Tax Cuts, Debt, & The Pretense of Knowledge

In the fog of fake news and partisan debate, most tangentially informed individuals are bewildered as to the effects from the tax legislation being fast-tracked through Congress. Larger corporations, with their phalanxes of lawyers, are not so in the dark. Chase Bank CEO, Jamie Dimon, chairman of the Business Roundtable and former head of the now passé “Fix the Debt” committee, broadcasted the corporate view without equivocation or qualification. “Passing tax reform is the single most important thing that Congress can do to make American companies more competitive, boost the economy, create jobs and spur wage growth.” Continued caution on the part of lesser luminaries is understandable.

As mentioned in other posts, the future anticipated by current forecasts must be measured against the facts of the past. That past would indicate that regardless of who might be opining, even the most constrained of forecasts will prove to be wildly—and quite likely destabilizingly—optimistic. Continue reading “Tax Cuts, Debt, & The Pretense of Knowledge”

Is the Business Cycle Dead, Or Just Hibernating?

Eight years since the official end of the Great Recession in July, 2009, rumblings of another recession are conspicuous by their absence. Is the business cycle dead? Although expansions will eventually die, old age itself is not among the direct causal factors, despite the popular adage. Moreover, expansions—like humans—are living longer while the duration of recessions has shrunk. Continue reading “Is the Business Cycle Dead, Or Just Hibernating?”

Two Sides of the Same Coin


While best known for its Consumer Sentiment Survey, the University of Michigan conducts a host of other subordinate surveys. The chart below shows the response of households to a specific question. “Suppose that tomorrow someone was to invest $1000 in a type of mutual fund known as a diversified fund. What do you think is the percent chance that this $1000 investment will increase in value in the year ahead?” Continue reading “Two Sides of the Same Coin”

1929 Is More Apt Anniversary Than 1987

Edward Chancellor and I met soon after I read his prescient and literarily superb book, Devil Take the Hindmost: A History of Financial Speculation (2000). We have stayed in regular touch, including attending a Berkshire Hathaway annual meeting together. This morning he sent me the following column from Breakingviews which, with his permission, I am including as the first guest post to my blog.

Continue reading “1929 Is More Apt Anniversary Than 1987”

The Tail Risks Optimizer’s Dilemma: Taleb Vs Spitznagel

Nassim Taleb[1] and Mark Spitznagel[2], former partners and collaborators, are the reigning authorities on optimizing portfolio outcomes for when tail risks manifest. Neither, collectively nor independently, has been able to find a workable solution to what I call the “Tail Risk Optimizer’s Dilemma.” In Fooled by Randomness, Taleb lamented his inability to build a career by just betting on black swans. “There simply weren’t enough “tradable opportunities” and the life of a ‘crisis hunter’ tests the patience of even the most stoic.” Fortunately for Taleb, managing money is not currently his day job, but it is Spitznagel’s. Taleb is a best-selling writer, itself a positive swan phenomenon, and can afford to be philosophical. Spitznagel, who must hold a portfolio of equities to justify his fees, cannot. Hypothetically, a Taleb portfolio is beyond robust. Extreme adversity will make it stronger (and concurrently more valuable). Because of the probable drawdown in the value of the risk assets in Spitznagel’s hedge fund portfolios, it’s hard to imagine him doing much more than mitigating those losses. Taleb’s approach is not commercial and Spitznagel’s is a concession to the institutional imperative. As they stand, neither gets us to tail risk optimization—profiting from adversity—which, admittedly, sounds almost offensively negative when compared to profiting from opportunity. It’s often very difficult and seemingly antisocial, but we must discipline ourselves to see the world as it is, not as we wish it to be.
Continue reading “The Tail Risks Optimizer’s Dilemma: Taleb Vs Spitznagel”

It’s Time to Revisit Puts

For both natural and financial disasters, extreme preparation supersedes precise predictions. These are difficult days for value investors. There is a paucity of opportunities offering anything close to a margin of safety capable of sustaining long-term gains. Nearly all metrics agree. Whether you use CAPE, price-to-sales, GDP-to-market cap, or many any other measures, today’s market is dangerously detached from its underlying fundamentals.

Further, volatility of the S&P 500—historic and the VIX—has been so calm for such a prolonged period of time, despite the demonstrably more chaotic political and environmental climates, you could be forgiven for thinking the world was now segmented into distinctly disconnected parallel universes. I believe that economic and market stability is an illusion, a prelude to less tranquil conditions. Continue reading “It’s Time to Revisit Puts”

The Crowd: Social Schizophrenia

The most influential book I’ve ever read on social psychology was, unquestionably, The Crowd: A study of the popular mind by Frenchmen Gustave Le Bon in 1895. Some 30 years ago, while browsing through a used bookstore in Manhattan, I happened across a musty long out-of-print paperback edition. Today you can download the utterly remarkable 143-page Kindle version at no cost from Amazon, an exception to the rule that there is no free lunch.

To be sure, Le Bon’s theories are controversial. On July 27, 2016, The Atlantic published “Donald Trump and the Myth of Mobocracy: How the dubious ideas of a 19th-century Frenchman reverberate in 2016.” Zaretsky, the writer, nuances Le Bon’s thought with recent reevaluations. Still, Le Bon goes a long way in helping to understand the transformative nature of today’s digitally and therefore instantaneously linked, globally dispersed, crowds that make up the world’s capital markets. Continue reading “The Crowd: Social Schizophrenia”

Gresham’s Law & Growing Weeds

Gresham’s Law, a principle only vaguely familiar to most today, is a monetary concept that claims “bad money drives out good.” Although named after the 16th-century English financier, Sir Thomas Gresham, its origins can be traced back to the Greek comic dramatist, Aristophanes, in the 5th century BC.

The principle applies to the debasing of coinage, the intentional reduction of precious metal content in a coin during the minting process. Because old and new coins had the same face values despite differences in their metal content, the old were hoarded out of existence. Continue reading “Gresham’s Law & Growing Weeds”

The Financial Crisis Inquiry Report as a Harbinger

Privileging analytical functions over intuitive ones played out with real consequences in the 2007 financial crisis. My second book, A Decade of Delusions, dealt directly with whether the crisis was a thoroughly random occurrence, or an unpredictable but foreseeable one—a Grey Swan rather than a Black. Chapter 9, “Contagious Speculation,” published in early 2006 and 2007 and Chapter 10, “The Tipping Point,” written in February 2008 make clear that the coming of a crisis should have been expected.

In testimony before the National Commission on the causes of the financial and economic crisis in the United States, Warren Buffett candidly observed: “very, very few people could appreciate the bubble,” which he called a “mass delusion” shared by “300 million Americans.” Regulators echoed similar refrains. Ben Bernanke, Federal Reserve Chairman since 2006, told the Commission a “perfect storm” had occurred that regulators could not have anticipated. Continue reading “The Financial Crisis Inquiry Report as a Harbinger”