Read https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpgs, not Marx if you want to learn anything useful about the future.

It Ain’t What You Don’t Know That Gets You Into Trouble. It’s What You Know for Sure That Just Ain’t So

— Unknown (but frequently attributed to https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpg Twain)

 

Over on AxisOfEasy we often say the defining conflict of our time is between centralization and decentralization. When I listened to Howard https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpgs on the Value Investing Legends podcast he said there are two schools of thought, the “I know” school and the “I don’t know” school.

As I thought about this, I realized that the distinction between centralization / decentralization and I know vs I don’t know delineate out in a similar fashion.

Those espousing centralization do so because they think the centre knows. The trains will run on time as long as there is a super-intelligent brain, or AI or committee in the middle that has everything figured out and can direct traffic.

What could possibly go wrong? Well, you could make the case that history is largely a chronicle of things that didn’t go as expected, or at least things that happened that weren’t expected at all. As Winston Churchill termed it, history was “one damned thing after another”.

How is this relevant to contrarianism?

What is often misunderstood, as per Ken Fisher’s Beat the Crowd, contrarian calls are frequently mistaken for opposite calls. He used the analogy of an analog clock, if the hour hand is at the 1, the opposite call is 7. He called this “Curmudgeonly Contrarianism”.

But real contrarianism isn’t just picking the diametrical opposite outcome, it’s realizing that there are many other options than where the hour hand is pointing (or is predicted to be).

In other words, contrarianism isn’t really about thinking you know what’s going to happen that is different from what the crowd thinks. Contrarianism is more about knowing that whatever it is the conventional wisdom thinks is going to happen, probably won’t.

Thinking about it in this way helped me put a point on some bullet points / aphorisms I had been mentally pencilling out over the last while. If I tried to expand on all of them below this would be too long, I may break them out in detail in subsequent posts. Keep in mind, none of these are absolutes.

If something will never be the same again, it’ll be close enough.

The more hysterically that experts are shrieking about some unthinkable scenario, the greater the odds are that you can ignore it.

The batting average for the accuracy of the most sophisticated macro models about nearly everything is abysmal.

There is no such thing as AI. There are expert systems, a label from the 90’s, but they are by no definition “intelligent” and none of them give anybody any edge about predicting anything, let alone everything.

Some of the most sacred cows and established tenets that underpin conventional thinking are demonstrably wrong (Phillips Curve) or unfalsifiable (OOL theories).

The consensus outlook describes the one scenario that is impossible to occur (see Douglas Adams in his Hitchiker’s Guide to the Galaxy and his concept of the recipriversexcluson, a number whose value can be anything but itself , “In other words, the given time of arrival is the one moment of time at which it is impossible that any member of the party will arrive.”)

Continuing on above: It’s true that a gaggle of of people who guess at the number of jelly beans in a jar will often times be wrong individually, but close enough statistically. For some reason the Wisdom of Crowds phenomenon does not translate to consensus outlooks by experts. My suspicion is that if you did the jelly beans in a jar guessing thing with a population comprised solely of  Nobel Economics Prize laureates and central bankers, their guess would be further off than a crowd of inbred hillbillies.  I don’t know why this is, but a few years back Dan Gardener put out a pretty good book about this called Future Babble: Why Expert Predictions Fail – And Why we Believe Them Anyway.

There is a big difference between something being inevitable and it being imminent – the differential between the two can exceed the length of multiple lifetimes.

However, the corollary is that “eventually” inevitably shows up sooner than anyone expected.

The majority of expectations are delusional. Keynesian beauty contests lead to perverse feedback loops in which entire premises are built on infinite linear extrapolation. Then if you want to see real hysteria (or exuberance), put in an exponential curve. Exponentials cannot continue indefinitely anywhere, but our expectations around them certainly can.

Many fears are unfounded. When bad things happen to people they are more often things that they didn’t expect rather than things they were actively fearing.

All of the above boils back town to https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpgs’ (not Marx’s) “I know” vs “I don’t know”. https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpgs doesn’t know. Marx knew. Marxists today know.

The governors of the Fed Board, Ben Bernanke, Janet Yellen, Stephanie Kelton, Anthony Fauci, Paul Krugman, Neil Ferguson, Greta Thunberg, Klaus Schwab, they are all of the “I know” school. There’s an expression “Left knows best” and it’s not wrong, but it’s not limited to lefties. Right wing conservatives belong to the “I know” school too. Especially those Neocons.

Austrian-school capitalists, libertarians, Howard https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpgs and I suspect, all master class investors, belong to the “I don’t know school”. And so do I. At least I try to.

So when I make a bet on gold, on silver and crypto currencies, I’m not making a bet because I think “I know what’s going to happen”. Contrarianism may not actually be about “everybody is wrong, the market is wrong, and I’m right, I know what’s going to happen”

Contrarianism may more accurately understood as being about examining what everybody thinks they’re right about and what they take for granted. It’s not about what will happen as much as what can’t happen, or will likely stop working.

You can’t print prosperity, you can’t indebt your way to wealth, you can’t save an economy by destroying the currency, even if you invent a scholarly sounding perpetual motion machine like MMT to justify it. And you can‘t keep leaching the last crumbs of wealth out of the under-class to enrich the elites and expect the underclass to sit still for it in perpetuity.

I think the experts and the policy makers are wrong about inflation and I think they’re wrong about debt and I think they’re wrong about interest rates. That means I don’t want to be in cash, and to get out of a cash I don’t want to put it in things that are over priced and expensive relative to their value.

Out of all that, it leaves a contrarian bet on precious metals, crypto currencies (because of capital destruction), income producing businesses (economic destruction) and commodities (because of inflation).

Over the past year as I’ve been seeing increasingly more references on #fintwit that fundamentals are dead, value is dead, the New Normal is permanently high multiples, there is certainly some merit to these arguments given  the destruction the monetary reset that certainly seems to be coming (even if we don’t know how it’ll play out).

But also reminds me of the famous “permanently high plateau” remarks of yesteryear and other forms of New Era thinking, and thus the last couple of aphorisms from my collection:

If it’s unprecedented, there are precedents.

and

If it’s different this time, it isn’t.

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Postscript

After I had finished the first draft of this post, my copy of Christopher Mayer’s How do You Know? arrived. Mayer has written such investment classics as Invest Like a Dealmaker and 100 Baggers (which was in turn his study of the Tom Phelps’ fabled 100-to-1 In the Stock https://bombthrower.com/wp-content/uploads/2019/03/shutterstock_1030471843-e1551983495127-1.jpget).

The graphic I used in this post is from Mayer’s book. In the chapter on General Semantics he is talking about William O’Hanlon’s demonstration of reality:

“Let the dots represent ‘facts’. Now we want to “connect the dots”, or make sense of them. O’Hanlon’s chart shows some of the ways in which you can connect the dots.

It’s a brilliant rendering that makes clear there are many ways to interpret the same set of facts”.

It is a different kind of book than his other two, but in this day and age of experts-uber-alles, mandatory narratives and institutionalized groupthink, it’s more important and a must read. This book is an ode to the I Don’t Know school of investing and of life.

This is part of the ongoing Jackpot Chronicles, looking at four possible Coronavirus scenarios or lenses.

The last instalment was “Force Majeure”, which posited a complete breakdown in seemingly permanent institutions. As it may turn out, these outwardly immovable edifices may not survive this economic collapse and be left out of “the new normal” that emerges out the other end.

Given that the idea of Coronavirus being concocted in a Wuhan Lab has gone from being a conspiracy theory that could get you deplatformed, to being seriously looked into by Western intelligence agencies, now may be a good time to look at the “Tin Foil Hat” scenario, and try to discern where viewing this pandemic through the proverbial conspiracy theory lens actually gets us.

Conspiracy theories make for tricky subject matter for anybody who tries to look deeper than the veneer of conventional narratives. What we are expected to accept unquestioningly out of mainstream circles is sometimes less plausible than what we are expected to dismiss as conspiracy theories.

It get’s even more distorted when inversions or backwardations occur between what is fringe and what is, ostensibly, “fact”.

Russiagate was a conspiracy theory, one that was platformed as common knowledge by multiple mainstream media outlets for over two years before finally being conceded as a nothingburger by the Mueller Report. There are still people walking around believing that the current US president was installed as a Manchurian candidate by the Kremlin, and you’re the one in the tin-foil hat for pointing out how disconnected from reality that actually is.

I’ve been very clear about this all along. Russia hacked 2016 in advance, and changed vote totals by deleting registrations. But it was NOT enough to put Trump over the top. Without Comey’s last minute letter, Trump would have lost. This is very, very simple.

— Palmer Report (@PalmerReport) May 15, 2019

(somwhere along the line, legendary usenet kook alt.genius.bill-palmer got himself a blue check)

This is typical of the hall of mirrors you enter when trying to understand the dynamics of conspiracy theories. Even the term “Conspiracy Theory” is itself the subject of conspiracy theories. The legend goes that the term was invented by the CIA to marginalize pesky truthers (another loaded word) that were finding all kinds of holes in the official explanation of the JFK assassination.

Whether it’s the implausibility of a “magic bullet” in Dealey Plaza or what many building engineers and pilots have to say about 9/11, the official explanatory cover for such world-changing events are so riddled with inconsistencies and flaws that they can only be believed by those who do not examine them.

The danger in admitting to oneself that at least some aspects of the most pivotal events of our era are not what they seem, is that it can pull you into a downward spiral where everything becomes a conspiracy and nothing is as it seems.

We all know somebody who thinks every news story, every event that occurs is a direct outcome of some shadowy cabal that controlled the event, manipulated the circumstances that precipitated it, and selected the outcome to serve their own agenda.

This is not to say that people and groups don’t conspire, that societal elites don’t have a self-serving agenda and that moral hazard and pathological opportunism do not play a significant role in outcomes. In essence, that’s politics. But here’s the crucial duality of conspiracy theory:

To the degree that all major events being manipulated behind the scenes by hidden conspirators is actually impossible, so to is the degree to which  the mainstream media explanations of events are mostly inaccurate and at times infantile.

Into this milieu, enter the tin-foil-hats, and things become inordinately more precarious. What we get is a type of three-body-problem writ large where the three independent narrative forces can be described by three age-old adages, ( all of which are possibly apocryphal quotes):

1. “Never ascribe to conspiracy what can be explained by stupidity” (a.k.a Hanlon’s Razor, often attributed to Napoleon Bonaparte)
2. “Never let a good crisis go to waste” (Winston Churchill)
3. “Never believe anything until it is officially denied” (Bismarck)

The outcomes we as citizens experience, subject to our leaders following varying degrees of these three impulses can be rendered in a Venn diagram with three drivers: Stupidity, self-dealing and duplicity.

As I’ve been exploring a lot lately, we live in something that  increasingly resembles a cyberpunk bizarroverse. One where the explanatory powers of mainstream media are in secular decline and in which our institutions have largely discredited themselves. Two powerful coping mechanisms are:

1) to pretend nothing is wrong and that business as usual can continue even though the underlying scaffolding of the system is imploding (hypernormalisation)

2) subscribe to some non-sanctioned narrative that purports to reconcile the discrepancy between what we believe should be happening with what we are actually experiencing.

For my part, I find the most useful components of both conspiracies and consensus is that they are both known to provide an explanation of events that I can reliably assume as having near zero accuracy. A useful concept for this came out of Douglas Adams’s Hitchhikers Guide to the Galaxy. In it his concept of the recipriversexcluson describes a number whose value can be only be defined as anything but itself. Whatever the expert consensus is saying is happening or will happen, that’s the one outcome you do not need to plan for. Same goes for most conspiracies.

Introducing the Gell Mann Amnesia Effect

The last idea I’ll introduce is that mainstream media has itself, become a type of conspiracy theory. There is less reporting, less actual journalism and mostly punditry and editorializing. Ben Hunt gives us the concept he calls The Gell Mann Amnesia Effect (the phenomenon was originally described by Michael Crichton):

“Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.

In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”

I noticed this phenomenon years ago, but didn’t have a name for it. In my case, most articles I read in the mainstream press about the domain name system, DNS, and naming in general are so bad as to be cringeworthy. This is one of my faves:

Applying all this to Coronavirus narratives, we can look at what a specific narrative says is or will happen, what it probably preludes from happening.

So when experts say we may have to be on lockdown for 2 years, I assume it’ll come in lower.

When some authority says we we will never shake hands again, I don’t bank on it.

When people on Youtube say 5G causes Coronavirus, I’m pretty sure it doesn’t.

When they say the virus was engineered and released deliberately to bring about a totalitarian police state, I think that gives too much credit to the people who run governments (see Venn diagram).

So where does all this get us?

Enter  Radical Uncertainty.

This is the title of Mervyn King and John Kay’s latest book. King was the Governor of the Bank of England from 2003 to 2013 and presided over the Global Financial Crisis, writing about his experience in his previous book The End of Alchemy.  Kay is an economist who held various positions in academia (former Dean, Oxford Business School, also London School of Economics) and author of Other People’s Money.

Their central theme is that many problems we face are inherently unknowable and that no amount of data or sophisticated modelling is going to get us anywhere near a reliable probability of what any of it means, or what will happen.

Radical uncertainty cannot be described in the probabilistic terms applicable to a game of chance. It is not just that we do not know what will happen. We often do not even know the kinds of things that might happen. When we describe radical uncertainty we are not talking about ‘long tails’ — imaginable and well-defined events whose low probability can be estimated, such as a long losing streak at roulette. And we are not only talking about the ‘black swans’ identified by Nassim Nicholas Taleb — surprising events which no one could have anticipated until they happen, although these ‘black swans’ are examples of radical uncertainty.‘?

We are emphasizing the vast range of possibilities that lie in between the world of unlikely events which can nevertheless be described with the aid of probability distributions, and the world of the unimaginable. This is a world of uncertain futures and unpredictable consequences, about which there is necessary speculation and inevitable disagreement — disagreement which often will never be resolved. And it is that world which we mostly encounter.

So the ramifications of radical uncertainty go well beyond financial markets; they extend to individual and collective decisions, as well as economic and political ones; and from decisions of global significance taken by statesmen to everyday decisions taken by the readers of this book.

Radical Uncertainty means gearing our efforts toward coherently responding to events as opposed to insisting on modelling them with an eye toward achieving optimal outcomes, be that “full employment”, a targeted inflation rate or the elimination of the business cycle.

“Governments choose policies to maximise social welfare. A moment’s introspection is enough to tell us that they don’t. They could not conceivably have the information required to do so. They do not know all the available options, and they are uncertain what the consequences of them will be. They do not even know whether what they wish for today will be what they still want if they achieve it tomorrow….the notion that a government could calculate what maximises social welfare is simply ridiculous. The consequences of policies and actions are far too uncertain….”

It is arguable that many of the problems we experience today, such as debt bubbles and brittle supply-chains are the result of trying to prevent bad outcomes of the past instead of facing them head on and taking the requisite pain when they happened (no bailouts, allowing the over-leveraged to fail). But they didn’t and this is a major reason why the pandemic, when it finally hit, is having such a disastrous effect for something that all else considered, isn’t as deadly as pandemics of the past.

Ironically, Radical Uncertainty was written just before the outbreak, it’s publication date was March 17, just as things were really coming unglued…

“The Black Death will not recur – plague is easily cured by antibiotics (although the effectiveness of antibiotics is under threat) – and a significant outbreak of cholera in a developed country is highly unlikely. But we must expect to be hit by an epidemic of an infectious disease resulting from a virus which does not yet exist. To describe catastrophic pandemics, or environmental disasters, or nuclear annihilation, or our subjection to robots, in terms of probabilities is to mislead ourselves and others. We can talk only in terms of stories. And when our world ends, it will likely be the result not of some ‘long tail’ event arising from a low-probability outcome from a known frequency distribution, nor even of one of the contingencies hypothesised by Martin Rees and colleagues, but as a result of some contingency we have failed even to imagine.”

So as I try to balance out these varying imperfect narratives from mainstream sources, official sources, and the tin foil hats, I try to use them more as filters to identify what to take out of the equation than as providing information and having explanatory power.

1. I eliminate what the prominent futurists and experts say will happen
2. I  eliminate the reason why conspiracists say something is happening
3. I severely discount what the MSM says is happening.

Then I  look at what’s left and try to make sense of it. To that end while I personally think that all most of the hysterical outcomes, in terms of millions of deaths, mandatory implants, FEMA camps,  are highly improbable, under the Jackpot’s Tin Foil Hat Scenario I’d be wrong (think China, everywhere).

What I am positioning for is a mother of all economic depressions, rampant inflation, joblessness, war on cash and basically everything described in the second part of Graham Summers’s The Everything Bubble (tl/dr Inflation, NIRP, War on Cash, Bail Ins and wealth taxes). When I run through all of this filtering and analysis this is what looks more imminently probable to me.

While I don’t think of these anticipated events in terms of a coordinated global conspiracy to screw all the plebes (again, consult the Venn diagram), I do expect that the rationalizations of these events along with the narratives justifying them will be rife with conspiracy-sounding elements. This brings us back to the hall-of-mirrors aspect of what is conspiracy versus what Jaques Ellul called “integrative  propaganda” in such times as these.

For the next edition of The Jackpot Chronicles I decided to rename the “Mandatory Pollyanna” scenario. That’s the one where central planners and bureaucrats manage to “save” the economy yet again. However the cost of that would be to undertake an LBO of the entire economy and running it as a centrally planned utility. I’ve decided to rename that one “The Great Bifurcation”, after the the inevitable result of that would be emergence of an even more pronounced and starkly divided Two Tier Society.

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