The arrogance of expertise has been on full display the last couple of decades, from disastrous perpetual foreign wars to subprime being ‘contained,’ to lockdowns and the systematic abuse of children for nearly two years, supposed “experts” have not covered themselves in glory. I posted on Twitter back in February about spending a chunk of my time in lockdown watching WWII documentaries and having been struck by how many pivotal events boiled down to which adversary was less incompetent.
Of course, these sorts of issues are nothing new but remain pervasive within Wall Street and the mainstream economics profession. Despite the groundbreaking work of Benoit Mandelbrot that began to emerge six decades ago, and similarly groundbreaking work by physicists such as Per Bak in the 1980s, much of the establishment remains grounded in what I like to call Flat-earthing Astrological Alchemy.
I have never, and will never, claim to have any expertise in these advanced fields, but then it does not take a lifetime of study or a PhD to simply accept that the earth is not flat or that the periodic table and elements are a ‘thing.’
Something as obvious as washing one’s hands was once considered senseless. If you are not yet familiar, may I introduce to you the story of Ignaz Semmelweis.
Semmelweis was a Hungarian obstetrician who figured out that washing his hands with sterilizing solutions dramatically reduced his patients’ infection rates, in 1847. As quoted on his Wikipedia page:
Despite various publications of results where hand-washing reduced mortality to below 2%, Semmelweis's observations conflicted with the established scientific and medical opinions of the time and his ideas were rejected by the medical community.
Some other more famous names like Pasteur and Lister were among the emergence of scientific discovery and recognition of what would become known as germ theory in the mid-19th century. Despite the emerging evidence and proven results of adopting sterilization techniques, much of the medical establishment was slow to adopt them and in many instances outright hostile.
By the time of US President James Garfield’s shooting in a Washington DC train station in July 1881, these issues were generally known if still controversial. After being shot, Garfield was left to lay on a filthy train station floor while various medical professionals began to penetrate his wounds with unsterilized hands, and his primary physician who oversaw his subsequent care skeptical of the emerging science. The circumstances and causes of Garfield’s protracted path to his ultimate demise remain a topic of debate, including published research as recent as 2013!
While the specific timeline and medical causes of Garfield’s death remain uncertain, it was yet another example of a historical flashpoint that displayed the degree to which the ‘experts’ were pretty clueless even within the context of available information at the time.
Fast forward about half a century to April 1930, the Dow Jones Industrial Average was just finishing its rally of 48% off the post-October 1929 crash low. This was a headline from the New York Times: The New Bull Market Is Great For Business
From the article:
The boisterous conduct of the stock market lately has given rise to apprehension in some quarters that a new and unbridled wave of speculation is about to start. The specter of a voracious market which once more will gobble up all available credit, nullifying the efforts of the Federal Reserve Bank to provide business with easy money, is being paraded.
Leading bankers profess to see no such alarming symptoms, however. They say a rampant bull market can hardly be expected with business conditions as they now are. On the other hand, a buoyant market will have a valuable effect in lifting public morale and stimulating business optimism.
While an extreme example of the madness of crowds having departed from what we now know was occurring at the time within the ‘real economy,’ it offers insight into how extreme these departures can become.
As I wrote about last November in Simon Says, this cycle has very specific dynamics unfolding relative to asset flows, market structure, and what was then still a burgeoning mania in short-term equity options trading. These factors have continued to spiral into what has become a frenzy of speculation over the past two months.
How long will/can it last? A study of history suggests that predicting the Extraordinary Popular Delusions and the Madness of Crowds is not an easy task. At this point, the business and inflation cycle timeline continues to unfold within the expectations of the Kayfabe Capital analytical framework, while financial markets are seemingly disconnected from those developments. This is not a US-centric development, as major equity market indexes in Europe have diverged from what has become pretty clear evidence of recession.
As the extreme example in 1930 indicates, these sorts of manic developments are not unusual, even as living through them makes it feel as if they can and never will end. They induce all forms of dissonance and confirmation bias as FOMO dynamics kick in - investors/clients become dismayed by being too conservative, career risks enter the picture, assets get taken away from the prudent to join the mob, etc. This is what early-stage recessionary bear market rallies do - make it nearly impossible for prudent investors to endure.
Despite the frenzy and manic move higher in equity markets, the ‘guts’ of the US stock market remain below the early February high, with sentiment having shifted to bullishness. The expected timeline for coincident economic data to turn sharply negative lies directly ahead, even as the flat-earthing astrological alchemists refuse to wash their hands and focus on advanced GDP reports as a supposed proxy for the business cycle.
Touche Mr. Market - another masterclass in cycle evil.
Great article, throughly enjoyed reading this.
Just want to say that I read The Worked Shoot as soon as I see it in my inbox. Thank you for sharing your wisdom and perspective. So much truth!