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2020-03-05
Simpletons Seeking Simplicity - the correction aversion chronicles, March 6th edition

^Introduction

When we interact with the world, whether it be with another person or with a group or with an institution, we develop a framework of understanding. We look for patterns. We look for homologies and imagine we find them even if there are none. Day by day, we construct our scheme for making sense of the world and of others. It is a life-long pursuit and, as with other tasks, some do it better than others.

Making sense of what is external to us is predicated on our surroundings and those surrounding us being true or real. Early on, we learn that others wear masks, of a sort, and present us with the person they want to be instead of the person they are. We discover, with familiarity and deepening of relationships, the true selves of family and friends. With that better understanding of those close to us, we gain a more nuanced view of those farther from us. We apply those understandings as we interact with the parents of our friends and teachers and coaches and the merchants in our neighborhood.

Remember the sense of betrayal you felt when someone first lied to you or cheated you? Our expectation of things being real and true is so powerful because in most families and communities, others are basically honest.

As our ken enlarges beyond kith and kin, beyond the neighborhood or village, beyond even cultural boundaries, we necessarily become more cautious but do not withdraw. We learn to be wary of those who are too glib, or those who fail to make eye contact. We become better at analyzing non-verbal clues. Our interactions become mature and, in general, successful.

So long as we are trading in tangibles and those goods pass a cursory examination, we do not hesitate to exchange money (or apply credit) to make a purchase. But, when we deal with intangibles, or goods at a distance, verification becomes more difficult but not impossible. Again, we rely on trust.

Saving and Investing

Saving and investing come naturally to some and are impossible for others. Steven Pinker wrote in 2011, "In experiments beginning in the late 1960s, the psychologist Walter Mischel tormented preschoolers with the agonizing choice of one marshmallow now or two marshmallows 15 minutes from now. When he followed up decades later, he found that the 4-year-olds who waited for two marshmallows turned into adults who were better adjusted, were less likely to abuse drugs, had higher self-esteem, had better relationships, were better at handling stress, obtained higher degrees and earned more money."

The children who were willing to wait, who intuitively practiced delayed gratification, had low time preference. Remember the kids your mother warned you about? Those delinquents had high time preference, And, yes, I would suppose some of them were often high. The Marshmallow Test was first carried out in Trinidad. That story is interesting.

The key to saving money is to begin. Begin small if you have to, but begin and be consistent. If you have the financial acumen of a wastrel, STOP. Discipline yourself to spend less than what you earn. Rewards will be small at the beginning, but they do increase with time. It is true, you need money to make money. Capital does not come from a credit card line of credit, it comes from savings.

If I were starting, I would open an investment account with an online brokerage that charged infinitesimal fees to buy or sell stocks. My initial investment would be SPY because it holds all of the stocks in the S&P 500. Further refinements of that strategy would come with more observation and calculation. The above is not financial advice.

Financial Markets

I do not have all the answers, but I've gotten better at asking questions.

A well-functioning market, of any sort, is based on having a stable and universal medium of exchange and participants being able to perform price discovery, specifically honest price discovery. In the US, our financial markets lack both prerequisites.

The US dollar is not stable. Its general trend since 1913 has been one of decline in absolute value. The Fabian devaluation is produced by un-elected central planners. Magic money dollars are not universally available in the economy. Favored banks and institutions, primary dealers and those close to them, receive such dollars directly from the Federal Reserve, obtaining them at a lower cost and more abundantly than the rest of us. They are suckled by the magic money mammary.

Price discovery is impossible to perform in a market where the price of money (interest rate) is distorted by central planners at the Federal Reserve. Price discovery is impossible to perform when stock buybacks distort the real value of stocks. Price discovery is impossible to perform where accounting sleight of hand prevails. Even at less than Enron levels, accounting creativity makes honest price discovery an endangered species. Though such creativity appears, for the most part, to consist of lawful tax-avoidance activities, it nonetheless obscures the actual performance of corporations while they juggle funds from one subsidiary to another, and from one nation to another.

This prevailing falsification of everything turns investors into gamblers. A low-interest-rate policy means that savings are discouraged, and capital for investment and innovation disappears. An official policy of tampering with asset prices is insane and a recipe for disaster. And, I don’t mean a financial disaster, I mean a civilizational disaster. I know how to ride a horse, keep chickens, raise and slaughter rabbits, and grow a vegetable garden. Do you?

The correction aversion position of the FOMC and their panic move on March 2nd to lower interest rates should inspire more of you to sow vegetables this spring. Jay Powell and his gang at the Federal Reserve, in effect, announced that they have no more Keynesian panaceas. They are taking blind curves at 90 mph and expect us to stay quiet in the back seat. Whatever control they had was lost when Russia just said no to OPEC a few days ago. All the pension funds and other institutional investors holding the junk bonds of frackers and shale oil hustlers will be left with dry holes and miles of drill pipe to auction off.

The financialization and securitization fueled by magic money did not benefit the economy as a whole but only the builders of those very tall and narrow residential towers in Manhattan, yacht brokers, and the sellers of already over-priced real estate from the Hamptons to Scarsdale, NY to Greenwich, CN. Magic money, whether it was called liquidity, or quantitative easing, or overnight REPO lending, or TARP, facilitated an orgy of carry trade speculation. Main Street and the overall economy did not benefit.

The Venerable Bede, in his Historia ecclesiastica gentis Anglorum (ca 731 AD), wrote of a bird that flew into a mead hall and continued out the opposite window, back into the storm and sleet. While seeking alpha (high returns) we too are often like that bird.

May you not fly so steadfastly through the storms that you miss the safe havens.

Knowledge, Objectivity and Observations

If you wish to become an investor in securities, below please find some persons and topics for you to research. However, for me, at this point, buying ten to twenty 3-bed, 2-bath middle-class rent houses later this year (after prices crash) is looking more and more attractive.

Austrian Business Cycle Theory
Central Planning
Chaos Theory
Efficient Market Conjecture (Hypothessi)
Fractional Reserve Banking
Fragile versus Robust Systems
Gaussian distribution
Globalization
Kurt Friedrich Gödel
Interconnectivity and Counter Party Dependency
Lags in effect of fiscal and monetary policy
Lévy stable distributions having infinite variance
Benoit B. Mandelbrot
Randomness and “wild randomness” in financial markets
Shadow Banking Credit system

BOOKS / ARTICLES
Argyros, Alexander J. 1991. A Blessed Rage for Order: Deconstruction, Evolution, and Chaos. Ann Arbor: University of Michigan Press
Arnold, Vladimir I. 1992. Catastrophe Theory. 2nd ed. Translated by G.S. Wassermann and R.K. Thomas. Berlin: Springer
Assad, Maria L. 1993. Portrait of a nonlinear dynamical system: The discourse of Michel Serres. SubStance 71/72: 141-152
Best, Steven. 1991. Chaos and entropy: Metaphors in postmodern science and social theory. Science as Culture 2(2) (no. 11): 188-226
Bowen, Margarita. 1985. The ecology of knowledge: Linking the natural and social sciences. Geoforum 16: 213-225
Buffett, Warren E,, 1997 - 2008, The Essays of Warren Buffett: Lessons for Corporate America, arranged by Lawrence A. Cunningham
Kosko, Bart. 1993. Fuzzy Thinking: The New Science of Fuzzy Logic. New York: Hyperion
Mandelbrot, Benoit B. and Richard L. Hudson, 2006, The Misbehavior of Markets: A Fractal View of Financial Turbulence

P.S. Tattoo this to your non-dominant hand: trends are transitory.

P.P.S. The only price that matters is the last one recorded.

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