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Without Black Swans Who Knows Where We'd Be?


A conversation between Minyanville Professors Conor Sen and Kevin Depew.

Editor's Note: Below is a conversation between Minyanville Professors Conor Sen and Kevin Depew further exploring some of the themes covered in Five Things You Need to Know: The Crisis of Non-Linearity.

CONOR SEN: Just checked the archives and see you took a two-month article hiatus?

Yeah, basically. I was launching The Daily Feed blog on, and also just didn't have anything more to say. Everything we'd been writing about for the past five, six years more or less happened and all that was left to do, it seemed, was pile on; central bankers are stupid or idiots, politicians are greedy and corrupt, etc. etc. There was nothing new being said. Everyone is in basic unanimity that Quantitative Easing will fail, and that there will be multiple rounds of it, and that the PIIGS will result in the failure of the EU, etc. etc. so really I had to step back and think about what it was, if anything, that I'm missing? I kept going back to the fact that when I started writing -- and Scott Reamer and I started at about the same time so he can verify this -- the reception was awful. No one believed anything we wrote about housing, the economy, markets, absolutely nothing. The kickback was negative and extreme. We were called permabears. People in well-respected publications, at least at that time, openly laughed at what we were writing. Those same people, of course, are now leading the charge for systemic collapse. And so what is something I could write today that would run counter to the mainstream thinking, and could I write it and even justify it so that I wasn't being totally a contrarian for contrarian's sake? So now I'm just partially a contrarian for contrarian's sake. Ha! And now the market will probably crash on Monday.

CONOR SEN: I have to admit I stepped off the QE-leading-to-hyperinflation-or-permanent-deflation bandwagon earlier this year for similar reasons. As you know I've had a harder time letting go of the PIIGS crisis meme, but I don't think that one is as prevalent outside of a certain insidery crowd. But even with the PIIGS I think it'll be more of a short-term heart attack than a fatal blow.

Right, and it is a serious issue, no question.

CONOR SEN: But I think you're on the right path, obviously or I'd fight you harder on it. The first thing of yours I remember reading was the Demise of Bling piece, which was in 2005. It was the first time I had ever even thought about it so it surprised me, but it made sense, and I get a similar feeling the more you write about the synthesis.

KEVIN DEPEW: It may be overly simplistic. I think this Hegelian concept of synthesis is possibly what people mean when they use the cliche: "History doesn't repeat; it rhymes." I mean, the risk is actually lower to this thesis than it appears. If I am wrong, and the system fails, then being wrong will be the least of my worries. There is far greater risk in arguing for and positioning for systemic failure. I don't even know how one positions for it.

CONOR SEN: I just find the "everything is going to blow up in one gigantic deflationary or hyperinflationary black hole and society will be set back 500 years" too troubling/extreme to bet on. I mean, in some ways that was my bet on 2007-2008, and I lived that rage/crusade, and it didn't pay off financially or emotionally the way I thought it would.

Yes, exactly! Part of what we are seeing today, the negativity and rage, is I think directly related to the lack of catharsis or emotional pay-off from the deepest part of the crisis. It's hard to make a secure case for something else emerging from this because it's nearly impossible to accurately predict what that something else will be in its entirety. For example, in the late '70s and early '80s, the books prophesying a dollar collapse and hyperinflationary bust and warning of too much debt were right... had there not been a hundred different emergences of credit dispersion, securitization, derivatives, all those things that allowed us to arrive to 2007. This crisis has been a severe regression from that emergence, but what comes next is unclear. And I just do not think it will be collapse.

You read the Market Wizards books and stuff, and even before then macro guys were worried about the dollar and debt, and yeah, we had S&L crises and such, but we're still standing (for now!). I bought that book on eBay six years ago. Written in 1973.

KEVIN DEPEW: If you look at the dollar, it's already collapsed twice since the peak in 1985. Twice. The dollar collapse most assuredly happened. It recovered about half of that collapse in 2001 and then collapsed again to make a new all-time low in 2008. It's happened. Everyone was right. It's time to stop predicting it. It's like the entire country has been gathering outside the Super Bowl every year since 1979 to successfully predict the Pittsburgh Steelers will win the 1979 Super Bowl. You're right. They won. You can stop predicting it now.

CONOR SEN: Imagine telling someone in 1973 what kind of computing power you could buy in 2010 for $500-$1,000 -- in 2010 dollars!
Who's to say it won't be the same for education/health care in 2030?

KEVIN DEPEW: Oh, people would say we'd be living on the moon and colonizing space by now if you put it to them that way. Which we practically are, by the way.

It speaks to your point about non-linearity. Before, the gatekeepers mostly hid it from us, but now it's in front of our faces.

KEVIN DEPEW: Yes, throughout history, the approved storytellers all enjoyed immense power. You know the old saying that "only the winners write history." With the media gatekeepers there is massive economic and political power at stake in trying to retain their role of information gatekeepers and interpreters.

I vaguely remember the Berlin Wall coming down (sorry for making you feel old). We talked about it in school for a bit and I remember it being on TV and in the newspaper for a little while, and then it was onto the next MC Hammer song. With the Internet now and the excess of information I can't imagine what kind of sociological impact that would have today. There could be a Zerohedge-esque site popping up talking about the coming Ukranian zombie invasion.

KEVIN DEPEW: Haha, I'd love to run that site.

CONOR SEN: Finance and politics are particularly susceptible to fear-mongering due to the constant stream of information emanating from both disciplines, whether the information is meaningful or not.

KEVIN DEPEW: Right. The irony is that polarization in politics is a more natural and more free state than unanimity. People miss this point and I believe it is crucial; once the parties completely merge into one, and there have been times in recent memory when they nearly have, freedoms become intensely jeopardized because there is no contrasting opposition. Without opposition there is totalitarianism. In a facile sense, people imagine totalitarianism to be the physical domination of the individual by the state. But domination of the individual need not be a physical constraint. It can be a mental state, and unanimity is just that, a mental constraint. So the more people talk about polarization in markets and politics, the more I take that to be the system healing itself; thesis and antithesis, to make way for the coming synthesis.

CONOR SEN: I've got a friend who longs for the return of the days when the educated person would listen to NPR, read the New York Times, and watch the evening news or the Sunday morning talk shows. I actually like the fact we're self-selecting media from a diverse list now.

KEVIN DEPEW: Yes, exactly. I mean, I understand your friend's perspective. It's comforting. I remember as a kid lying in bed and hearing my parents laugh and talk quietly while watching Johnny Carson on The Tonight Show and, look, that was one of only three channels you could choose from at the time, but everything seemed simpler then. Of course, this is how our linear minds function. We create these narratives in order to possess or hold on to these mythic experiences, and they are mythic. It is true, I really did at some point lie in bed and listen to my parents laugh and talk quietly while The Tonight Show ran, but how many times did that happen? Literally? Twice? A dozen times? A hundred? Do those hundred times, even if it were that many, define my childhood in some important way? Of course not. We're talking in total, even if it were a thousand times, a collection of fleeting, fragmented, cobbled together experiences that comprise several hours of a 40-year life. Several hours, at most, in total, over the course of 40 years. But my mind wants to use that experience and create something linear, explainable and informative to my existence. So I let it. Even that, what I've described, is non-linearity hidden behind a simple narrative. Suddenly the magnitude of that experience of lying in bed as a child in no way corresponds to the space, time or sequence of the original experience. In no way. The myth of the simpler time is nothing more than the power of the narrative, the attraction of the linear explanation of experience.

CONOR SEN: Right, and even underlying that is an assumption that "simplicity was nice" because it sounds like you had a good, nuclear family. If you were a gay kid in a broken home in an extremely Christian part of the south you might not have found that simplicity/dearth of choice quite so appealing.

KEVIN DEPEW: Right, and so whose linear experience is more real? We will say that both are. Individually. For both, there are things we will use, narrative inventions we will create to explain who we are, justify actions, etc. Both co-exist and both are right, which if taken to logical conclusion runs into obvious problems. Yet, that diversity and co-existence is precisely the same logical problem that runs through financial markets and securities valuations.

I've also found that it's the non-linear that provides the wonder and memorable moments in life. As much as I enjoyed my childhood routine as well (falling asleep to Orioles games on the radio, that kind of stuff), it's the non-linear that truly defined my path and led me to where I am today. Without those "black swans" who knows where I'd be?

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