The Moneyball Method — Excerpt 3C
Corporate Complicity
In situations of significant uncertainty, anticipating the possibility of events is vastly different than trying to predict future outcomes or control the behavior of others for desired results. Exposing the audacity of economic central planners and defending civilization is the mathematician and chief executive of the Alan Turing Institute, Sir Adrian Smith, “Any approach to scientific inference which seeks to legitimise an answer in response to complex uncertainty is, for me, a totalitarian parody of a would-be rational learning process.”[1] Moreover, when new information is routinely introduced, economic policy decisions are immediately obsolete.
Specifically, author Peter Bernstein explains it this way, “This procedure of revising inferences about old information as new information arrives springs from a philosophical viewpoint that makes Bayes’ contribution strikingly modern: in a dynamic world, there is no single answer under conditions of uncertainty.”[2] Bayes Theorem is another discovery from the Enlightenment; a statistical tool for measuring the potential effects of conditional probabilities. For example, quantifying the possible effects of new information is most useful in the controlled settings of the scientific method. Notable examples are genetic sequencing, materials tolerance testing and capital market return sequencing for individual investors.[3]
However, problems involving ethics and justice are a different matter, but that does not discourage those who wish to exercise authority over the economic events of producers. Despite all the contradictions, we now have theoretical models using regression analysis to justify policy initiatives for central planning authorities: “Spatial econometrics is concerned with the formal specification, testing and estimation of empirical models, taking into account the existence of spatial externalities. Such externalities may take the form of spatial interaction or spatial spillover.”[4] Gibberish.
In reality, by focusing on real or imagined negative externalities, econometrics multiplies potential assumption errors used by the forecasters in their totalitarian parody of desired social outcomes.
The Protection Racket — The monetary “social contract” is they pretend to protect employment and prices and you pretend it's for something greater than ourselves. After all, nothing is certain, no one is perfect, just be kind, right? The saving graces of the policy makers, their economics department enablers and market strategists are that they will never suffer the consequences of policy enforcement and failure. That’s you job!
Explaining how that works is statistician and trader Nassim Taleb, "When I don’t have skin in the game, I am usually dumb. My knowledge of technical matters, such as risk and probability, did not initially come from books. It came from the thrills and hormonal flush one gets while taking risks in the market.”[5] Predictably, after the Great Recession of 2008 and economic lockdowns of 2020, every politician and policy expert kept their salaries and pensions. The deep, dark secret is that they need you and you don’t need them.
Because the economic planner’s choice of variables must be subjective, they are ultimately self-serving. Similarly, the economic analysis published by investment banks, no matter how objectively they present themselves, is based on the whims of government officials who rely on biased assumptions built into computer models that become self-fulfilling prophecies. To put it another way, a “parody of would-be rational” guidance for the investing public.
Macroeconomic Research — As demonstrated above, market economies are dynamic, open, complex systems that defy all pretension for improvement by centralized control. What is lost is the damage that is done with every attempt to regulate, as Frederic Bastiat observed, “Is there any need to offer proof that this odious perversion of the law is a perpetual source of hatred and discord; that it tends to destroy society itself? If such proof is needed, look at the United States.”[6] The context for this was the freedom and prosperity in the northern states in America in 1850.
Yet, investment banks publish reams of research that rationalize the force of regulation and every report has the same general analysis — continued volatility, near-term uncertainty, headwinds and tailwinds, long-term growth trend, potential policy errors, etc. Find an economic outlook report from anytime in the last fifty years and see for yourself. While that may be important for institutional investors, it is of little use to objective investors who understand that the market’s price mechanism discounts all of that.
Furthermore, and to the extent that this research employs econometric models, they are aligned with the climate alarmists who use their own flawed computer modeling. In both cases, the goal is to predict the outcome of vastly complex systems, justify massive government intervention and undermine independence. Alex Epstein, author and founder of the Center for Industrial Progress offers his perspective on the alliance,
“If a politician talks about ‘the social cost of carbon’, that’s based on model predictions. If an economist talks about ‘pricing fossil fuels’ negative externalities’, that’s based on model predictions.” Epstein continues, “It’s a truism in any field of math that if you are allowed enough complexity, you can engage in ‘curve fitting’ . . . Many investors lose money doing this sort of thing.” [7]
Consumer Sentiment — Every macroeconomic analyst relies on Gross Domestic Product as the benchmark for economic vitality. Using the GDP expenditure method, about 70% of the American economy is dependent on consumer spending and that is considered gospel. While untrue, it makes sense to most voters and justifies any form of consumer protection legislation. Make no mistake, the regulatory state is the protection racket and the monopoly.
Moreover, banking and financial services are the most heavily regulated industries in America and should be the least problematic. But not only is preemptive law unjust (the initiation of forced compliance), it has increased the frequency and size of financial calamities since President Nixon removed the gold standard in 1971. Regardless, the purpose of consumer sentiment surveys is to predict the future and defend the entrenched bureaucracy. In this environment, economic analysis using GDP as the benchmark is good for business, is widely accepted and pleases the regulatory state.
To be clear, GDP has merit for bottom line economic performance, but top line business investment is the energy stream that matters. To that end, Gross Output (GO), a method developed by economist and author Mark Skousen in the 1990s, was adopted in 2014 by the US Government as a quarterly indicator and is ignored by the analyst community. As the first major development in national income accounting since the 1940s, GO reveals the supply network to be double that of consumer spending.[8] This fact is virtually unknown among the analyst community, yet it supports Say’s Law as primary to sound economic theory.
Equity Market Forecasts — Among stock market analysts and speculators, the extent and direction of the next major move is top of mind. To get it right, they may consider the business cycle, Treasury yield curve, Fed policy, political events, purchasing managers index (PMI), consumer sentiment, or technical trends. Known as leading indicators, they tend to move in advance of GDP growth. In turn, good news or bad news for the economy is considered good news or bad news for future stock market prices. Sometimes. Maybe.
Another important metric is valuation: current stock prices compared to last year’s earnings per share and interest rates. One of the best is the Shiller PE ratio, also known as the cyclically adjusted price earnings (CAPE) ratio that considers the previous ten years market-wide earnings adjusted for price inflation. If the valuation of the broad market index is above historical averages, reversion to the mean theory requires that prices come down, sometimes, maybe.
Of course, there are other indicators and they do not always send the same signal. While the complexities are immense and more than a tricky position in a game of chess, there are also thousands of strategy experts who are paid millions of dollars with claims to “smart money” knowledge. But, what if they’re wrong?
Greenwashing — For the mystical common good, there are many organizations that do research and publish ratings on corporate fidelity to stakeholder demands. One engaged in compliance consulting is Bloomberg Professional Services and they profess to, “Understand macro trends, stay on top of ESG regulation and innovation and get expert analysis on the industries and companies leading the way on sustainability and their environment and diversity models.”[9] Bear in mind, the regulation and “innovation” mentioned here are subject to new forms of chaos as the political winds blow.
Another firm acting as whistleblower is JUST Capital, “Our Annual Rankings show which companies are making meaningful investments in their stakeholder leadership. Throughout it all, the connection to financial performance remains pivotal.”[10] In that shakedown, “financial performance” reflects a company’s ability to avoid costly litigation by the regulatory state, “meaningful investments” are wealth being consumed in the same way that tax money is spent and “stakeholder leadership” is submission to their wannabe authoritarians.
Adding fuel to the fire is the CFA Institute and their DEI code of gibberish, “The CFA Institute champions positive systemic change . . . transformative code . . . structured framework . . . crafting impactful . . . strategies to enable . . . etc.”[11] Regardless, nearly every major asset management firm has DEI officers, ESG products and research. None of it contributes to the efficient flow of capital and all of it corrupts the price discovery mechanism.
And it gets better. The Biden Administration is forcing the US Securities and Exchange Commission (SEC) to coerce publicly traded companies into new climate impact disclosure rules. Thankfully and in an all too rare display of bureaucratic honesty, SEC Commissioner Hester Peirce testified on March 6, 2024,
“The Commission performs impressive math-crobatics to slash the anticipated cost of the rule by almost 90%, but even with these potentially understated estimates, the Commission must still concede that this rule will increase the typical external costs of being a public company by 21%.”[12]
As illustrated, the only externality, the only monopoly and the only robber barons are those who use the force of regulation to denigrate markets.
Critically important is the fact that without the cooperation of their hosts, the parasites are impotent, as Ayn Rand stated in her last essay and public lecture titled The Sanction of the Victims,
“The businessmen are needed most by the so-called humanitarians because the businessmen produce the sustenance the humanitarians are unable to produce. Most businessmen today have accepted the feeling of guilt induced in them by the altruists. But the businessman’s actual guilt is their treason against themselves.”[13]
How to fight back? Journalist and author Isabel Paterson responded clearly, “vertically.”
For perspective, a chess player has three variables to consider: positional advantages, piece strength and time remaining. That is reality and all three are determined by objective rules. Only under those conditions can a player or businessman think long-term. In contrast, those who choose to avoid the effort of productive thought and are nonetheless subject to reality will resort to changing the rules on a whim and become parasites like a regulator.
Essentially, free markets give the appearance of being simple, ingenious, graceful and efficient because that is their nature. In turn, Moneyball investors take stock of our positional advantages, utilize our piece strength and give purpose to our remaining time.
At this point, it would be good to ask, does my financial advisor, brokerage firm, or trust department defend or justify social investments by government, consumer rights agencies, behavioral finance strategies, community ownership privileges, or antitrust action? Of course, they all do, to some degree. Does any of that help individual investors improve their lives by increasing their likelihood of success? Not so much.
[1] Peter L. Bernstein, Against the Gods, 1966. Page 133.
[2] Ibid.
[3] Biomedwire, 2020. “Genome sequencing gives data on millions of genetic variants that may be useful. The purpose of sequencing was to find out if gene groups were connected to the degree of toxicity that chemotherapy had on patients’ bone marrow.”
[4] sciencedirect.com, J. Lauridsen, 2012.
[5] Nassim Taleb, Skin in the Game, 2018. Page 30.
[6] Frederic Bastiat, The Law, The Fatal Idea of Legal Plunder. 1850.
[7] Alex Epstein, The Moral Case for Fossil Fuels, 2014. Page 101.
[8] Steven Landefeld, Director, Bureau of Economic Analysis, Econlib Library, “Gross Output provides an important new perspective on the economy and a powerful new set of tools of analysis, one that is closer to the way many businesses see themselves.”
[9] www.bloomberg.com/professional/solutions/sustainable-finance
[10] Nick Masercola, The JUST Report: What Our Financial Analysis Reveals, March 1, 2024.
[11] cfainstitute.org, Diversity, Equity and Inclusion Code.
[12] Hester Peirce, Green Regs and Spam, Securities and Exchange Commission, March 6, 2024.
[13] Ayn Rand, The Voice of Reason, 1988. Page 152.
