Tuesday, 21 April 2009

Hope, hype and happenstance:Part III


Introduction

Part III in my little departure from an increasingly rigid road of market prediction was inspired by a conversation I had at my office Christmas party, though I was reminded of it by the repeated correspondence of world events with my choice of country for analysis.

I am used to being challenged when I mention my involvement in astrology. Those that don’t laugh outright attempt to engage me in debate along the lines of “if you think it works, explain and prove how.” I usually refuse to rise to the bait; it works for me and I would rather just play the markets with it than lock myself up in dusty academia to research the mechanics.

However, now and again, I have doubts myself. Not doubts about the effectiveness of my predictions but over what exactly contributes to them And the potential conclusion of such musings is far more troublesome and scientifically disturbing than astrology itself could ever be.

These troublesome musings were thrown into sharper focus at the aforementioned Christmas dinner, when the colleage to my right did not show scepticism about my forecasts, but went straight for the jugular. “Did I think that my predictions were right because astrology worked or for some other reason?” I, expecting the usual doubting Thomas, responded that if he thought that I was solely using economic or business expertise, how did he account for the fact that some of my best predictions in 2008 were for Japan, a country which I have neither visited nor understand politically or economically. His response? He did not mean economic expertise, he meant something akin to psychic powers!

Psychic powers? You are joking right....?
Now, setting aside that there is no single, conclusive definition of what psychic powers comprise, let’s run with the idea. I have noticed, myself, when reviewing my forecasts in retrospect, after they have been realised, that I am sometimes at a loss to easily explain how I formed a judgement regarding a particular date. Although hindsight should be clearer, sometimes it isn’t…..

In order to recreate the forecast I have to recreate the process of getting there, not to just look at the date in question. When analysing a chart over a period, it is not a series of discrete events but a story that evolves and grows as I move forward in time. Themes emerge month-on-month in a way they can’t if I just look a specific date in isolation. Now this might be because that is how astrology is supposed to work: but it might not.

In order to conduct an analysis over a long period, I need to focus on a chart and its transits for some hours. Normally during that process I am uninterrupted and reach a level of concentration that I don’t in other matters (certainly not in my excessively dull day job). Essentially, it is a form of meditation. The question then is, under the meditative state, am I able to channel information not available to the normal conscious mind?

And of course if I can do so, presumably so can others. Even allowing for the fact that the ability to express and interpret such “universal information” might benefit from a reasonable level of financial knowledge, the fact remains that channelling information about the future from the universe is not accepted as scientifically possible. Clearly a can of worms has been opened. That will be $1m, thanks very much, Mr Randi.

I think, therefore you aren't
However, if you find that disconcerting, the explanation could be even worse. I’ve poked around in this particular worm can before. A few years ago, an astrologer friend and I pondered the subject of myriad astrological techniques and the existence of so many predictive and religious belief systems. It seemed to us that, for the believer, the chosen system always works. But the logical conclusion of this is that the world becomes exactly what we believe it will. Now I am aware that this is the premise behind the literature relating to the so called “law of attraction.” But that does not take things to their final conclusion…... namely, that our whole world is the creation of our minds and nothing but that mind exists.

In such a scenario, astrology only exists in my mind, and in my mind it works. And similarly astrology’s detractors are all products of my mind. As are you, my reader. Explanation, simple: upshot, terrifying.

Obviously the much vaunted law of attraction becomes irrelevant under the above scenario. If nothing exists, who cares? There is nothing to attract. And whether astrology exists, well, who cares? There is no solar system or universe. And whether the Dow will rise or fall in 2009, who cares? There is no Dow. And whether you are reading this, who cares? No-one cares, you aren’t, you don’t exist…….

But supposing you did, wouldn’t you be beginning to see that astrology is a much lesser evil?! So having peaked under the lid, I prefer to leave the worms in the can and carry on with the astrology.

Hope, hype and happenstance: Part II




Disclaimer
Ok . I didn't ask for permission to republish this cartoon, but I reckon I am giving it the best possible publicity here and the getting your message out there, as we shall see, seems to be all that matters.

Introduction

The primary purpose of my blog is prediction. From time to time I also include short discussions to further the understanding of the art of forecasting. Occasionally I indulge myself by taking a diversion into something such as how the broader planetary cycles manifest in other areas such as music. I don’t, however, usually devote space to my personal opinions on economic or political policy. This post represents a dramatic departure. It is not about astrology, nor is it about prediction; it is purely and simply about economic policy and hype.

One might think that hype and economics would be poles apart: one a function of psychological manipulation, the other of mathematics. But hype doesn’t automatically work. It won’t work if the evidence completely contradicts it. And it works best if there is a smattering of “scientific proof” (better known as misleading statistics) to convince. It works best of all when its proponents also fall for their own snake oil; when they read about each other’s statistical models and become as totally convinced of their own righteousness as American evangelical preachers.

Bubbles we have lived and loved
Remember the late 1990s? Remember the dotcom boom? If you weren’t such a victim of that particular bubble that you have conveniently blocked all trace of it from memory, you will recall how every newspaper and TV channel was full of the “new paradigm” that guaranteed infinite wealth for those brave enough to invest in a web-holding page with a fancy brand name and nothing else, and that the Dow would soon be at 36,000 on the back of the fact that profit was no longer an essential quality of a successful business. Sceptics were mocked as dinosaurs. No wonder so much of that particular hype was sustained even after the markets had peaked.

Profit eventually regained its role as the primary goal of any business model but soon we were hearing that it was property that could only ever go up. Economists, academics and consultants jumped on the latest (fee generating) hype bandwagon telling us how the UK population was rising, and that this would lead to limitless demand for houses (but see note 1). Other vested interests chipped in, to explain how gearing up on your property investments would make you as wealthy as an x-factor judge in your old age. And, if you had more money than you could possibly ever need to gear up your property investments, not to worry; you could gear up your private equity investments as well.

Whilst developers, property services companies and private equity groups have been shrinking like Alice after following the “drink me” instructions, many members of the public are still coming to terms with the fact that they were victims of this particular hype.

They are also only just coming to terms with the fact that “buying and holding” equities hasn’t quite materialised as the brilliant investment strategy that proponents suggested over the last 20 years.

That is all very well, you say, but these were all driven by market vested interests, the same situation can’t happen in the whole economy? There we have economic theory to underpin our actions. Hype won’t work if we have a truly solid foundation, right? Right! But, wrong! We don’t have anything like a solid foundation.

Economic theory is useless
As professor Willem Buiter pointed out in his FT blog of 3rd March 2009, (ages ago but actually at the time I wrote most of this- note 2) most economic theory is useless. The trouble is not that the mathematical models of economics fail in themselves; they are mathematically perfect and quite beautiful in their own way. But, as Buiter describes, they assume states which are for all intents and purposes practically irrelevant.

In this case the PhD mathematicians were so busy differentiating to the nth degree that they didn’t do the simple arithmetic. If they had they would have realised that at the rate per annum at which the hedge funds and traders were accumulating wealth, the whole GDP of the world would be in a few hands in less than 2 decades. So, unless you are a philosopher who believes that having got all the angels in existence onto your pinhead you don’t have a problem populating the other end of your pin, you logically have a practical problem.

And if you think that hype just restricts itself to market participants, you are destined to be disappointed and you probably haven’t noticed that the so called government is run by communications consultants. Simply, the leaders didn’t know, the traders didn’t care, and the spinners didn’t know or care as long as they got paid.

If you are a UK resident, you will recall the Gordon Brown promise of “no more boom and bust.” We’ve run an economy to ruin over the last decade on the basis of that little hype gem. Even just two years ago in March 2007, I sat in a financial services seminar while an “expert” showed us a series of graphs which “demonstrated how successful” the UK economy had been over the previous ten years. The room was full of representatives from the financial services industry, but no-one challenged a single premise on which this presentation was based. I sat there shaking my head in disbelief, but even I didn’t ask the 64 trillion dollar question “what element of that so called growth disappears when you strip out the effect of credit growth?” (Even Cassandra can be afraid to challenge the hype when representing her employer rather than herself).

But the UK in the 2000s was only a microcosm. The economic theory that underpinned the above bit of hype was only an extension of the prevailing theory about free and efficient markets and growth that has dominated US policy for the last 5 decades.

But you are probably asking “Now we recognise the hype of the last decades for what it was, why is there still a problem?” The problem is that, we are still buying into that hype and now we are the na├»ve recipients of its extension which is, at least, as dangerous as anything we have encountered before.

What is that is being hyped now? Keynesian solutions.

Keynes: another time another place, please
This is not a critique of Keynesian or New-Keynesian theory. Nothing wrong with these in their place; I can see (without a single mathematical model) the sense in what are essentially counter-cyclical government policies. Under conditions where the private sector has failed to allocate sufficient resources, no harm at all in a bit of public sector stimulation, a few periods of low interest rates etc. And of course that’s why the hype is working – because the theories are mathematically logical and perfectly justifiable under the right conditions.

The problem is this is most definitely not the time and place for stimulation. In my view the current situation is the opposite of the one Keynes envisaged.

For the last two or three decades, increasing cheap credit led the private sector to allocate too many resources to… well pretty much everything really. The US called this growth and attributed it to their economic superiority (and indirectly to the superiority of the prevailing economic models). The time for intervention was then, although the intervention required would have been the opposite of stimulation. Now, the credit drug fuelled party is ended we might have had a chance to get a much more sustainable allocation of private sector resources. Sadly that has not happened.

Instead, we are getting more and still more stimulation, all based on the principle that Keynesian economics is the right medicine for the condition.

There are a lot of lay people, not yet been exposed to the full onslaught of the hype, who are still saying, “how can these type of solutions help a situation where there is already so much debt?” No doubt all but the “criminally insane” among them will soon capitulate under the tidal wave of expert en-masse advocating the same solutions. How can the average lay person resist when even the professionals are in concord?

Do I have a better solution? Or, more to the point, as the spinners will ask “do I have a KISS solution they can sell to the masses? The answer is no. I can’t pick up the milk and put it back in the broken bottle anymore than the next person. But I am wise enough not to spill another bottle in order to hide the mess from the first. Until time travel becomes a reality, it is too late for solutions to problems that arose in the past.

Hope or happenstance: where we are going now
Buiter ended his blog entry with “I believe that the Bank has by now shed the conventional wisdom of the typical macroeconomics training of the past few decades. In its place is an intellectual potpourri of factoids, partial theories, empirical regulaties without firm theoretical foundations, hunches, intuitions and half-developed insights. It is not much, but knowing that you know nothing is the beginning of wisdom”. In any case it looks like the milk is mainly frozen in the bottle and is not spilling out as planned. That can only be a godo thing for the future. We can hope, but as we saw in Part i hope isn’t all its cracked up to be either.
Of course, it is also too late for me to be writing this. It is always too late when so many decades of spin have obscured reality to such an extent. So now the consequences will unravel as destiny decrees that they will. And that is where astrology comes into its own. For my views of that, see part three of this little series – happenstance.


Notes

1) though they failed to point out that population was not growing as fast as in the first half of the 20th century ( 38m to 50m from 1900 to 1950 (30% increase) and 50m to 60m from 1950-2000 (20% increase)) or that almost all the growth from 1965 to 2005 was in the over 60 age group ( hardly first time buyers), or that the late 80s house price increase was actually a lag effect of the 1970-80s inflation.

2)Yes, I got distracted by other matters. But no matter as you see the intervening weeks have been relatively uneventful.

3) I am not here questioning the bail out of certain elements of the financial system: unlimited for private and non-financial corporate depositors. Such action would be required to stabilise the whole system. Only the bail out of the whole failed structures.

Sources
Willem Buiter's Maverecon blog, Financial Times, March 3, 2009

Hope, hype and happenstance: Part 1


Introduction
I’m afraid this blog has been a little quiet of late. I didn’t intend it, indeed I had this series of 3 posts almost ready 5 weeks ago, but other distractions took over and suddenly here we are, weeks later.

I thought another break from the run of mechanical analyses was in order. So what follows are three non-astrological posts, dealing with facets of prediction in general. The third post will look specifically at the validity of astrology, the second with how hype and spin blind people to the real forecasters out there. This one, however, looks at negativity in forecasts and how this is received; basically why spin falls on such receptive ears.

In my weeks off we haven’t missed much market wise. As expected the turn came on 10/11th March and things have been relatively stable/almost positive since. However I wonder if perhaps this optimism is a little misplaced. But I bet most readers will be embracing the promises of green shoots. Maybe they only want good news? Is the turn on 2Oth April more realistic- you'll have to wait for later posts for that now let's get on with looking at the optimists.

On December 29 2008John Kay wrote in the FT:
Although people endlessly ask for predictions, they rarely really want the answers. It was only late – too late – in life that I realised that when people said, “We really want you to challenge our ideas,” they mostly did not. They wanted instead to be congratulated on their wisdom. Similarly, when they ask, “What is going to happen?” they seek reaffirmation and reassurance rather than insight into the future.


This is certainly true. People do indeed want reaffirmation. (I’ve duly just obliged). Yet I think that there is another factor at work. Mr Kay continues:
The market for clairvoyance has existed through history and is satisfied by messages based on hope and ambiguity. The market for economic prediction is similar.


The essence of this statement is that Mr Kay is saying that some predictions are accepted not just because they confirm what people believe but because those predictions confirm what people want to believe.

On being Cassandra

I recently published a forecast for Argentina which was generally positive. That forecast might, of course, prove to be completely wrong. The point is not the outcome, rather that the prediction is relatively upbeat; to date, optimism has been rare in my posts. Indeed one of the first criticisms I received on this blog related to the negativity of my forecasts. If I had been quoted at all in the mainstream media, I would have been deemed an economic Cassandra.

Now, as it happens, my negative outlook has been more than realized in practice, which got me wondering………… Like the Cassandra of mythology, unfortunately, I was not wrong. Yet, even if I had a higher profile, my forecasts probably wouldn’t have been quoted in the mainstream media. Had my forecasts been rather more rose tinted, however, I hazard a guess that I would have been deemed an “expert” with the forecasts seized on and repeated ad-infinitum.

Why, then, is there such an asymmetry in the public acceptance of positive and negative data? Why is it that upbeat predictions are seized on without question yet predictions of failure lead to unpopularity, or worse, invisibility?

This asymmetry or bias is endemic, not just in market forecasting, but in business as a whole.

“Give me solutions not problems” is the response of the ostrich like manager across the globe when confronted with anything other than positive news. Superficially that even sounds rational; but when the problem presented and denied represents a fundamental market change and indicates a need to review strategy from the top. Denying it dooms the business.

The denial of potential bad news is entrenched in day-to-day life too, though the fact is often obscured by actual real time news which is unfortunately impossible to deny so easily.

Interestingly the level of denial is so overarching that even the literal experience of Cassandra herself is denied by writers and psychologists. At best the archetype is described as “someone whose prophetic insight is obscured by insanity, turning their revelations into riddles or disjointed statements that are not fully comprehended until after the fact”.(wikipedia) At worst Cassandra’s visions are ignored and instead her experience used as a metaphor for the disbelieved victim of abuse or the oppression of women’s ideas.

This denial in modern references of the fact that Cassandra is simply supposed to have been able to forsee disasters is both facinating and unnerving. The need to deny, to such an extent, that the path that is being followed could be anything other than the yellow brick road leading to the great wizard suggests that there is some fundamental human characteristic at work.

What’s left in Pandora’s box?


I think the answer lies in the quote from John Kay, the little word hope. Not Cassandra’s domain but Pandora’s.

Arguably hope is a brilliant genetic mutation, which evolved giving early man the will/hormonal stimulus for long enough to keep going against all odds. A lack of hope in a primitive environment would mean capitulation too early and almost certain death. Imagine one is lost in the desert, hope keeps one going that few extra steps. And even in the last throes of death, hope is perhaps anaesthetic in its effects, a protection. Hope can therefore be a good thing and still is in many tragic circumstances. Without it most of us would be registering with Dignitas at age 22. And yet…

…..Remember that when Pandora released all the evils from the box, only hope remained? Anything that is at home with a box full of evil isn’t likely to be a cuddly toy itself. So let’s look a bit closer.

Hope triggers (is?) hormones, chemicals: a drug. Like anaesthesia, it numbs us to the reality of the increasing pain, it encourages us to stagger on, oblivious to the impending doom that bears down on us. But in the modern economic world hope bestows disadvantages as well as advantages. We have to hope because it helps soldier on by denying the agony of our limited prospects. But we do not have the possibility of overcoming the threat; but the threat is unending, we cannot walk away from the system that enslaves us even when it is killing us, so we become hope addicts instead.

Hope also encourages us to believe, against all evidence to the contrary, that we can win the lottery, back the winning horse, beat the market, or attain wealth and glory as a result of the latest get-rich-quick gimmick. Unfortunately, on a national scale, it also allows us to refuse to accept the fact that we can’t grow our GDP infinitely, that our booms can’t go on forever.

The problem of economic cycles must thus be unavoidable. Not because of some invisible market force, but because we are almost all programmed to hope for the best until the moment of annihilation.

Hope is the last evil in the box, because in the modern financial environment, the motivation to keep going actually propels us onward down a path of destruction instead of encouraging us to acknowledge defeat and branch out elsewhere.
Furthermore, when presented with information to make decisions, we chose to ignore the negative options and embrace the more attractive possibilities, no matter how infinitely less likely they are.

Well, when I say we, I mean the majority. I don’t mean the typical Cassandra. The gift and curse of Cassandra is not the ability to foresee the future, but the ability to see today as it really is without the benefits of those dregs at the bottom of Pandora’s box. And, thus, to be denied by the hope addicts.

So where does that leave a financial astrologer such as myself? Off the hook for peddling doom maybe; the Cassandra label is misapplied if all the forecaster does is see today’s reality more clearly than the rest. But if all the forecaster sees is today’s reality where, if at all, does astrology have a place? I shall leave consideration of that question for the final of my three posts. With the knowledge that people are programmed to be susceptible to positive messages we turn next to the question of spin.

I have referred solely to hope in this post. Arguably in this context hope and faith could be interchangeable types of belief. However my view is that, although the two appear to overlap, faith is a fundamentally intellectual perspective, whereas hope is a biological compulsion.

Note:
Hope is much on people minds given Obama's election campaign. This post is not in any way reflecting on that campaign or administration. It seeks only to discuss behaviour in general

Reference
Financial Times :Kudos for the contrarian by John Kay Published: December 29 2008 18:48