Alphabet soup

History is a guide to how things will turn out in the future. Nothing more. But right now everyone is trying to search back into the realms of history for a guide to how the future will unfold; whether its pandemics, hurricanes or just boring recessions. From this analysis they prescribe a V, U, W, L or even an I shaped recovery.

However, new forces like technological developments, disruption, demographic change, political instability and media trends give rise to an ever-changing environment, as well as to cycles that no longer necessarily resemble those of the past. That makes the job of those who dare to predict macro more challenging than ever.

h/t @Peter_Atwater

The accelerating pace of change may mean that the old cycles begin to play out much more rapidly in the future. According to hedge fund manager Howard Marks (author of Mastering the Market Cycle: Getting the Odds on Your Side), that may make the job of economists, analysts and investors much more challenging in the future:

I realised recently that in my early decades in the investment business, change came so slowly that people tended to think of the environment as a fixed context in which cycles played out regularly and dependably. But starting about twenty years ago – keyed primarily by the acceleration in technological change – things began to change so rapidly that the fixed backdrop view may no longer be applicable.

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There could of course be a contradiction in Marks’ prediction of the challenges involved in prediction. As can be heard almost any time someone frets about the future, there is the issue of hindsight bias. Someone says, “Things are uncertain, not like it was in the past.” The first part of that statement is accurate; the second is not. The future is always uncertain, whether it is the future we face right now or the future that people faced a century ago.

If Marks is correct, then how should investors react to this new market? Well, when change is both inevitable and gaining speed, a person’s ability to adapt to the market environment based on what can be observed here, right now, in the present is far more valuable than trying to predict the future. Evolution and those best able to take advantage of commodity market trends both favour those individuals and organisations that can adapt the fastest and most effectively to that accelerated change.

Alphabet miso.
Photo by revbean on / CC BY-NC

Believing that we know and understand where we are now can lead us into the temptation that we can then extrapolate this to the future (back to the alphabet soup). For the successful, a delicate balancing act is required to guard against this inherent demand in our psyche and from others around us. According to Marks:

We can’t predict, but we can prepare… the key to dealing with the future lies in knowing where you are, even if you can’t know precisely where you’re going. Knowing where you are in a cycle and what that implies for the future is very different from predicting the timing, extent and shape of the next cyclical move.

The advice for traders and investors is that instead of attempting to second guess the future direction of economies and markets, devote yourself to specialised research in market niches. These are the inefficient markets in which it is possible to gain a “knowledge advantage” through the expenditure of time and effort.

Try to know the knowable.

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