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A Worse Crisis Is Yet to Come

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Interest rates will rise, forcing mortgages up and making the deficit even worse.

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Friedrich Nietzsche wrote:

"To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown -- the first instinct is to eliminate these distressing states. First principle: any explanation is better than none… The cause-creating drive is thus conditioned and excited by the feeling of fear …"


This weekend I turn 60 and have been a little more introspective than usual. I am often told that the letter I wrote well over three years ago on ubiquity and complexity theory and the future of the economy was the best letter I have ever done. I went back to read it, and it has aged well. I basically outlined how a financial crisis would unfold, and now it has.

On reflection, I think there are perhaps other, even larger, events in our future than the recent credit crisis and recession; yet, just as in 2006, there's a great deal of complacency. But as we'll see, there are fingers of instability building up that have the potential to create large disruptions -- both positive and negative -- in our future. And for the political junkies, I offer a brief insight into what may be one of the more intriguing behind-the-scenes developments in recent years. Now, to the letter.

"Any explanation is better than none." -- Nietzsche


And in the investment game, it seems the simpler the explanation, the better. "The markets went up because oil went down," we're told (except that when oil went up, then there was another reason for the movement of the markets). But we all intuitively know that things are far more complicated than that. However, as Nietzsche noted, dealing with the unknown can be disturbing, so we look for the simple explanation.

"Ah," we tell ourselves, "I know why that happened." With an explanation firmly in hand, we now feel we know something. And the behavioral psychologists note that this state actually releases chemicals in our brain that make us feel good. We become literally addicted to the simple explanation. The fact that what we "know" (the explanation for the unknowable) is irrelevant, or even wrong, isn't important in achieving the chemical release. And thus we look for reasons.

The credit crisis happened because of Greenspan's monetary policy. Or maybe it was a collective mania. Or any number of things. Just as the proverbial butterfly flapping its wings in the Amazon triggers a storm in Europe, maybe an investor in St. Louis triggered the credit crisis. Crazy? Maybe not. Today we'll look at what complexity theory tells us about the reasons for earthquakes, tornadoes, and the movement of markets. Then we look at how the world and that investor in St. Louis are all tied together in a critical state. Of course, what state and how critical are the issues.

Ubiquity, Complexity Theory, and Sandpiles

We're going to start our explorations with excerpts from a very important book by Mark Buchanan, called Ubiquity: Why Catastrophes Happen. I highly recommend it to those of you who, like me, are trying to understand the complexity of the markets. Not directly about investing, although he touches on it, it's about chaos theory, complexity theory, and critical states. It's written in a manner any layman can understand: There are no equations, just easy-to-grasp, well-written stories and analogies.

As kids, we all had the fun of going to the beach and playing in the sand. Remember taking your plastic buckets and making sandpiles? Slowly pouring the sand into an ever bigger pile, until one side of the pile started an avalanche?


No positions in stocks mentioned.

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