This Is the Biggest Problem (and Opportunity) of 2021
We live in a world where bureaucracy is outpaced by technology.
The rule makers can’t keep up with the rule changers.
It’s a good thing… if you have the guts to keep up.
Take the poor saps at the Federal Reserve these days. They’ve got a heck of a head-scratcher going on with this mob trading mess that’s erupted in the last week.
Bubbles come and go in the span of hours… not the years or decades they’re used to.
These folks are trained at Harvard… Yale… and Princeton. They study old, dusty history books.
Guys like Ben Bernanke can tell you all the wrong moves made by President Hoover in the lead-up to the Great Depression.
But can Bernanke tell you what’s in the heart of an angry Reddit trader?
We haven’t read that thesis yet.
But we have looked over his doctoral work…
Elementary, My Dear
The Harvard grad’s doctoral thesis from MIT was dubbed Long-Term Commitments, Dynamic Optimization, and the Business Cycle.
It’s a snoozer. But it’s now a piece of history… involving a who’s who list of world money maestros.
Its writing was supervised by Stanley Fischer, one of the rare banksters who have held the position of governor on the central banks of two different countries (Israel and the U.S.).
The work’s official readers include names like Robert Solow… whose namesake growth model looks at oh-so-silly indicators like labor growth, productivity and capital accumulation. When the thesis was written in the ’50s, growth meant making more things. The digital age was still generations away.
And there’s not a single mention of the biggest growth factor these days… free money!
Another Ivy-lined mind who helped Bernanke is Peter Diamond.
His work has largely focused on analyzing the policy behind America’s Social Security program.
His conclusion… raise taxes and cut benefits.
He won the Nobel Prize in 2010 by using math to prove that finding a new job was hard and that the unemployment rate would never hit zero.
These folks know the theoretical. Most of them wrote it.
Responsible for the gilded age of financial theory, these men and their ivory tower offices put together some grand models to know which type of carrot to put at the nose of the big banks.
But what happens when that carrot turns old and rotten?
Looking through Bernanke’s thesis this morning, we see all sorts of crazy math.
But when we read the conclusion on Page 63, we see the thing that has so many folks worried…
“This paper has argued that when investment is irreversible, it will sometimes pay agents to defer commitment of scarce investible resources in order to wait for new information.”
They remind us of the favored words of our fourth-grade teacher, the late (liver issues) Mr. Sears…
“No shit, Sherlock.”
When you can’t get your money back, the future Fed chief surmised, sometimes you hold off until you get more data.
Golly… ya think?
“Give this man a job in the government,” his professors said as they doted over the idea.
A Problem… a Nightmare… and a Conundrum
But our point here isn’t to bust the chops of the bureaucracy. Its shortcomings are self-evident.
Our point is to remind you that our keepers live in the land of theory and ideas. They rely on a world of research and lab experiments. To them… a solution doesn’t exist unless the math proves out.
In a world where the mob roams from idea to idea in a matter of days… that’s a problem.
In a world where information can zoom across the globe in a matter of seconds… it’s a nightmare.
And in a world where investors put a price tag on eyeballs and ideas instead of widgets and gadgets… it’s the financial conundrum of our lifetimes.
It ties to what Bernanke wrote about… Until humans get more information, most of them tend not to act.
Meanwhile… Reddit groups explode, crypto goes mainstream and the “old rules” are made crisp by a Molotov cocktail that was thrown from behind.
The technology is moving faster than the theory.
But is it a time to heed Bernanke’s thesis and wait it out until we get more information?
It is a time to toss aside the rules of yesterday and follow new rules that acknowledge what’s happening… and why.
The theory of the ’50s and ’60s depended on a slow-moving market that aimed for efficiency and tight correlation. It called for a diversified array of assets that leaned on one another for support.
It’s too soon to say whether the move is temporary… but the merit of that idea is gone.
The correlations have gone bust, and the market is anything but efficient. It’s now a tug of war between two forces. Whoever has the most money will win.
It’s why, last summer, we debuted a different type of “allocation model.” It’s behind the portfolio at the heart of our Manward Letter.
It’s not based on old-school theory. It focuses on real-world reality – using stimulus efforts, interest rate maneuvering and the new digital economy as variables in its math.
It’s worked beautifully.
One of our healthiest winners, of course, has been the addition of crypto to our portfolio. Just a small slice has done a lot of good as the realm of digital money gains credence in a world drowning in fake money.
It’s our reaction to the realization that our keepers are in trouble.
The economy and the markets that represent it are moving far faster than these rule makers can keep up.
Policy and theory aren’t going to protect our money.
Common sense and a nimble portfolio will.
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What kinds of “modern” investments have you made? Tell us about them at firstname.lastname@example.org.