Welcome to Kayfabe - whatever the hell that is
Let's start a journey together to try and distinguish between delusion and reality
What the hell is “Kayfabe” may be a question you are already thinking about, and it is a good one. The term comes from professional wrestling, which may seem an odd inspiration for a newsletter nominally focused on financial markets and the economy. The goal of this initial post is to offer context as to the analytical process which will be deployed going forward. It may be unusual compared to what many consider “normal.”
Along with reading the About page, watching these two videos are also a prerequisite- apologies for the homework in advance. All in, the homework should not take much more than 30 minutes….I’ll wait…
Ok - now that that is done, it is time to build out a bit more about some assumptions which undergird the process which will drive this newsletter, and how I strive to remain anchored closer to “reality” versus common narratives. Many of the narratives upon which we base our decisions are versions of kayfabe, in my opinion.
Humans are not generally rational - we evolved to survive and not to be rational. Part of that evolution to survive included deluding ourselves into thinking we are smart and rational most of the time.
Markets and the economy are manifestations of a bunch of irrational humans at varying individual degrees of delusion. Sometimes large delusions emerge as the madness of crowds emerges.
This process of interaction of billions of humans is a complex system.
Analyzing complex systems introduces what may be new concepts and terms for many. Criticality, entropy, phase transitions, power laws, and fractals are all examples.
I am human, allegedly. This means I am also irrational and in various states of self-delusion. At times I may be able to fake expertise when in reality I know little about most of which I speak- including the topics listed in #4. I have read some books on the topics over the years and now at my advancing middle age, my memory is already beginning to fail me at times. You should probably ignore me.
Traditional Investment Analysis
My academic and early career training were grounded in traditional investment analysis, which is to say looking at fundamentals. A concept Warren Buffett has attributed to his mentor Ben Graham, fundamentals are the “weighing machine” of investment analysis. Are markets cheap or expensive and relative to what? The “voting machine” have traditionally been the domain of technical analysis, which is to say looking to use chart patterns, quantitative indicators, etc., to help identify things like instituional money flows, and investor sentiment.
Business Cycles
The cycles of aggregate human delusion manifest in business cycles, otherwise known as economic expansions and contractions. The latter are often characterized as either recessions or depressions, while the former as recoveries. I am a devotee of the Economic Cycle Research Institute, which was founded by the godfather of leading economic indicators, Geoffrey Moore. The process is anchored in leading indicators and is distinct from “models” in the common sense of the word.
Macro Economics
My understanding of the macro economy, which is distinct from business cycles, has had a pre-blow up version and one after. The original version was geared similarly to mainstream economics, which is essentially an applied arm of poltical science and related ideology. While I had been familiar with the writings and work of an economist named Lacy Hunt, I had disregarded his analysis up until the point where doing so contributed to my own demise. Lacy treats macro economics as a science, even as it is a social one and distinct from physical disciplines. Lacy has been writing quarterly commentaries and analyses for years at the investment company at which he works, Hoisington Investment Management. Similar to Warren Buffet’s early shareholder letters at Berkshire Hathaway, Lacy’s commentaries offer a timeline and treasure trove of knowledge. In addition, this one hour interview from August 2020 offers a relatively concise window into his macro framework:
To summarize briefly, there are significant implications for economies due to the level of indebtedness, demographic trends, and the monetary system and related policies being deployed.
Complex Systems
This analytical prism ties these disciplines together. As relates to the framework laid out by Weinstein in the videos above, they can assist in using the other tools to try and measure self-organized criticality, and monitor for potential system instability. To revert to the kayfabe vernacular, this prism helps with the potential timing of when a “Shoot” may interrupt the “Work” - i.e. when reality smacks delusion upside the head.
So that’s it - a relatively basic outline of the pieces of the analytical puzzle. The next letter will begin to dive into where the process suggests we are at within these various components. The timing of this launch may be occurring at a time that is even more explosive than those which preceded the Global Financial Crisis and Donald Trump’s election.
Subscribing is and will remain free, other than wasting your time reading my delusional thoughts.