The Road Ahead: Nixon-Carter Redux? Part 3–Reprise

April 1st, 2010

Reading the future:  it has intrigued me for years.  I call it foresight, because I reject the idea of prediction.   Real-world movement is a jagged line, not a linear trend.

Maybe the jagged line that describes the stock markets is also the jagged line for business investment and prices.  Up, up, and up, then off a cliff; and then, slowly starting back up again.  If you draw a jagged line that reflects the market and then draw a straight line below the peaks and above the bottoms, you get a trend line.  The line shows upward trend.

So stay the course, they say.  Let us assume—and this assumption is often untrue in reality—that you have both the capital and the stomach for the jagged ride:  the capital, so you won’t run out of money before the market turns, and the stomach, so you won’t panic and forget that the trend is up even as the direction is temporarily down.  Even so, do we have to ride out the line?  That cliff does damage; confidence is broken, liquidity dries up, and asset values crash beyond all reason.  A strong stomach does not cure running out of money.

Returning to the jagged line, the question isn’t perfection of foresight.  If you get out in time, it must always be before you reach the cliff.  Getting back in will always is never comforting at the time.  Even those who get out in time find their stomach tested just the same when they buy back in.  When you buy toward a market bottom, you buy when the consensus is that stuff is broken.  Reasoned foresight doesn’t change the feeling in the pit of your stomach, it just helps you remember that it is a sensation of a problem, not an actual problem—unlike just riding that jagged line, which is an actual problem and the sensation always comes too late.

This jagged line is inevitable.  It is inevitability is made more extreme by the [arguably] well-intentioned hand of the government.  It is also inevitable that you will face a storm of criticism for profits forgone–profits that continue to pile up until the top.  But the criticism pales compared to the ire you will draw from some quarter for seeing and acting.  Many people’s dogma says there is something unfair about knowing something others could but didn’t,  and something even more than hateful about those who act on what they knew when others declare they too saw but were not in position to act.

At our meeting I drew that jagged line on the board.  It is intriguing to begin to construct the thinking, the math, and model for foresight. It was great fun.

Know this: the nature of foresight is to be always wrong (get out too soon, get back in not quite at the bottom), but wrong on the right side of the cliff.  Let me say, correct side of the cliff:  think of the jagged line, the right side is where it’s too late, the left side is where you’re wrong but a fraction as wrong as everyone else winds up being.

What bugs me, and has always bugged me, is the years of hard work that get tossed by riding off the cliff; years of work that because of the loss now will have to be followed by year more of hard work.

More on this next time.