Russell 2000 YTD - 2014 vs 1994

Russell 2000 Index (price) YTD Through May 14, 2014 - Return -4.13%

Russell 2000 Index (price) YTD Through May 14, 1994 - Return -4.13%

The Interfragile, not the Antifragile

One can be inundated with all the information in Taleb’s book, but there is no point if it cannot be converted (or interconverted) into useful knowledge. Different readers of the book, for example, can read the same facts and come up with diametrically opposite and yet equally plausible conclusions. Who is right?

My opinion after reading the book is, investors should recognize that economic outcomes, like investing, is really a game of probabilities.  There are not a lot of definite things that will happen in the future but that only depends on the interfragility, not antifragility.  To me, investments do not gain from disorder but they gain from order.  (Some confuse the disorder to price volatility.  When I refer to order or stability I am not referring to the VIX….)

To be more clear, Taleb basically claims that decisions like the decision to allow Lehman to fail, was good for the system.  But would a different governmental response have generated a less favorable outcome?  I don’t think so….

Let me try to illustrate this: Who are the strong players today? We are all finally agreeing that the stock market is mainly driven by Fed actions…..so why is the Fed the strongest?

After letting Lehman fail, the central banks were under popular pressure to save the world, so obviously they had to apply stimulus in large enough quantities to replace dwindling export demand. The remaining research to be done is then consisted of identifying whether saving Lehman would have avoided the necessity to apply such aggressive stimulus?

The recovery came through the injection of stimulus packages, not the “antifragile” concept of letting Lehman fail.  The saving of Lehman would be the best stimulus and the best multiplier effect that would avoid the concept of quantitative easing.  Saving Lehman would have been a qualitative measure.   

Indeed one of the most inevitable outcomes of 2008's subprime crisis, in retrospect, was the danger of collapse facing the financial system. Hence, the collapse of Lehman did not only affect banking stocks, but indeed all stocks.  The Fed since then has tried to avoid making the same mistake because it knows we live in an interfragile economy, not an antifragile one….

End the Fed? Really?

Ending the Fed will result in the elimination of the business cycle.  Hmmm…let me think…NO!

Have there been any academic studies done with evidence in favor of the above?  I don’t think so.

To me, it is a question of two issues: firstly, causation, and secondly, of how one defines the degree of the Fed’s influence in the markets.

To answer the above questions consider the analogy I like to use where the Fed is equivalent to the Fire Department. 

Under such a scenario, the Fire Department spots forest fires and sends its helicopters to control the fire and where possible to put the fire out completely…Can one make the argument that ending the Fire Department will result in the elimination of forest fires?

Many will dispute this suggestion.

The critical assumption, actually, lies in that there is no way to determine/verify if the Fed is good at putting out fires…But what one can’t dispute is that the Fed is equivalent of the Fire Department and not, as the critics of the Fed claim, the arsonist!

So going back to the critical assumption, what if the Fed is actually not as good as it thinks, and that the real probability of helping at putting out fires is low?  Well then the question should not be whether the “helicopter” attempts at putting out fires should continue.  The question is: is the level of the Fed’s interference sufficient?  Moreover, what’s our assessment of its track record?

If we deem the Fed’s efficient/inefficient margin to be….. say….. 75%/25% (based on track record) en-route to the subsequent decision to keep the Fed or not, then even the slightest over-estimation of the Fed’s abilities will be better than no involvement at all.

So although claiming that the Fed actually starts the fires is a totally false assumption, however, the bare fact remains, if one is confident that the Fed cannot put out fires and its operations do not translate to great monetary gains, then there is no way to convince them otherwise.  Besides, there is really no way to compound the advantage of having the Fire Department at a forest fire.  One can always claim that the fire was fading or a potential storm would have or the self-organized operations by citizens on the ground were sufficient enough and there was no need for the Fire Department’s involvement!

What’s up With the Gold Standard Craze?

Are we really debating the reality of backing our currency to the price elasticity of gold?  Do these “doctors” ever think of the potential of a country discovering new sources of gold that could destabilize the whole financial system?  Worse, what if the country that discovers this new gold source is against American interests?  

In theory, backing the currency with a physical commodity in my opinion makes sense.  But in practice, it can only be achieved if the price elasticity is zero.  The only example that comes to mind is artwork.  But how realistic is the scenario of backing your currency to a dead painters work?  I don’t know about you, but to me, it seems absurd…

Annualized vs. Cumulative Performance Numbers

A common error made by performance reporting experts when comparing net vs. gross of fee returns is: annualizing the one year fee structure but not the one year rate of return.  This usually results at in-depth analyses on how fees significantly impact your net performance and other such nonsense.    

"Anonymous" Members

The question is: should bloggers use their real name or a pseudonym?  To me, a pseudonym is a preferred option than the "real" sounding name.  I mean, who really knows if my identity in the blogosphere is truthful?  Is it really that more useful to go by the name Joe Smith or Superbmindset?  And besides, a pseudonym is in no way anonymous.  When I post a comment to your blog, you have the option of tracking my IP address, so if I am in any way "trolling" on your site, you can easily identify the owner of the comment.  In other words, a pseudonym is not necessarily an anonymous one, in the general interpretation of the word anonymous.  In conclusion, I feel there is a truthfulness in utilizing a pseudonym in the sense of letting the reader know you would rather withhold your true identity and not take credit for your insights....    

Facts About Me

I find great pleasure when someone can stimulate my thought and reason.

In my life, I’ve gone through prosperity, then adversity, now somewhere in between.

I find it hard to resist liking those who compliment me.

Every time I made up my mind to seek happiness, that-in-itself, made me happy.

I have a good memory. I often choose not to remember that.

Over the years I’ve learned not to be selfish.  I now truly enjoy the happiness of others.

I think I have a strong character.  It is my personality that is weak.

My ideas are very open-minded.  My beliefs are not. 

I can strongly relate with those who have conflicting attitudes towards the same issue.

I still don’t know if I have made good decisions in my life but I sure know of all the damned-bad ones.

In theory all my ideas pan out perfectly, in practice they don’t.

The greatest accomplishment in my life so far: seeking other people’s advice.

I am very forgiving with others.  It is myself I have a problem forgiving.

I like those with a serious sense of humor.

I don’t always agree with my strong opinions.

I protect myself by a fence.  No one has found a way to destroy it, although few have found a way to break in from time to time.

The above facts define me but in no way confine me.