also expressed his opinion to this author that “You, Mr. Gambles, are an imbecile.”
The investment profession today seems more than usually torn between those relying on heuristics (such as buyers of the dips, in the sure knowledge that dips are always followed by rebounds) and those determined to prove Taleb wrong by imagining that they can see black swans everywhere (which misses Taleb’s point, that if you can see them, then these are just pitfalls that investors have missed, grey swans, not genuinely unpredictable events or true black swans).
To that end, we’ve spent an uncomfortable last 18 months or so, trying to both sit on the fence and hide behind the sofa at the same time (while peeking through our fingers).
We’re still not ready to climb down or come out from either of these vantage points but we are getting increasingly worried.
The source of our uncertainty and discomfort has been the unknown consequences of the actions of policymakers (exemplified by but certainly not limited to Fed Chair, Jerome Powell).[4]
Reading the minutes of Fed meetings has provided precious little relief to our angst – these seem chock full of oversimplified assumptions and heuristics that don’t stand up to any kind of close scrutiny. This doesn’t necessarily mean that the actions of Powell & Co are wrong but their thinking certainly is. In other words, if we end up with the right outcomes, it will be for completely the wrong reasons. That in itself is a huge red flag – driving in the wrong direction is rarely the optimal route to a destination.
Initially we comforted ourselves with the thought that policymakers would realise this and change course before too much damage was done. We watched keenly for signs of this. However, there’s still no sign of a policy U-turn but there have been all kinds of signs of the damage being wrought by policy. Crypto-winter and the various collapses in the frothy world of digitalia were an early sign that liquidity had been constrained (frothy assets purely driven by liquidity are the clearest gauge of liquidity drying up). The recent spate of banking mini crises is another. In turn, this could lead to a broad re-rating of many other forms of collateral, which has sparked fears of a commercial real estate, residential real estate, stock market[5] and corporate bond collapse and of a broader banking crisis, a credit crunch, an economic slowdown, a recession and even a depression.[6] To a certain extent, the Fed even acknowledge these concerns in their minutes and yet plough relentlessly on. The admission that they might ‘pause’ rate hikes is akin to a drug addict admitting that they have a problem but committing to take smaller fixes at some future point as a solution.
Initially we were comforted by the fact that a severe crisis was eminently avoidable, except in the incidence of major policy bungling. Living through the last 18 months’ major policy bungling has eroded that comfort on a daily basis. We’re reminded that the kind of once in a Taleb’s generation black swannish crises have often been completely unpredicted consequences of utterly unnecessary major policy bungling (sleepwalking into World War I, appeasing into World War II, policymakers triggering the Great Depression, policymakers incubating the Global Financial Crisis).
The fact that we have no way of estimating how much damage has already been done unnerves us. The fact that the framers of policy are dependent on data that they don’t understand terrifies us.
Maybe heuristics will, as they typically do lead policymakers, and by association the rest of us, to the right place through the wrong thinking.
Or maybe darker cygnets are lurking menacingly around the corner.
Nobody can know for sure.
But these are the perfect breeding conditions for Taleb’s quite ugly birds.
And everyday that goes by, the symptoms on the surface are indicating evidence that there are more serious and more widespread underlying issues that require treatment.
If not, this time really could be different.
And not in a good way.
[1] Shades of Gray – Barry Mann / Cynthia Weil
[2] Preface to This Time Is Different: Eight Centuries of Financial Folly- Reinhart and Rogoff, 2009
[3] “Before the discovery of Australia, people in the old world were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird.” – ―Nassim Nicholas Taleb, The Black Swan
[4] https://mbmg.substack.com/p/why-you-cant-rely-on-the-fed-now
https://mbmg.substack.com/p/irritable-powell-syndrome
https://mbmg.substack.com/p/-jerome-powell-demolition-man
[5] E.g. https://edition.cnn.com/2023/04/13/investing/housing-stock-market-bubble-jeremy-grantham/index.html
[6] https://www.bloomberg.com/news/articles/2023-05-03/bank-pain-is-just-getting-started-ex-fed-president-kaplan-says
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About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
