In the midst of work uncovering a target for the US dollar that will surprise many if it comes about, of taking a hard look at the messages of long-term Treasury yields and the yield curve, defining potential macro outcomes (inflation, Goldilocks or deflation) based on these indications and planning strategy accordingly, NFTRH 662 got a little out there with a discussion of the mindset that is behind the name of the Notes From the Rabbit Hole service.
The mention of John Hussman (I could also have put the estimable Jeff Snider or the Robert Prechter of yore in this piece) is not meant to insult. It is meant to simply state that a fiduciary manager like him, honestly following his work, is not geared to make significant gains during high risk market phases.
I too do not make the gains I could make (temporary though they would be) if I were a blue pill gulping all-in happy idiot. I am bound to ongoing risk management, but also avoiding the red pill while profit making and profit taking (part of risk management) with an awareness of the importance (for me) of high cash levels in a persistently high risk market (as defined by structurally over-bullish sentiment among other things).
Though the name Notes From the Rabbit Hole implies that a red pill popper produces it, I had to unlearn certain ways of the lunatic fringe the better part of two decades ago when I realized that one foot in each world is the only rational way to go about managing an over-stimulated market with cynical monetary and fiscal policy always in the mix.
Excerpted from NFTRH 662:
So the bright side (or dark side, depending on how you view it) is that Goldilocks [the work in #662 is not projecting a persistent Goldilocks economy, but it is allowing for it as a lower probability option] could go from a bounce to a trend as the Fed’s “transitory” inflation view carries the day, gold bugs are sent back to the hell they came from much like in 2012, and the Matrix resumes operation as usual. From Wikipedia:
“In The Matrix, the main character Neo is offered the choice between a red pill and a blue pill by rebel leader Morpheus. The red pill represents an uncertain future—it would free him from the enslaving control of the machine-generated dream world and allow him to escape into the real world, but living the “truth of reality” is harsher and more difficult. On the other hand, the blue pill represents a beautiful prison—it would lead him back to ignorance, living in confined comfort without want or fear within the simulated reality of the Matrix. As described by Morpheus: “You take the blue pill…the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill…you stay in Wonderland, and I show you how deep the rabbit hole goes.” Neo chooses the red pill and joins the rebellion.”
Seriously, how perfect is this analogy? And why on earth do you think you are reading a publication called Notes From the Rabbit Hole?
One thing we will not always be is right. But one thing this service will always be is respectful of both pills, while ingesting neither. You take the blue pill and you are a happy idiot, gainfully making coin until the music stops (as it always does sooner or later in this boom/bust continuum created by strenuously overdone policy) and you become a victim of your own lethargy. You take the red pill and you become an angry gold bug or perma market bear railing against the manipulation “they” have victimized you with.
You become a gold promoter (pick your favorite high profile perma-pumper) cheer leading inflation and gold through thick and thin, or you become John Hussman, intellectually laying out the perma-wrong economic and market bear case day after day, week after week, month, year… gulp, decade after decade.
In short, if you want to make gains in your intrinsically worthless dollars you need to respect the blue pill. That is the lesson I learned in the 2003-2004 time frame. But by continuing to have respect for the red pill (i.e. never losing sight of the macro’s bust side of the boom/bust continuum) I do not make the gains that all-in bubble participants make before they lose most or all of them, but I manage quite well along the journey.
Who wants intrinsically worthless dollars, you ask? Well, people who want to exchange them for things of value like gold (monetary), land, other resources/assets or even debt repayment (practical). In short, you play the Matrix’s game, get compensated in debt paper and then just maybe turn that funny munny into something real as long as the Matrix holds together.
Since I began functionally applying these metaphors to my investing style about 17 years ago the Matrix has been in danger of coming unwound the whole time. I myself used to warn about that, probably putting too much fear in the analysis early on but over time realizing year after year that the market can remain irrational longer than you can remain solvent (if you fight it). Or my friends, is it WE who are irrational if we fight it?
Two decades ago I was vulnerable to perma-bearish market messages and perma-bullish gold messages as well. I learned my lessons and hence, you have a manager who is dedicated to walking both paths, staying open minded and not falling for dogma or bias disguised as analysis that comes from it.
There is a middle road between the auto-pilot traveling mainstream financial services machine and the red pill gulping lunatic fringe. That is our road.
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