A drivers license is something binary: Pass/Fail. Nobody is foolish enough to try to get high scores in it to improve his CV with a "drivers license from the prestigious center X, summa cum laude". We understand the nonlinearity there; and we get the point that failing the test makes one a bad driver on the road, but better grades at the test won't necessarily make one a better driver. It is an entirely via negativa statement; failing (the negative) is where the information resides, where school knowledge may map to reality. The necessary is not to be confused with the causal.Now try to translate the idea into other areas of education. The statement "failing to get a degree is bad for you" does not necessarily mean that "better grades are good". It may even mean that higher grades might indicate a sick mind. This is the difference between SATISFICING and OPTIMIZING. An ecologically calibrated person, aware of the fuzziness of the mapping betwen education and skills, should be able to aim for just pass, and not be penalized by the nerd wasting time on fitting his brain cells to the exam at the expense of other skills and activities, such as street fights, reading Montaigne, or meditating under a tree. Given that university knowledge does not map to true knowledge, to protect people from themselves, university degrees should never be anything but binary, without the fluff "honors, shmonors", etc.
The art of economics consists in looking not merely at the immediate hut at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups—Henry Hazlitt
Thursday, January 24, 2013
Quote of the Day: The Necessary is Not to be Confused with the Causal
Tuesday, July 19, 2011
Quote of the Day: Is Expertise Posture or Knowledge?
Another thought provoking article from my favorite marketing guru Seth Godin [bold emphasis mine]
What I discovered, though, was that domain knowledge, edge to edge knowledge of a field, was incredibly valuable. It helped me understand where the edges were, and it gave me the confidence to be selective, to develop a taxonomy, to see what was going on.
As the deluge of information grows and choices continue to widen (there's no way I could even attempt to cover science fiction from scratch today, for example), it's easy to forget the benefits of acquiring this sort of (mostly) complete understanding in a field. I'm not even sure it matters which field you pick.
Expertise is a posture as much as it is a volume of knowledge.
Reading every single trade journal, for example, or understanding the marketing, engineering and sales of your field--there are countless ways to go deep instead of merely paying lip service to the current flavor of the moment.
To me, the importance of domain knowledge (specialized) is especially relevant for those in the financial markets (or in stock markets).
Instead of acquiring the necessary ‘signals’ that could deliver the ‘edge to edge knowledge’, most get lost in the din or cacophony of ‘noises’, which Mr. Godin describes as the “current flavor of the moment”.
The latter can be characterized by the pervasive use or application of cognitive biases and logical fallacies, except that they are masqueraded in numerical or technical methodologies which are completely dependent on past or historical activities or on some presupposed constants which operates on aggregated formulas.
Popular or consensus wisdom usually represents what Black Swan theorist and author Nassim Taleb calls as the negative knowledge (wrong and doesn't work).
For many, thus, expertise signify more as social signaling (posturing or seeking social acceptance) and or “telling people what they want to hear” but predicated on certain technically based paradigms which produces an aura of supposed superiority rather than representative of the true domain knowledge.
We should learn how to separate the proverbial “wheat from the chaff”
Tuesday, March 08, 2011
The Low Correlation Between the Stock Market And Economic Growth
Analyst John Mauldin cites Crestmont Research’s Ed Easterling who argues “stock market is not correlated with economic growth”.
They say “secular bear markets even have higher nominal GDP growth than secular bulls”, with the chart below as proof…
And also say “34% of the years since 1950 with economic growth have experienced declining earnings per share (EPS) growth!” Again a series of chart below as proof…
I am puzzled.
If “low correlation” means economic growth has not functioned as a good indicator of the direction of the stockmarket price trends, then why the heck, do these experts keep talking about various aspects of “economic growth” at all? This is obviously a cognitive dissonance.
One factor for the insistence of the “economic growth” conversation could be that they don’t agree with the referenced opinion.
A second factor could be entertainment value. Experts write to entertain more than to disseminate positive knowledge.
A third factor could be to use of such contrarian evidence as cover to their earlier misdiagnosis of the markets and the attendant mistakes in prediction.
Finally this could all be about social signalling.
Yet this just goes to show how more and more ‘experts’ appear to be getting lost or confused about what’s been going on. In other words, traditional methodologies and metrics are becoming more dysfunctional.
And all this provides more credence to what I’ve been saying all along.
Sunday, March 06, 2011
Knowledge Acquisition: The Importance of Information Sourcing and Quality
“The Pen Is Mightier Than The Sword”- coined by Edward Bulwer-Lytton English author, (also attributed to Dr. Jose P. Rizal)
Any serious or prudent investors in the financial markets would normally try to look for ways to improve on one’s returns. That’s if one recognizes what is workable and what isn’t. Thus, the main task of prudent investors in the financial markets is to screen information and theories and test them, and apply those that would seem as the most cogent, accordingly.
But again this isn’t true for many as returns might seem as a secondary importance. That’s because these economic agents obstinately adhere to biased or selectively chosen data (selective perception) which they interpret as applying to the whole (fallacy of composition), fixate on what is current (survivalship bias) while ignoring the rest, apply misleading definitions and embrace self contradictory and inconsistent theories.
I am just repeating what I said before. Sometimes it takes a deluge of information before the message sinks in.
Ignorance versus foolishness
Ignorance is one thing, foolishness is another. People who fail based on ignorance could be looked upon with compassion. They perhaps hardly knew of the consequences of their actions, which were most likely guided by wrong quality or sources of information.
But it’s different when people lose despite being informed or forewarned. This may be called as doggedness or practising financial religion.
For instance, when people refuse to heed of the inherent risks of conflict of interests that may arise among interacting agents[1], they are likely to fall into the Agency problem trap. Information embellished with statistics and presented as facts could mislead investors. It’s clearly an intangible or unseen risk, that’s because investors are likely to be unaware of the underlying incentives behind these presentations, which may shape or influence the way we think and how we allocate our resources.
And for non-exclusive reasons, boom-bust cycle happens because of information too. Credit fuels greed which impels people to look for information that would confirm on their preconceived notions. Bias, thereby, seeks information or analysis which performs the way dopamine functions, to serve the pleasure centers. So like drugs, misleading information will always have a market.
Also, in as much as price distortions from government policies affect the way people think, these are likewise exhibited through literatures. That’s because the mainstream usually focuses on the symptoms which are read as the cause and transmitted to the public as valid information or facts. This is also because mainstream information caters to short term orientation. In short, boom bust cycles occur also when people gorge on too much of false information.
Stakeholder’s Problem, If Birds Can Write
Most have been unwittingly seduced to the oversimplification of reading current events into market prices, for the reason that being wrong may have little consequence to them. In short, it’s usually a stakeholder’s dilemma or stakeholder’s problem[2]—where the incentives to secure knowledge are driven by the degree of stakeholdings.
Take for instance, a person who dabbles with the stock market, as sideline or for entertainment, will likely have a lesser intensity of incentives to acquire knowledge relative to an individual who lives by the stock market. The latter’s perceived risk factor is greater than the former who has other lines of revenues.
The varying situational incentives, thus, become crucial factors in determining knowledge acquisition.
Yet luck also plays a crucial role. Because no matter how wrong one’s ideas can be, for as long as such errors are made on the side of the general trend where the market is headed, market trends eventually remedies on such errors. And as a result, false ideas could lead to a self-attribution or self serving bias which according to Wikipedia.org[3], people attribute their successes to internal or personal factors but attribute their failures to situational factors beyond their control.
And this also applies even in academics, where wrong models can be seen as “workable”.
Prodigious author of the bestselling book, the Black Swan, Mr. Nassim Taleb writes of a marvellous example of in his forthcoming book[4],
Think of the following event. A collection of priestly persons from Harvard or some such place lecture birds how to fly. The bird flies. They write books, articles, and reports that in fact the bird has obeyed them, an impeccable causal link. They even believe their own theories. Birds write no such books, conceivably because they are birds, so we never get their side of the story. Meanwhile, the priests broadcast theirs.
Behind Media’s Altruisms And Biased Information
And as stated above, the quality and source of information matters.
The most likely source of information are usually the popular ones, such as mainstream media. They cater too our brain’s desire to get fed with visible, emotional, sensational, shocking or graphic linkages.
Take for instance, in the event of a disaster, media routinely appeals to the public to ask for donations. They appeal to the emotions by advocating charity work for the unfortunate victims. Media outfits create an aura where they are seen as doing purely social work. They become instantaneous heroes especially when celebrities lead them.
But this is only half true, what’s not seen is that by connecting to the public’s emotions and wallets they increase viewership on their medium. And the key to their revenues—advertisement—largely depends on the number of audiences. So media’s missives have almost always been attuned towards winning the public’s viewership. It’s like politics in a private format.
Thus for media, intention can be interpreted two ways, social work to help the community or self interests camouflaged by altruism.
In covering political philosophy, this is the same manner why socialism sells, it appeals to emotional center of the brain but are bereft of how “intentions” parlay into reality.
In terms of investment, it’s also the been same. Most people are continually deceived by information aired or disseminated by the media and their cohorts of experts, which for most instances have little value or are irrelevant.
As Rolf Dobelli writes[5],
Out of the approximately 10,000 news stories you have read in the last 12 months, name one that – because you consumed it – allowed you to make a better decision about a serious matter affecting your life, your career, your business – compared to what you would have known if you hadn’t swallowed that morsel of news.
The point is: the consumption of news is irrelevant to the forces that really matter in your life. At its best, it is entertaining, but it is still irrelevant.
Bottom line: information is vital to one’s decision making process, whether applied to the financial markets or in many other vital aspects of life.
The beauty of today’s technological advances is that information is not restricted or centralized but operates from a free market competitive environment.
And I am just part of the multitude of lowly voices here in the cyberspace trying to speak out what I see as true.
And unknown to most, revolutions begins with ideas.
[1] See Dealing With Financial Market Information, February 27, 2010
[2] See Philippine Elections: Why I Will Vote For President "None Of The Above”, May 5, 2010
[3] Wikipedia.org, Self-serving bias
[4] Taleb, Nassim Nicolas, Birds Do Not Write Books on Birds, Chapter 8, Anti Fragility
[5] Dobelli Rolf Avoid News, Towards a Healthy News Diet Dobelli.com (hat tip Bryan Caplan)
Monday, February 28, 2011
Another Example Of Financial Market-Real World Disconnect
People like to believe what they want to believe. Well, they are free to do so.
Here is another example of the blatant disconnect between the stock market and GDP. All charts from Tradingeconomics.com
Venezuela has still been in a recession but her stock market continues to climb.
Believing in the infallibility of conventional wisdom can mislead. Unknown to many, negative knowledge is a risk.
Sunday, February 20, 2011
Resurgent Gold Equals Resurgent Emerging Market Bourses?
By the way, full employment was one of the main justifications for the Reichsbank's inflationist monetary policies. So nothing has changed. Central bankers still believe that monetary policy can lower the unemployment rate. Patrick Barron The Nightmare of 1923 and Its Cause
Don’t look now, but gold is surging right back! (I have to wait for a successful test of 1,430 before I could blurt out ‘I told you so’[1])
If gold is surging right back, then it is likely that global equity markets will follow gold’s path. And this includes the Philippine Phisix.
Figure 1: Stockcharts.com: Phisix-Gold
We’ve been saying that gold has been a reliable barometer of the equity markets.
As you can see in figure 1, gold (black line main window) seems highly correlated with the actions of the Phisix (candle chart main window), as well as with the movements of key emerging markets as the BRIC (Brazil, Russia, India and China via BKF) as well as ASEAN equities (via FSEAX).
However such correlation doesn’t imply causation. The link between gold and emerging markets can be traced to concerted monetary inflationism by global central banks most especially by the Fed’s QE programs.
And places which were said to suffer from the risks of deflation, as the US[2], UK[3] or Euro[4], have actually been experiencing the opposite—inflation has begun to seep in and has even been accelerating.
Earlier, mainstream had been telling us that inflation wouldn’t be a factor. How consistently ‘spectacularly’ wrong they have been[5].
Inflation hasn’t just been manifested in the asset markets but has also been spreading throughout the commodity space (see figure 2).
Figure 2: Price Shocks in Food and $100 Brent Crude (sources: Danske Bank[6] and tradingeconomics[7])
Some in mainstream media has pointed to the soaring food and energy prices[8] as representing effects of the unfolding political events in the Middle East and Africa.
However the causation has, in fact, been the opposite—the unintended effects of the cocktail mix of monetary, fiscal and administrative policies of global governments has caused a widespread boom (signs of crack up boom) in commodity prices that has partly added to the public’s political discontent which have led to the spate of unrest in many countries. While rising food and energy prices has functioned as trigger, there are deeper underlying problems from which has caused the public to vent their dissatisfaction.
Concerns of the risks of supply shocks represent as only ‘secondary’ effects or as a feedback mechanism from the main cause—government inflationist policies.
The False Allure Of Negative Knowledge
This reminds me of Nassim Nicolas Taleb’s “Subtractive Prophecy” knowledge theory where the knowledge of the consensus can be characterized as generally “negative”.
Mr. Taleb’s proposition holds that (from his forthcoming “must buy” book-AntiFragility[9]): [bold emphasis mine]
we know a lot more what is wrong than what is right, or, phrased according to the fragile/robust classification, negative knowledge (what is wrong, what does not work) is more robust to error than positive knowledge (what is right, what works). So knowledge grows by subtraction, a lot more than addition —given that what we know today might turn out to be wrong but what we know to be wrong cannot turn out to be right, at least not easily.
Mr. Taleb’s negative knowledge theory melds with my own when I alluded to why many celebrity gurus remain highly popular[10] despite being constantly ‘spectacularly’ wrong on their predictions—the public may not all be concerned with what really works but espouses on what may seem as the traditionally or conventionally accepted wisdom. Peer pressure, or the informational bandwagon, seems to be the single most influential factor in disseminating ‘negative knowledge’.
In addition, a secondary factor could one of projecting the acquisition of ‘positive knowledge’ built around empiricism modelled through scientism or as Professor Russ Roberts writes[11], “the use of the language and tools of science to reach a conclusion that is not merited”.
In short, scientism could signify a form of social signalling aimed at exhibiting one’s intellectual prowess through math based models.
Or simply said, the desire to build self esteem or social capital by projecting themselves as intellectuals. Thus, much of mainstream’s actions have hardly been about the quest to achieve positive knowledge, instead they are focused on sprucing up image or reputation for the intent of social interactions.
As prudent investors our main concern should not be about what is conventionally accepted, but about being right, and importantly, what works. That’s because return of investments depend on ‘positive knowledge’ rather than the false allure or the wishful thinking from a top-down engineered social utopianism.
Soaring Gold Investment ‘Reservation’ Demand
It is important to also point out that as we have been predicting[12], the demand composition for gold has been shifting from a typical commodity to one of money, and this has been represented by the substantial expansion of ‘investment’ demand (figure 3).
Figure 3: US Global Investors[13]: Changing Composition of Gold’s Demand
Investment demand for gold leapt 70% in 2011 with China as a big factor in the demand growth.
According to this Bloomberg report[14],
Investment demand in 2010 jumped 70 percent and consumption by the jewelery sector gained to a record, it said. Investment was 179.9 metric tons, surpassing Germany and the U.S., as buyers sought out gold bars and coins, according the London- based industry group. Demand from the jewelry sector was 400 tons, it said....
Chinese investors have shown great enthusiasm amid lack of other alternative investments,” Wang Lixin, China representative for the council, said today in Beijing. Wang said the forecast was a “conservative estimate.”
As for the supposed reasons for such growth in demand, the same Bloomberg article quotes a report from the World Gold Council...
“The main motivation behind this demand has been concern over domestic inflation pressure and poor performance of alternative investments, combined with expectations of further gold price gains,” the council said in a report released today.
Again the report only further confirms what we have repeatedly been talking about—a shift of gold’s demand dynamics to one of ‘reservation demand’. As I previously wrote[15],
“money’s “store of value” is increasingly being factored into gold prices (unit of account). Hence, relative to gold pricing, this implies that reservation dynamics or the reservation model (and not consumption model) determines gold valuations or that the exchange ratio or monetary valuations relative to fiat currency applies-- where valuations are determined by the expected changes in relationship between the relative quantity of, and the demand for, gold as money vis-a-vis paper currencies.”
So while jewellery still accounts for as the largest demand for gold, the gist would likely shift towards investments. Nevertheless, statistics can’t assimilate on what people actions represent.
Applied to gold, people can buy jewellery not only for aesthetics or for ornamental purposes, but also as investments.
Official Buying And Monetary Stablization
Figure 4: WGC: Official Purchases First Time in 21 Years
It hasn’t been only the man on streets and the financial markets whom has contributed to a surge in the demand for gold. Governments, perhaps, may have equally been afraid of their own shadows and have begun to stockpile.
In 2010, the official sector, writes the World Gold Council[16], became a net buyer of gold for the first time in 21 years. (see figure 4)
Two factors seem to bear this out, one emerging markets became significant net buyers and secondly, Europe, with significant gold holdings, has greatly reduced their traditional sales activities.
The end in the streak of official selling, should serve as a pellucid and practical example of the error prone predictive value of rigidly relying on statistics and or on the anchoring effect (linear expectations) of past performances. Numbers cannot and will not substitute for people’s actions (this includes the government, who are also comprised of individuals).
As to whether the shift in the attitudes of some governments as reflected by their gold buying patterns would parlay into prospective policies would be another matter.
Yet unless governments act in the way a gold standard is in place (which is to severely downsize on the welfare state and various forms of political economic interventionism), or that government democratizes the banking system to allow for mass competition (by dismantling the banking cartel structure), we are not likely to see governments stabilize the monetary system soon. Adjustments will likely happen at the brink of or during a crisis or what I would call the Mises Moment.
That’s because central banks can always surreptitiously work for the state’s political agenda camouflaged by the esoteric nature of the operations of central banking.
In the fitting and resonant words of Henry Ford,
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
So while the fiscal side of governments may be scrutinized by a vigilant public over the perceived profligacy of a government, central banks actions can and will likely substitute for such a loss.
In the US the Federal Reserve’s recent actions appear to reflect on this.
Fund manager Axel Merk glibly explains[17],
Many of the Fed’s policies since the onset of the financial crisis have not been traditional monetary policies: a central bank usually applies a very broad brush in managing economic growth by controlling levers such as interest rates or money supply. However, when the Fed, for example, bought mortgage-backed securities (MBS), it steered money to a specific sector of the economy. That’s fiscal, not monetary policy, traditionally reserved for elected policy makers in Congress. Just like the MBS program, many of the Fed’s policies continue to appear to be attempts at addressing the “shortcomings” of Congress.
In short, what the Congress cannot do, the central bank can.
So any talk of monetary stability should translate to the reining of the actions of central banks or to a more radical extent—abolishing the central banking platform.
Alternatively this also means that given the absence of popular discontent with central banking, the monetary skulduggery can and will likely go on, in spite of globalization or the internet.
Thus, like all price trends, gold will not go up on a straight line but will sporadically encounter severe headwinds, as seen in the previous months.
Nevertheless, the general trend for gold is that it will continually move higher, and most importantly, increasingly assimilate more of money’s characteristics in the face of the persistent central bank manipulation of the monetary system coupled with competitive debasement for political goals.
Even in the political front we seem to be seeing the evolution of gold as money gain significant ground.
I mentioned earlier the World Bank Chief Robert Zoellig[18] has called for the inclusion of gold in monetary reforms. This seems to be shared too by Kansas Federal Reserve President Thomas Hoenig[19] whereby Mr. Hoenig says gold standard is "legitimate”. And so with 10 US states which had “introduced bills in the past few years to allow state commerce to be conducted with gold and silver.[20]”
Moreover, there has been NO fear factor or fear premium in gold[21] as the vicissitudes (rise and fall) of gold prices has been along with risk assets.
To stubbornly insist on this is to put misplaced belief rather than acting on the basis of evidence required for any serious examination.
Having said so, with the momentum of gold seemingly regaining the upside path, we are likely to see a similar price inflation on equity assets as gold and equity prices have shown strong correlations.
This is most likely to be seen on many emerging market bourses that has started the year on the wrong side of the fence.
The Philippine Phisix included.
[1] See Gold Fundamentals Remain Positive, January 31, 2011
[2] Wall Street Journal, Deja Deflation Fear, February 18, 2011
[3] bbc.co.uk UK inflation rate rises ‘hitting savers’, February 15, 2011
[4] Bloomberg.com Trichet Says ECB Doesn’t Exclude Possibility of Inflation Risks, February 19, 2011
[5] See Inflation Expectations: The Widening Chasm Between Households And Experts, February 12, 2011
[6] Danske Bank, Inflation so far not a risk to growth February 17, 2011
[7] Tradingeconomics.com, Brent Crude
[8] Bloomberg.com Brent Crude Trades Near Two-Year High on Mideast Supply Concern, February 17, 2010
[9] Taleb Nassim Nicolas Anti Fragility, How To Live In A World We Don’t Understand, Chapter 5, How (NOT) To Be A Prophet fooledbyrandomenss.com
[10] See Explaining Popularity In Terms of Predictions: Dr. Nouriel Roubini’s Case, February 17, 2011
[11] Roberts Russ Scientism, Cafe Hayek, January 10, 2011
[12] See Is Gold In A Bubble?, November 22, 2009
[13] US Global Investors, Investor Alert - February 18, 2011
[14] Bloomberg.com China 2011 Gold Investment May Jump 50%, Council Says, February 17, 2010
[15] See What Gold’s Latest Record Prices Mean, June 21, 2011
[16] World Gold Council, Gold Demand Trends Full year 2010
[17] Merk Axel, Politics of Inflation, safehaven.com February 16, 2011
[18] See World Bank Chief Robert Zoellig: Bring Gold Back As Part Of The New Monetary Order, November 9, 2010
[19] Reuters.com Fed's Hoenig says gold standard "legitimate", January 5, 2011
[20] TPMDC, At Least 10 States Have Introduced Gold Coins-As-Currency Bills, January 5, 2011
[21] See Four Reasons Why ‘Fear’ In Gold Prices Is A Fallacy, April 26, 2009