Lately there have been a lot of ‘weird’ posts on this blog – stuff about IQ, signaling, and intellectualism, and the like. If you go to the archives, back in 2011-2013, not once did I mention IQ (maybe one time in 2013 I think) and no mentions of SJW, Social Darwinism, or HBD either. It was pretty much strictly finance and politics related. So why am I venturing out to these other topics. Mainly it’s because since early 2014 we’ve been in an ‘autopilot’ economy, society, and stock market – or , in other words, there isn’t much going on, besides the usual manufactured hype. So I’m tying to expend the repertoire of posts and topics; otherwise, there would be much less to wrote about. Second, these issues are important – IQ and Social Darwinism – and they tie into finance and economics, and are worth exploring.
From 2007-2006 was the build-up to the crisis, with stories of mortgage-based hedge funds failing, economic weakness, and home prices falling.
From 2008-2009, there was the actual crisis, and then in 2009 bull market which still continues to this day.
In 2010, Europe began to falter, and there was the ‘flash crash’.
2011 was a tumultuous year, with the S&P debt downgrade, debt ceiling, and the economic debt crisis in Europe and possible dissolution of the Eurozone. Portugal, Ireland, Greece, Italy, Spain were all close to defaulting and needed to be bailed out.
2012 was less eventful. Europe began its austerity programs, and the US stock market and economy rebounded despite some weakness in the middle of the year.
In 2013 the S&P 500 rose a whopping 28%, shaking off the fiscal cliff, government shutdown, fed taper, and sequester. Home prices also surged, especially in California.
But not much has happened since then. The S&P 500 is flat since late 2014 and is only up 13% since early 2014. More importantly, the economy is still humming along, with neither deflation nor inflation. All prediction made between 2008-2016 of crisis, bear market, recession, hyperinflation, dollar collapse, or the fed being ‘boxed in’, all failed to come to fruition. The placidity the economy and financial markets has left commentators, myself included, without much to discuss.
Once you pull away the cobwebs of sensationalism, hype, and distractions, a clear picture emerges of what to do: ignore the doom and gloom and buy & hold stocks, which Is what I have done with success since 2011. Some say, ‘it’s different this time; the end is near’. Maybe, but maybe not. Odds are, going by hundreds of years of empirical evidence, it’s not.
As far back as the advent of agriculture, civilization and technology has progressed at an exponential rate, with some hiccups along the way, despite systemic risks. When crisis does occur, it tends to be brief. Of course, this does not prove that future crisis will always brief, but that’s the way it’s been for centuries.
Taleb and others shift the burden of proof unto others to ‘prove’ that there won’t be a crisis, an example of the fallacy of the argument from ignorance.
A common argument you’ll hear is that, ‘the models are wrong/policy makers are ignoring systemic risks’.
If the models are wrong, you can always bet against them, but as it turns out the expected return on such a strategy is negative, meaning that for every large win like in 1929 or 2008, there are enough losers that the expected value is still negative. There is a mathematical explanation for this: volatility skew, which means that anticipated volatility is, 90% of the time, higher than present. That means you are buying ‘high’, not ‘low’. Options are priced to account for jumps, resulting in a skew that makes put options expensive enough that long-term profit is not possible. Betting on crisis is sorta like buying insurance. However, if it weren’t profitable for the insurers, insurance companies would not exist. Policy writers are not going to let policy buyers take their money, or at least not for very long. If insurance companies notice that a certain neighborhood is susceptible to fires, they will raise premiums. Taleb creates a strawman argument that all options are priced with an underlying Gaussian distribution and that traders and statisticians are unaware of factors such as skew and jump processes, when neither of these are true.