I left the breadcrumb for readers, Wednesday.
Candidly, I am not certain that is what was actually said, and guess what? It doesn’t matter what I think, Mr. Market understood it that way.
Mr Market voted the other way on Thursday, in dramatic fashion. SHHHH: During the middle of yesterday’s plunge, which started at about 1PM ET, I was napping. Just not surprising or worrying for the stable.
He Correctly Adjusted, Can You?
The mistake isn’t wrongful predictions. It’s adhering to the wrong framework of understanding.
I Watched In Fascination Which Turned Into Horror
A poker pro overestimated his “edge.” That’s okay, it happens, people think X, with overconfidence, even if wrong. To make it much much worse, he limited the restraints required to win.
To his very, very high credit, he realized this and then resigned after only 25% of the showdown was completed. It must’ve been painful to do so, but there was no point in throwing good money after bad. And it would’ve burned through time as well.
In other words, the poker pro went back to the lab, where simulations are run and studied, over and over and over, and realized that getting to the red dot was unlikely. So he adjusted.
In personal finance, this happens all the time. Incorrect oversimplifications are thrown around with reckless abandon, and somehow believe in the oversimplifications.
Except that people don’t adjust.
You Are Always At The Red Arrow
Weather Forecasting And You
Jokes aside about the weatherman, I am pretty sure that weather forecasting isn’t voodoo. That said, the forecasts change as the path of the hurricane moves.
So if you were not part of the ‘cone’ but then the hurricane moved, the idea that people don’t change their plans isn’t reasonable.
When the topic switches to money, they switch logic that they would never use on a day-to-day basis in order to survive. WHYOHWHYOHWHY. Wrongly formulated oversimplifications, and then “look it worked, I was right” on top.
Don’t get me wrong: I have witnessed very smart people with more than enough experience and academic chops to fully understand everything that I have mentioned, and they fail to adjust. It is that prevalent.
Now What
The observations regarding the peculiar combination of financial markets events didn’t start yesterday, or the day before. We’ve been tracking all the back to Q1, 2021, when the combinations started reacting oddly. There has been a LOT of time to adjust. A LOT.
But, since the incorrect happy talk ruled the day, and people don’t understand how much bigger and more important the denominator is (the reason for my “Stocks For Show, Bonds For Dough” slogan), largely ignored.
There is NO financial formula regarding price or valuation without “r,” which has been either straight down AND not volatile, for decades. Even this formula isn’t precisely correct, because around C(1), C(2), etc and underneath each 1+r, there needed to be the word “Expected.” It’s a significant omission.
Estimating C is difficult and full of Monday-Morning Quarterbacking, and other flag-waving in the media on your 10 shares of TSLA. Estimating 1+r is boring and misunderstood…and influenced/determined by the largest holders of financial interests on the planet. Federal Reserve, PBOC, BOJ, BOE, ECB, SNB, Norway Oil Fund, Singapore GIC: they do not care about your 10 shares of TSLA or Joe Stock Picker’s message of “stocks in the long run.” Nor should they, they have bigger fish to fry (and wars to fight, which sit under the surface).
In public, I mentioned the fact that people hadn’t fully taken inflation (a component of interest rates) into account.
Now, Mr. Market is doing it for you.