The Proper Thought Process for the Debt Crisis

As we enter truly perilous times, it’s important to have the right thought process. One of the reasons I hesitate to give trading recommendations is because it doesn’t prepare you for the future. It doesn’t help you think on your feet. The only people who will prosper in the years ahead will be those who can make connections that aren’t obvious.

Learning is not about memorizing a whole bunch of facts and then regurgitating them back. Nothing will be internalized this way and true learning works a little differently. At first your knowledge of a subject is scattered as you immerse yourself in the basics. Connections aren’t obvious and things just don’t make sense. But then suddenly insights start coming and you build from that. And we’re lucky because the human brain is amazing: the bigger your foundation of knowledge, the easier it is to remember additional pieces of information. Basically knowledge accumulation works dynamically just like nearly everything else in the world.

When you see stocks rise along with unemployment, you must add that to your store of knowledge. You cannot write it off as a freak event. Then you need to make the connection that stocks are rising because of global capital flows that are prompted from currency risk. Understanding the movements in markets isn’t about studying forward P/E estimates or plugging in discount rates on an excel spreadsheet. This is the simpleton approach to investing that doesn’t give you a grasp of the worldwide economy.

The way I think is in patterns. I try to make connections. So for example, I can’t tell you off the top of my head what bond rates were in the early 1980′s. But I can tell you that U.S. government bonds have been in a bull market for over 30 years and that there is a very high likelihood that bonds will be in a bear market the next 20-30 years. I also can’t name every single revolution that has occurred in the world, but I do know that they tend to cluster together: 1989 saw the collapse of communism and 2011 brought riots and revolutions worldwide. This is the pattern of history and you just can’t grasp these concepts with a linear mode of thought.

They say statistics are misleading, but I believe this is because we have a flawed conception of statistics. Frequentists believe you need a very large sample size of data before you can come to a conclusion. If there are no prior examples of something happening, it is assigned a probability of exactly 0. This is positively stupid. The Bayesians have it right because they understand that just because something didn’t happen before, it doesn’t mean it can’t happen. And although our current situation may not have an exact precedent in history, there are similar enough precedents in history to draw from that allow us to come up with probabilities for “black swan”-type events. And if you are wondering, yes I am talking about the collapse in U.S. bonds and the introduction of a new monetary system.

Volatility will rise because we are talking about the actions of fickle human beings. Even people in Germany are taking their money out of the banking system and buying real estate. The banking system in the Western world will be in crisis and this will precipitate a magnificent rally in tangible assets. The only way you can understand the coming market volatility is by making connections that aren’t mainstream yet. When the dollar rallies, people will be utterly confused because it will come at a time when the U.S. economy is in the gutter. But European and Asian capital will be looking for a temporary safe haven, and the U.S. dollar will ironically provide that.

I am fairly certain that volatility is going to go through the roof later this year. I will be talking about it a bit more in my newsletter, which you can sign up for on the right sidebar if interested. Nonetheless, it is time to hedge because there are going to be massive moves in markets.

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  • lidya

    moses, are you still keeping your hope for increading gold price ? It seems American Economy is recovered and hope for gold is fainting.

    • http://www.expectedreturnsblog.com Moses

      Seems like a perfect setup for a gold rally to me

  • http://www.ultimatemoney.com/ buy gold

    keeping gold is much more practical than keeping cash on the bank, no telling til when your money is worth the same today from yesterday

  • lidya

    it seems that a game is being played on gold, Moses do you have any comment?