The Three-Body Problem
December 21, 2017·4 comments·Money
The signals that guided investing for decades have disconnected from reality. Quality companies underperform junk. Strong governments borrow cheaper than weak ones. Yet the entire financial industry continues operating as if these relationships still hold. Something moved into the system and changed the game without anyone declaring it openly.
• The bet that quality companies would outperform has gone completely flat. A neutral long/short quality index returned almost nothing while the broader market tripled.
• Portugal and Italy were financial disasters in 2012, paying 9 percent and 4 percent premiums to borrow. Today, despite worse debt ratios, they pay less than the U.S. This shouldn't be possible if government quality still mattered.
• Central bank asset purchases of $20 trillion entered the system as a gravitational force so massive it's now drowning out everything else. The old signals didn't weaken. They got buried.
• The problem isn't that we don't know when the old patterns will matter again. The problem is we don't know if they ever will, or if the system itself has become something we can no longer predict.
• Investors are still searching historical data for patterns that will tell them what happens next. But in a truly chaotic system, the past tells you nothing about the future. So what are we actually doing when we keep looking?
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Comments
This is Excellent. Thank you ?
This note, and “Sheep Logic” are my two perenial favorites
They have been immensely clarifying.
Thank you Ben
The underlying assumption in economics - at least the way we were taught- is that money was a scarce commodity .
Have we now morphed into a society where that is no longer the case ?
& With that foundationaL assumption gone, is all econometrics = rubbish
I think Ben was correct to repost this …the markets make zero sense to me ,as I write this today Producer Prices were just announced up 8.6% YOY --and the 10 year Treasury yield is DOWN to 1.445%
I’ve read this note a few times since 2017. Each read hits me differently. Earlier this year I read The Three-Body Problem, great book. Why did today’s read strike a nerve? At the end of the note, “That’s the technical definition of The Answer, and that’s the practical definition of totalitarian thought.” I’ve brushed over the ending on my previous reads, but today “totalitarian thought” bothered me. Maybe that’s the point of BITFD, to avoid a totalitarian outcome?
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