Investing in a Post-Fact Society (a/k/a, Were the Good Times a Mirage?)
One of the concerns we have expressed here over the years is that there was much more -- and less -- to the post 2001 recession recovery than met the eye.
Several years ago, this was a controversial position. We first suspected we were on to something, however, when the many critics of this view found it much easier to use epithets (negative, naysayer, perma-bear) than to do the credible critiques of our positions, or any kind of critical analysis. It reminded me of an old lawyer's joke: "When the facts go against you, stress the law; when the law is against you, emphasis the facts; when your case has both the law and the facts against it, call the other lawyer an asshole."
As of March 22, we are still in the early stages of any sort of
widespread understanding about this post-recession recovery cycle. Many
people are just starting to realize how much fertilizer has been spread
around.
Many of the stated economic gains have been a false ghost. Whether it was overstated job creation (NFP), understated inflation (CPI) or "inflated" growth (GDP), a shocking amount of the debate about the economic expansion has been primarily spin.
That's what attracted me to this book by Farhad Manjoo: Learning to Live in a Post-Fact Society. That such a book is even necessary boggles the mind. Consider the myriads of benefits and standards of living improvements we have seen from the reality-based community -- and by that, I mean Scientists (Physicists, Biologists, Medical Doctors) and Engineers (Technology, materials and mechanical). Why so many people would turn their backs on this belief system leads me to Arthur C. Clarke's 3rd law: "Any sufficiently advanced technology is indistinguishable from magic."
While a "Post-fact society" might being intellectually appealing for the slavish followers of a given political or religious order, the same philosophical approach invariably proves very costly for investors -- if not financially fatal.
Consider these elements that are of interest to investors:
1) What objective reality is;
2) The variant perception: What the widespread belief system is versus this objective reality;
3) How far these two are out of alignment;
4) And most importantly to Traders, when the variant view recognizes its error and embraces either a more realistic, or an even more fantastic, view on reality.
For example, as weak as many of the traditional metrics have actually been, some sectors of the economy have enjoyed strong legitimate gains: Everything energy related has been on fire for at least half a decade; the entire agricultural explosion has been for real; all things China related have enjoyed strong growth (tho it certainly became frothy this past year). Metals and Miners have done well, and Transports have had a terrific run, be they rails or shipping. If the economy was truly strong and healthy, these sectors would be ones to avoid.
Consider also the US industrials -- they boomed courtesy of a weak dollar (not healthy) and improved production management (very healthy). What is being called Web 2.0 is seeing genuine innovations, functional business models, and increasing significance in the economy (also healthy).
If you correctly identified where things were healthy or not, the right themes before the crowd caught on, there was plenty of financial gains to be had.
Philosophically, I want to explore -- beyond the legitimate gains mentioned above -- a nagging question about the spin and artifice. Why have we as a nation been increasingly reluctant to confront objective reality? What is it about the present social mood, political leadership, and economic environment that has so totally led us to a world of denial? Up is down, black is white, good is bad -- its all very Orwellian.
One of the world's great cautionary lessons are the significant contributions made towards mathematics by the Islamic Arab Empire, circa 8th century to 15th century. While European intellectual progress had ceased -- blame the rise of church extremism -- enormous gains were being had elsewhere. Sometime around 18th or 19th centuries, the cultural roles seem to reverse. After the Age of Enlightenment, the Europeans rejected religious extremism, and prospered, while the Arab Empire embraced extremism, and suffered -- at least until the discover of Crude Oil. There are societal lessons to be learned from this.
I have long railed against superficial headline data that belied the weakness underneath. There were a parade of syncophants and cheerleaders who, despite knowing better, continued to cheerlead punk data. These pundits, politicos and pinheads are now confronting the ugly reality they can no longer ignore. Consider the progression the motley crew of fools and liars went through: First they denied what was happening, then we got the whole contained thingie, then they blamed da Bears. Now, they have unwittingly embraced Marx, and have successfully pled for the central planners to rescue them from their own stupidity.
~~~
Here's my question: Are we stuck with these fantasists? Has Truthiness replaced Truth? Are we going to be saddled forever with these damaging, hallucinatory hacks?
>
Source:
Worries That the Good Times Were a Mirage
DAVID LEONHARDT
NYT, January 23, 2008
http://www.nytimes.com/2008/01/23/business/23leonhardt.html
Saturday, March 22, 2008 | 09:43 AM | Permalink
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Never underestimate the absolute power of lazy and stupid. Animal house isn't only a movie, it's a role model and a metaphor.
This is another book for my reading list.
Can you recommend a book that describes modern day credit as it is actually applied, as opposed to college texts that describe the perfect world. I want to get a better feel for runaway credit, as opposed to money and banking.
Posted by: cinefoz | Mar 22, 2008 10:04:09 AM
We are social creatures, and we soak up or align our beliefs with our "group" much more than we admit.
I think that means cultural norms can reinforce themselves in any direction. Sadly, growth through debt and consumption was the direction "found."
Part of it certainly is that debt and consumption are so well marketed. They were long before daytime financial television start pushing "trading" to the group.
If you let the message wash over you, you will borrow, spend, and day-trade for profit (house-flipping is now off the list).
Posted by: odograph | Mar 22, 2008 10:08:17 AM
Barry,
Your observations about truth this morning are sobering. There really is only one truth, the one supported by facts.
Thanks for the lifeline to reality,
Phil Smith
Posted by: Phil Smith | Mar 22, 2008 10:13:21 AM
"despite knowing better'. I'm assuming you are referring to certain parties in the main stream media who, for the sake of their wives and families, should remain nameless.
How will these people regain credability or do they even need to? One person who comes to mind who I believe has successfully re-established his Street Creds so to speak is Joe Batapaglia.
I recall his cheerleading the 'new economy' bubble of the late 90's up to the seeming recovery from 03. He is a big guy and held BIG yet incorrect opinions. Whatever caused his conversion to reality remains a mystery but in recent years, his thought process and logic have returned to sobriety. I applaud him.
It is said a smart man learns from his mistakes. Also that a really really really smart man learns from watching the mistakes of others.
All in all, a thought provoking post for a lazy morning on the farm.
Posted by: Ross | Mar 22, 2008 10:13:36 AM
When Bush called Greenspan to the WH in the days after 911 I knew for a fact that we were in for "something special". Now true, the collapse of the travel industry, combined with the social mood, was going to have enormous effects but they were damned if they were going to let bin Laden accomplish in fact what he only set out to do symbolically: destroy our financial empire. Sadly, we seem set on doing it ourselves.
Posted by: MarkM | Mar 22, 2008 10:17:10 AM
The unwillingness to go against "authority", and the unwillingness to go against the crowd, coupled with the demonization of those who do (by both the authorities and the crowd), and crowned by the human propensity towards hubris (it's what I believe, so it must be true, because my decisions are right, the facts must be wrong).
The first part of the above statement have lead to the term "sheeple". The second part - hubris - is why some people follow a losing stock all the way to the bottom.
Hopefully, there's a dollar left to be made off of this scenario or its collapse.
Posted by: Marcus Aurelius | Mar 22, 2008 10:18:16 AM
Agree with cinefoz. I would add that mediocrity is the religion of the day, from The Simpsons to Brittany to the argument of Oil dependence somehow being turned into a discussion about global warming....to the Prez's adept language skills. It doesn't matter where you look in this nation - excellence is dead!!! Get-r-done is vogue. I would also add that this current administration has taken laissez fair to be the French for a big Lazy Fair and has essentially reinvented the wild west in the 21st century for themselves.
All of this mis-information is just a way of making it a feel better than it is, again to borrow The Simpsons - this is a chronic condition with that bunch. Everything is going to be OK. Its good enough. You did your best honey and that is all that matters.
We are diseased by a hipness and coolness that has somehow infected our culture that says: Doing things really well, over-achieving, being great, aiming high ain't kwel man!
Posted by: Matt | Mar 22, 2008 10:19:21 AM
Denial of the rational doesn't require an education but it does require fear and greed. I've had many confounding arguments with professionals over the years who have proposed solutions and opportunities who have failed to see their emperor has no clothes. It's the "esoteric-ness" of the proof (the lawyer's facts) that only few understand, or are willing to research, that make it hard for the priests of lies to comprehend. Intellectual laziness, fear of the "law", and a desire to be beholden to or bedazzled by some new "law" (lie) are also impediments to rationality.
I've seen this in the technical, quantitative, and financial fields for over 20 years. And when you kindly point out in detail the weakness of their opinions, it rapidly becomes strident. The bearer of the facts becomes da-bear and in corporate environments often becomes sequestered until called in for da-rescue.
Advice: da-rescue is best served cold.
Cheers
Posted by: teraflop | Mar 22, 2008 10:23:05 AM
It is my view that the issue you raise is the primary one facing this culture, most of our problems can be attributed to it. Whether it be presidents making up information and using that to launch wars of aggression *and not ever being held accountable for the act*, to 'news' that is deliberately fact free, indeed overtly manipulative of facts in order to support pre-established positions, to (worst of all) the large crowd that cheers this process on, the culture has clearly moved into a phase not unlike the novel 1984. Indeed it seems to this observer that our policies have long since ceased to be about anything other than creating power bases for politicians and maintaining the power of wealthy individuals (not actually corporations, interestingly enough, rather the individual who run them, and profit from them regardless of actual corporate performance).
So your question is most relevent: will it continue? I don't have fixed opinion. It seems likely. Cultural trends don't turn on a dime. And consider this: in any system if leaders choose to seal themselves off from real knowledge the system will enable that. We have a tradition (or had) of regarding this as 'bad leadership', 'killing the messenger' etc. However, in a free market/democratic system the real leaders in a sense are the people at large, the public. But how many people have the kind of wisdom it takes to be a good leader, particularly if the crowd is running the other way? How do you sell more newspapers, telling the public that they are failing to be alert to the manipulations around them, or telling the public that they are lilly white and it's always 'someone's fault', the 'bad guys'? Answer seems obvious. So, we have an endless parade of societal problems, and endless parade of 'blame' -- the media, the politicians, big business, 'bad apples', 'The evil doers', 'islamofascists'. It's never us. It's never 50 years of destabilizing foreign societies with military power instead of telling the little bushes that they can't have anymore coke. It's never our fault, always someone elses.
Sounds like bad leaders to me. And bad leaders eventually fall. Is democracy going to last? How about 'free markets'? hmmm.
Well, maybe people will figure it out. But they'll have to start shouldering some responsibility, instead of being so focused on getting power/money.
Posted by: VoiceFromTheWilderness | Mar 22, 2008 10:23:06 AM
With the proliferation and crippling over-abundance of information sources, the "noise" is louder than ever and it is getting louder. The quality of information is lower because there are more ways to make money via cable news, blogs, and various internet mediums.
I know Barry is familiar with these words:
"... in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it." Herbert Simon
Posted by: The Financial Philosopher | Mar 22, 2008 10:28:17 AM
Man, I'll give Kudlow a break on this one....
"What is it about the present social mood, political leadership, and economic environment that has so totally led us to a world of denial? Up is down, black is white, good is bad -- its all very Orwellian."
I recall being told, after 9/11, by "Shep" of Fox News to "fight terrorism by going to the mall and buying that suit 'I' wanted." A lot of people went and bought things and it turns out they didn't have the money to do it. We had one of the shallowist recessions because people loaded on the debt. Now what?
Posted by: Chief Tomahawk | Mar 22, 2008 10:31:14 AM
I agree, I think superficial data is cherry picked to get the message about that benefits the communicating group of government body best. When this can't be done lesser known obscure statistics are used to reassure people that the sky is really not falling.
Posted by: Richard Wilson, Hedge Fund Consultant | Mar 22, 2008 10:32:57 AM
IMHO, our nation and largely the world has always been filled with people reluctant to confront reality and people willing to profit from that condition. Perhaps we're recognizing the misalignment between reality and variant perception because in the internet age, an educated person can so easily and quickly identify this disconnect from reality. I actually have sincere hope for the future because I foresee a market evolving for accuracy in the information age as more and more people communicate worldwide. It's a necessary evolution in the infoage.
Posted by: Camille | Mar 22, 2008 10:35:01 AM
I think something additional is going on here--it is an expansion of campaigning to all aspects of public discussion. Most public discourse is completely predictable based upon which "team" the speaker is on, supporting facts are stressed, or overstressed, or fabricated and conflicting facts are spun or denied. Even people who should (and probably do) know better participate. There is a whole industry of think tanks devoted to confusing people on behalf of specific interests.
Most people can't spend enough time on this stuff to see through the "information fog", so it is unsurprising people have no idea what is going on.
Perhaps some kind of mediating institutions will evolve to help people deal with this, but the existing media mostly don't.
Posted by: matt wilbert | Mar 22, 2008 10:36:14 AM
Thomas Friedman says “The World is Flat” his way of saying we will have to compete on a more and more level playing field as time goes on. We have had the playing field tilted toward us, economically, ever since WW1 and as it tilts back toward flat we are going into denial, the truth is we will have to be better than the competitor to win. If we lie to ourselves we will not even be good enough to be competent. Old values like hard work, delayed gratification and thrift will win the day. We better figure out how to encourage them here! Lying about the situation has not been helpful but those responsible for delivering the message are rightfully afraid of the crowd’s response if they tell the truth. I expect we will continue to be lied to until we actually want to know the truth!
Posted by: miller | Mar 22, 2008 10:37:43 AM
Were the Good Times a Mirage?
Yes for the USA but not for the Oasis Economies
http://www.strategy-business.com/press/article/08105?gko=d6c06-1876-26698132
by Joe Saddi, Karim Sabbagh, and Richard Shediac
Surrounded by tension and unnoticed by many observers, the nations of the Middle East are building their own kind of sustainable prosperity.
Five years ago, Dubai’s Palm Island didn’t exist. Where there are now three human-made land masses — the largest the size of a major city — arranged in the shape of a tree, five years ago there was merely the sparkling blue water of the Arabian Gulf. Then the government of Dubai decided to accelerate the diversification of its economy, from a purely oil- and trade-based system to a business and recreation hub designed to lure investors and tourists.
A few miles south, Abu Dhabi, the capital of the United Arab Emirates (UAE) and the world’s wealthiest city, is experiencing an even more dizzying rate of growth. The US$3 billion, gold-domed Emirates Palace hotel was completed in 2005, ready to welcome visitors to the scores of world-class museums, universities, and hospitals that are slated for construction, at an estimated cost of $200 billion over the next 10 years. These fast-paced developments are part of the UAE’s reinvention of itself as the cosmopolitan crossroads of a sleek new Middle East.
All this is one piece of a still broader story. In the past five years, the Middle East region has consistently been transforming into a hotbed of new private enterprise. The government-controlled monopolies of the past, such as the Saudi Telecommunications Company, are being deregulated and exposed to competition. Research and development in high technology is booming; enterprise zones have attracted the likes of Hewlett-Packard, Cisco Systems, and Microsoft. Local companies are investing in streaming video and other technological applications. Manufacturing, too, is on the rise. Driven in part by growing demand from China, the region’s petrochemical sector is exploding, with more than 190 projects currently operating across the Gulf; its $28 billion biotechnology and pharmaceutical manufacturing industry has enjoyed double-digit growth each year. Many consumer packaged goods companies are opening factories in the region, in part to serve its growing middle class and in part to export goods to Europe and the rest of Asia. In short, the region — once an end consumer in the world market — has begun to transform itself into a supplier. All of this translates into unprecedented opportunities for investment.
********************************
Connect the dots folks... this is where Dick Cheney will be retiring.
However, Bush will be off to his compound in Paraguay.
And the US middle class ( what's remaining of it ) will be holding the bag !
Posted by: km4 | Mar 22, 2008 10:38:05 AM
Irving Kristol summed it up best:
"There are different kinds of truths for different kinds of people. There are truths appropriate for children; truths that are appropriate for students; truths that are appropriate for educated adults; and truths that are appropriate for highly educated adults, and the notion that there should be one set of truths available to everyone is a modern democratic fallacy. It doesn't work."
It is arrogance, pure and simple. Only a few are fully equipped to handle the truth, so a lesser truth should be made available to the unwashed masses.
Orwellian, indeed.
"Fascism is capitalism in decay." - Vladimir Lenin
Posted by: Winston Munn | Mar 22, 2008 10:53:09 AM
[Quoth Barry]:
Are we going to be saddled forever with these damaging, hallucinatory hacks?
-------
For the moment, yes. Perhaps at some point they'll be replaced with better people (or more competent hacks), but as long as humans have their cognitive biases, succumb to logical fallacies, are enslaved to their broken ideologies and belief systems, then at some point a new set of damaging, hallucinatory hacks will come in to replace them.
We can continue to build better and better systems (the American experiment looks wonderful on paper - Constitution, Bill of Rights, Separation of Powers, etc.), but as long as people are willing to find ways around it, and others are willing to go along with it, this will happen.
"Fix" the human mind, and you won't have these problems. Till then, we're stuck.
Posted by: RNL | Mar 22, 2008 10:53:30 AM
Thanks, Barry. One of the things that keeps me coming back to your blog every day is that you ask the most interesting, thoughtful questions.
Posted by: merrill | Mar 22, 2008 10:55:05 AM
Post industrial revolutions have depended on the vilification and exile or murder of the intelligentsia. Germany, Russia, Cambodia - pick a revolution, and you'll find heaps of dead intellectuals who, for very good reasons, warned against it.
Anybody else noticed the swiftboating of science over the past decade?
The earth is only 6,000 years old. Intelligent design is scientifically valid. The earth is too big to pollute to death. The oceans have an endless bounty of cheap nutrition. Teri Schiavo is only sleeping the sleep of sweet dreams.
Oy.
Posted by: Marcus Aurelius | Mar 22, 2008 10:55:59 AM
Isn't this what happens in any bubble?
Posted by: Will | Mar 22, 2008 10:56:34 AM
In other news, Barron's sees DOW at 20,000 in a year:
http://www.alleyinsider.com/2008/3/dow_20_000_in_12_months
Posted by: RNL | Mar 22, 2008 10:57:37 AM
As a European, I have been repeatedly told by Americans friends and media that the US is superior on all fronts. Officially, US GDP and GDP growth was stronger than Europe's and has been for decades, which makes sense for anyone believing in free market economics. Therefore, I was surprised to see during my two years in the US (2000-2002) that Americans didn't appear particularly rich. Yes, the houses and cars where big, but generally of poor design and quality. The clothing worn, the food eaten, the furniture bought, the design and quality of most things I encountered were poor compared to what I was used to in Scandinavia.
My American MBA friends, most of whom had never been outside of the US, were so sure that the US was ahead on all accounts and always would be. At the same time, my European friends who earned less and paid more taxes had better clothes, better food, better drinks, better phones and electronics, better haircuts, better education, better most everything. And less debt.
There are so many variables that go into comparing countries. I have no idea if the US on average is really richer than the richest countries in Europe or the other way around. Unfortunately, this discussion is hardly ever based on facts, but purely on nationalism and ideology.
But I suspect too that America appeared richer than it really was by way of using steroids. The steroids being a strong dollar (at the time) which made the US look richer than it was, higher consumer leverage combined with falling interest rates, aggressive accounting, squeezing the poor and the middle class, windfalls (tax cuts, more aggressive offshoring) and incomparable employement and inflation statistics.
However, it is beginning to dawn on Americans that leverage and steroid use have to be reduced. It is my clear impression that Europeans are still being too optimistic. Americans may have more cleaning up to do than Europeans, but at least they are slowly getting started. The politicians though are equally clueless on both side of the pond.
Posted by: Michael M | Mar 22, 2008 10:58:26 AM
Although we are the most developed nation on earth, the BRIC nations will eventually eat our lunch - they won't surpass us, anymore than we have surpassed England, but IN REALATIVE TERMS, just by getting on par with us, gives them a financial feast. Therefore like any nervous and freightened animal we flee from our own logical thought processes, after all having our real-wages diminish while the BRIC nations increase, isn't a soothing thought. This is why the FED lets the money supply increase by allowing extreme leveraging, knowing that it is the only way the average-Joe, can spend and will unknowingly support the process. And of course the financial psydo-gurus in the media, play with their archaic metrics, thinking that it is game-on as usual.
Of course this massive asymetric build-up in real-wages, real-spending power, etc.,(ADVANTAGE BRIC), eventually creates a catasrophic financial earthquake, of which the Central Banks around the world think they can somehow stop. Fact is they are prolonging the process. I don't know about you but I'd rather cleanse the system with one cathartic swoosh and pick up the pieces, (which would more than likely get every one thinking (seeing) with, "eyes wide open," rather than having blinders on.) then practice "a death by a thousand cuts." The whole globe is part of the economic system now, and the sooner the powers that be work-out how the process can work the better - one central bank, perhaps and one currency.
Posted by: JustinTheSkeptic | Mar 22, 2008 11:05:08 AM
As long as the media continues to report "both sides", even though they know one side is without a factual basis, this will continue.
As long as the media goes back to the same folks who were wrong all along and ask what to do now, rather than ask the folks who were right, this will continue.
Posted by: edhopper | Mar 22, 2008 11:06:35 AM
