October 7, 2011


Three friends stand looking at a black widow spider arguing whether or not she is poisonous. One friend insists the spider is filled with venom, another says that’s crazy, that the spider is in no way a danger to any of them. The third feels agnostic about the whole spider thing and reaches down to pick it up. The spider bites his hand and almost immediately he becomes deathly ill. The man’s friends rush him to the Emergency Room.


What is the moral of this story? Reality trumps opinion.


In the never ending attempt to predict where the markets and the economy are going many methods are used. Despite swearing by their charts and trend lines, chartists disagree with one another about the future as often as those who disregard  graphs and diagrams altogether. Other analysts put their ear to the ground and bank on consensus. But if the entire group of friends had been in 100% agreement about the black widow being harmless, there may have been no one to drive the car to the hospital.


There are those that look at the world, and those that look at what others think about the world. The novelist and philosopher Ayn Rand, one of the most influential thinkers of our time, said the key to understanding the nature of things is to have an “unobstructed” view of reality. To do this one has to eliminate obstructing factors and focus on the essential ones. Just listening to other’s opinions is no confirmation of reality. Firsthand reality is clarified only when one concentrates on facts they have personally verified. And when contradictions are encountered—they must be resolved. Contradictions cannot exist in reality.


My economics combine the metaphysics of Aristotle with the subjective theory of value as espoused by Ludwig von Mises.  Aristotle asserted simply that existence exists: A is A. He also maintained that it is possible for man to identify reality. In other words, Aristotle believed the world is objective and intelligible. Von Mises held that markets move because of human action based on their individual values and perceptions of reality.  He knew that while people are often wrong, and markets with them, people are nevertheless the cause of direction in markets—right or wrong.


Both men investigated reality directly, and are correct.  In the short-term markets can be wrong, because people often ignore or misinterpret reality. But long-term, markets always adjust and expose reality.  The key is to distinguish the reality from opinion, if and when possible even before the market catches up.


To forecast correctly one must clearly identify long-term reality while keeping one eye on human action at that moment. While no forecaster can be right all the time, a very good forecaster will be correct 60 to 70% of the time month after month and year after year. A lot has to happen to achieve this, including quickly identifying mistakes, correcting them, and moving forward with the corrected information. The first requirement for accurate forecasting is the ability to change ones mind.


So how is it that some “forecasters” have been predicting an inflationary depression for years, or never tire of prophesying about an imminent and severe deflationary depression? What about those who say the Dow Jones will crash to 5000 or that monetary and economic collapse is inevitable with gold at $5,000 or more? Most of these predictors have been staring into the same unchanging crystal balls for at least a decade. (See my article The Perma-Bears in the archives.)


I said before, there is nothing wrong with making mistakes. Mistakes are natural and inevitable.  It’s impossible not to make mistakes. But to espouse theories month after month, year after year, with no regard for what is actually happening in the real world around you is a sin; it is the sin of evasion. Those predicting Armageddon may eventually be right, yet they cannot be trusted. Their dogma prevents them from adjusting their reality during good times and bad. The world changes but not their views. For perma-bears and bulls—the world revolves around their opinions—rather than the reverse!
Being right once in a while each year is not a very good track record. It is testimony to the people who have such a record that they will never allow facts to get in the way of their theories. I liken it to their posting a perpetual notice on their corner store’s front door: "Free Beer Tomorrow.” Tomorrow never comes. The promise of free beer is made over and over, but it is an elusive reality. Yet this is the very illusion that the public buys en masse.


Some of these forecasters made one good call that made them correct about things for a few months.  Often these are the individuals held up as gurus. Real credit should go to those that are correct at least 60-70% of the time year after year. Yet it’s the “prophets” who make so many dramatic calls that, every so often one of them has to be right so they get the fame. The consistently accurate forecaster who refuses to ignore the facts and how it will shape the future is discarded as boring, and ironically “unrealistic.”  The problem with that of course is that a guru who is right less than half the time is no guru at all.


Consider this the next time you hear that the dollar is going to crash while it is rising, that the U.S. will lose its reserve currency status as the world is clamoring for the safety of dollars, that interest rates are about to go sky high as they are falling, that we are in for hyper-inflation or massive deflation as the price index moves in a narrow range.  Check the facts around you when you hear that gold is going down to $250 or up to $10,000 an ounce; that we are on the brink of a failed monetary system, a failed economy, that we are headed for a great depression as the banking system collapses and implodes on itself.


Whenever you hear these prophecies check the record of those predicting them and see how many of their predictions came true over a specified period of time. If they have indeed managed to be right significantly more often than they’ve been wrong, you might want to consider heading for the hills. But even more important, conduct your own due diligence. Only in this way will you obtain your own personal unobstructed view of reality.


Post Script:


As I’m sure you’ve heard, Steve Jobs of Apple died this week.  A lot of what I just wrote had to do with thinking outside of the box.  Steve Jobs was such a person.  He was a first-hander.  He had an unobstructed view of reality and used it.  He was our Edison.  In each century there are only a few individuals that have this kind of vision.  Disney, Rand, Einstein, and Jobs, are among those that immediately pop to mind. We have lost one of the true visionaries of our time.  A chapter of individual achievement has been closed.

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