Notes From Underground

This is the topic of discussion for this week’s meeting in Jackson Hole. For the Federal Reserve system, this is a statement, but I raise it as a question. A long-held theme of this BLOG has been that what the Federal Reserve, ECB, BOJ, BOE and other central banks promote as certainty supported by mathematical models I maintain IS NOT ROCKET SCIENCE.

In July, Barry Ritholtz posted an interesting article by Alan Jay Levinovitz in Aeon Essays titled, “How Economists Rode Maths to Become Our Era’s Astrologers.” The final paragraph sums up my continued theme of “it ain’t rocket science”: “There is no longer any excuse for making the same mistake with economic theory. For more than a century, the public has been warned, and the way forward is clear. It’s time to stop wasting our money and recognise the high priests for what they really are: gifted social scientists who excel at producing mathematical explanations of economies,but who fail,like astrologers before them, at prophecy.”

This essay is important to read as we head into Jackson Hole weekend and the financial media goes gaga over the promoters of certainty as they seek to control the global financial system through mathematical models that are theoretical in nature but sold as fact by Wall Street sycophants. The juxtaposition of Jackson Hole with the SOLAR ECLIPSE is perfect for understanding the FED‘s deficiencies. The ROCKET SCIENTISTS at NASA were able to provide exactitude for monitoring the path of the eclipse, knowing to the minute when locales spread over a 3,000-mile path would be viewing the commencement of this rare astronomical event. We were told to don certain GLASSES to view the full eclipse so as not to harm our eyes.

The FED has provided a once-in-a-lifetime experiment to promote a resolution to a severe financial dislocation, but the progenitors of a massive liquidity cannot provide a sense of certainty to the path out of the financial experiment. And, they have no sense of how it ends. The FED, like NASA, bases its outcomes on sophisticated models but in following its theoretical construct we also need glasses: ROSE-COLORED GLASSES. The FED, ECB and BOJ will allude to exit strategies but they do not ensure the certain path of predicting TOTALITY that concludes in South Carolina. Low volatility priced with so much uncertainty will provide dangerous outcomes. When? I don’t know and I say that with great certainty.

On Monday, the markets were abuzz with the most recent missive from Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund. Two weeks ago Dalio put out a recommendation to purchase GOLD in response to the heightened geo-political risks emanating from the TRUMP tweets on North Korea. In typical fashion, gold retreated $30 as tensions were reduced (and GOLD is always a poor investment in response to geopolitical risks). But GOLD has since regained some strength but has yet to take out the highs of panic of the North Korean tension. Dalio cited increased global and U.S. political tensions as a reason to reduce risk. He said, “While I see no important economic risks on the horizon, I am concerned about growing internal and external conflict leading to impaired government efficiency [e.g. inabilities to pass legislation and set policies] and other conflicts.”

Mr. Dalio has cheered the FED‘s policies over the last six years by asserting that it created a “beautiful deleveraging” of the financial crisis. Maybe the great income disparity resulting from FED policy was not as beautiful as those on Main Street imagined. If Mr. Dalio proves correct, he will not be able to “tactically reduce risk” as the markets are saturated with a crowding-in phenomenon from those engaged in risk parity trades and seeking monthly gain through being short volatility trades. One aspect of the Dalio missive I loved was this: “I’m essentially an economic mechanic who focuses on how reality works by studying the cause/effect relations and how they played out in history to help me bet on what’s likely to occur.” This defines what I have tried to accomplish in writing NOTES FROM UNDERGROUND for traders and investors. I have respected Mr. Dalio as a thinker and trader when I first encountered his Bridgewater writings more than 30 years ago. This is what I strive for and is my mission statement. Thank you, Ray, for defining it so well. This writer will continue to see the unbalanced word where 2+2=5 and try to find ways to preserve wealth and search for investment opportunities.

***Tuesday on CNBC Power Lunch, Josh Brown discussed one of my favorite equity trades that I analyzed in the May 9 blog post.

“I’m monitoring KSU–Kansas Southern Railroad–after the fear of Trump cutting NAFTA. While the stock got whacked, its back above the 200-day moving average. KSU is the primary beneficiary of rail transport between the U.S. and Northern Mexico. This railroad would be perfect fit with Berkshire’s BNSF. Buffet is sitting on a great deal of cash. Commerce Secretary Wilbur Ross says he wants to make NAFTA better. If Buffet believes it to be so,watch for Berkshire to spend some cash. Just putting it out there for commentary and positive investment opportunity … thinking from the underground.”

The stock today closed at 108.60 and with Josh Brown making it a piece of his portfolio I come back to this in the light of Berkshire’s failed attempt to purchase ONCOR energy for $9 billion as Buffett has fresh money to allocate towards other significant assets. The market cap for KSU is $11.5 billion. Just refreshing a recent idea because Josh Brown noted the positives of the company and didn’t even cite Buffett as a reason.

Tags: Alan Jay Levinovitz, BOE, BOJ, ECB, Fed, Gold, Jackson Hole, Kansas Southern Railroad

This entry was posted on August 22, 2017 at 6:41 pm and is filed under Central Banks, Gold. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.