Knave or Fool?

WATERFORD, Ireland – Markets were calm on Monday. Investors wanted to panic, as usual, but didn’t know what direction to take.

We’re not sure either. On the one hand, the world economy is slowing down. On the other, Mario Draghi has announced again that he – not willing buyers and sellers – will determine consumer prices.

Mario Draghi, the monetary crank currently heading the ECB. We are not dispensing this insult (or let us better say: this objective description) of the man willy-nilly. The hoary inflationism he propagates was unmasked as the hallmark of monetary crankery more than a century ago already. Somehow it has become the “economic orthodoxy” of the centrally planned fiat money system and the welfare states that are hosting it.

Photo credit: Picture Alliance / DPA

And he wants to see them go higher. No kidding. Bloomberg:

“European Central Bank President Mario Draghi set the scene for further stimulus in two weeks’ time, saying the institution will do what’s necessary to reach its inflation goal rapidly. The euro fell.

‘If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible,’ Draghi said in a speech in Frankfurt on Friday.”

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Finally, the purchasing power of the euro actually appears to be stable. According to Mr. Draghi and his fellowbien pensants at the ECB, this is absolutely terrible and needs to be corrected by creating even more money from thin ai

The lesson of the last few years is that central banks are hell on an economy, but they’re heaven to stock market investors. What will happen next? We wait to find out.

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The lunacy of Draghi and his fellow planners properly visualized. This is the bulk of the euro area’s true money supply (a few items such as foreign resident deposits are excluded). It has grown by more than 74% since January 2008, and lately it has begun to “go parabolic”, growing by nearly 14% per year

We’re on our way back to the U.S. for Thanksgiving. Before boarding our plane in Dublin, we checked our email. Aiyiyi!

Koch… Paris… the Catholic Church. Do you have any readers left?” asks a concerned subscriber. You can scroll down here for today’s extended mailbag edition for the latest batch of hostile reader feedback. But in general, we seem to be annoying those on the left and on the right. As for the center, it can’t make up its mind.

Are we knave? Or just fool? We’re not sure ourselves. But we remind readers – and ourselves – that the Diary is a commercial e-letter. It is not a hobby. It is not a vanity project. It is supposed to make money. How?

By exploring – rigorously, seriously, and without flinching – contrary, unpopular, and alternative ideas. It does no good to gratuitously madden readers. Nor does much good to tell them what they can hear everywhere else. We learn little from the soothing, flattering nonsense of the leading political parties. Here we paraphrase:

“Yes, we are the best people on Earth. Whatever we do is good. Our stocks always go up. Because our economy always gets better, under the wise guidance of our Fed and Treasury department. Our nation gets stronger and stronger, too, under the watchful eye of our political leaders. And all our children are above average.”

We’re not clever enough to be a politician. We would surely say the wrong thing. And we’re not smart enough to avoid irritating readers either. Besides, we’re on a daily schedule: We don’t have time.

So, for better or for worse, we just plunge ahead. Sometimes right. Sometimes wrong. Always in doubt.

Perverse Outcomes

Of course, there are some things that are true, no matter what you think. “Objective reality,” you could call it. You leave an open can of beer on the counter, and it’s going to go flat. It doesn’t matter what you or anyone else thinks about it. That’s just the way it is.

Step off the curb at the wrong time, and a crosstown bus will flatten you. No point in arguing with it. There are other things that exist only because you think they do. These are things that might be called “subjective reality,” like government, war, and religion.

People occasionally express doubts about the nature of reality. “Is it real? Is it real? Is it real?” – this question was posed by a comic book character in Grant Morrison’s The Invisibles, a series of Graphic Novels exploring,inter alia, this very problem. The insert above shows one of the protagonists of the story proposing a toast tochaos. If you personally have doubts about the shared continuum generally referred to as “reality” and happen not to get out much, you can always watch reality TV to find reassurance.

Image credit: Columbia Pictures

God may be an objective reality. But our perception of Him is subjective. And our organized religions are products of our perceptions – products of our brains and imaginations – trying to fathom the reality of God.

Then there’s another kind of reality – we might call it “subject unreality” – which is even harder to grab hold of. In the investment world, for example, there are things that the great majority of people believe and expect to happen. But because people expect them, they almost never come into existence.

This is the perverse nature of markets. Stocks are most expensive when investors are most optimistic – just before they crash. They are cheapest when people have given up hope – just before they rally.

Losing Proposition

Markets DON’T do what most people expect them to do. Reality doesn’t correspond to what the crowd thinks or what it wants.

When large numbers of people expect a particular outcome – say, a bear market – it won’t happen. A bear market is born of excessive optimism (just as a bull market is born of excessive pessimism). If too many people expect a bear market around the corner, they won’t bid up stock prices to the point where they’re likely to crash.

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A recent example showing how price trends themselves determine the consensus of market participants. When extremes in both prices and the consensus are reached, they are essentially guaranteed to turn out to be completely wrong. Even though the timing of trend changes is always uncertain, the eventual outcome in terms of long term returns is as close to an apodictic certainty as these things come.

That means only contrary and alternative ideas pay. The mainstream ideas, the conventional wisdom, the soothing nonsense that “everybody knows” and “everybody wants to hear” is a losing proposition. Because it is already priced in. Everybody already believes it. There isn’t much upside left.

You get a big crash only when investors are optimistic enough to bid up prices to the point where there is no chance of decent returns. And you get a big bull market only when they are so gloomy that they have sold off their stocks to record lows.

The big profits are made from big surprises. The opinion that seems too far out, the analysis that comes to the opposite conclusion of most others – those are the investment ideas that make money!

Are we wrong to think about the rest of the world – not just markets, but economics, politics, and war, too – with the same wary eye?

Charts by: ECB, StockCharts.

Image captions by PT