Money and Finance

Links

Scott Adams: Words versus Reason (LINK)

Berkshire Soars as Buffett Shifts Focus From Stocks to Takeovers (LINK)

The Brooklyn Investor blog on the Shake Shack IPO (LINK)

Canada’s Richest Grain Family Betting on Rebound in Oil [H/T Matt] (LINK)

Oil: An introduction for New Zealanders (LINK)

Jeffrey Gundlach’s Surprising Forecast (LINK)

Book of the day (which received a 5-star Amazon review from Nassim Taleb a couple of years ago): The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind

Hussman Weekly Market Comment: Pills for Cognitive Dissonance in a Speculative Bubble (LINK)

In the 1950’s, Stanford psychologist Leon Festinger developed the theory of cognitive dissonance, describing the psychological conflict that results from holding two opposing beliefs or attitudes at the same time. When subjects were asked to convey or act on information that they knew was untrue (and were provided only weak justification for doing so), the resulting “cognitive dissonance” actually led them to change their own beliefs and attitudes to be consistent with the untrue information. It is difficult to hold opposing beliefs simultaneously. Festinger later showed that people typically respond in two ways to cognitive dissonance. Either they try to preserve their current understanding of the world by rejecting or ignoring conflicting information, or they abandon their existing beliefs to reduce the conflict.

Several years of persistent yield-seeking speculation provoked by zero-interest rate monetary policies have created a fertile ground for cognitive dissonance. On one hand, any observer with historical perspective knows not only that the overvaluation from this kind of speculation inevitably ends in tears, but also that the heavy issuance of newspeculative and low-quality securities during the bubble finances and enables unproductive malinvestment that leaves the economy far worse off in the end. We should recognize that this same narrative was observed in the late-1920’s bubble-crash, in the tech bubble-crash, in the housing bubble-crash, and will be remembered painfully, but in hindsight, as the QE bubble-crash. On the other hand, prices have been advancing.

It’s difficult to entertain both of those facts at once. One must simultaneously hold in mind reckless yield-seeking speculation, hypervaluation that rivals the 1929 and 2000 equity market peaks (see Yes, This is an Equity Bubble), zero interest rates, low prospective long-term returns all around, and persistent malinvestment that poses increasing systemic risks for the entire global economy, plus one fact that encourages us to forget it all: prices have been going up. Cognitive dissonance tempts us to reconcile this tension by ignoring one part of the story or another.

For bulls, this cognitive dissonance creates the temptation to ignore the speculative risk and to dispense with valuation concerns by citing measures that have weak or zero historical relationship with actual subsequent market returns. The result is a stream of justifications for why stocks are reasonably priced and likely to advance without interruption. For bears, this cognitive dissonance creates the temptation to ignore the rising prices – to plant the valuation flag, knowing that a century of evidence on reliablevaluation measures supports the strong conviction that market returns over the coming decade will be dismal (most likely negative over horizons of 8 years or less), and that the likelihood of a market loss on the order of 40%, 50% or even 60% in the next few years is quite high.

- Links
TED - Jim Simons: A rare interview with the mathematician who cracked Wall Street (video) (LINK) THE MUSEUM OF ART AND FINANCE, GALLERY 1: TULIPMANIA (LINK) Robert Shiller on CNBC (video) (LINK) Scott Adams: The Tells (for cognitive dissonance) (LINK)...

- Links
Phil DeMuth's Daily Journal Annual Meeting Notes, Part 3 (LINK) Stan Druckenmiller's interview with Bloomberg (video) [H/T Market Folly] (LINK) Measuring the Moat – Part 1 (LINK) [The tour de force on this topic is Mauboussin and Callahan's Measuring...

- Links
I had previously missed this, but Richard Koo's latest book came out a few weeks ago: The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy Fortune: Inside Elon Musk's $1.4 billion score (LINK) Amazon...

- Hussman Weekly Market Comment: This Time Is Different, Yet With The Same Ending
Link to: This Time is Different, Yet with the Same EndingThe Federal Reserve’s policy of quantitative easing has produced a historically prolonged period of speculative yield-seeking by investors starved for safe return. The problem with simply...

- Hussman Weekly Market Comment: The Future Is Now
Link to: The Future is Now While the evidence may be alarming to some, make no mistake: The median price/revenue multiple for S&P 500 constituents is now significantly higher than at the 2000 market peak. The average price/revenue multiple across...

Money and Finance