What Do I Know?
“New year's resolution to write something of value,
New year's resolution to write something would be fine.
All I ever wanted was someone to rely on,
All I ever wanted was somewhere to call home.”
Camera Obscura
What Do I Know?
I recently left my firm to pursue something new and different. But I had no idea what the new and different was going to be. For the first time in my career I faced a blank page, an opportunity to find a new passion that would inspire me and lead me through the next phase of my life. But I didn’t know where to start.
Rather than bore you with my resume and the things I did and tried throughout my 30-year career, I will say I started with a list. I wasn’t interested in jobs I had or what I had done or accomplished. I was interested in what I had learned. So, I simply wrote down what I thought I knew. I wrote down whatever I could think of that I had learned, experienced, or area where I felt I possessed some sort of knowledge or expertise. I kept this list going for a couple months as I worked through my exit at my previous firm.
It ended up being extensive and dare I say impressive. But as I came back to my list of knowledge and expertise, I found myself asking…do I really know that? Do I know what asset class will outperform in the future? Do I know what the growth rate of GDP in the US will be over the next 10 years? Do I know whether the stock market is fairly valued? Do I really know the direction of interest rates? I ended up changing a lot of the items on my list to include many usuallys, historicallys and added a lot of tends to. Very little was absolute.
It turns out I really didn’t know all the much, but two things really jumped out at me from my list.
The world/economy/market is a complex system. So complex that our ability to predict any outcome with great certainty is difficult.
The best we can do with uncertainty is to develop a range of probabilistic outcomes and make our best judgement.
If we recognize those two things as true and accepting a level of humility in our approach to what we truly know, then I think we can develop a framework for dealing with those uncertainties and complexity. This is what I think I know.
So, we have established that I know with certainty very little, but I am curious and I wonder about a lot. Today my list of wonders is long. The following spring to mind and are in no way exhaustive:
I wonder about debts, deficits and demographics and what they mean for economic activity, and I wonder if it is realistic that AI will deliver a productivity miracle that saves declining rates of economic growth.
I wonder if the correlations of stocks and bonds have changed permanently making asset allocation decisions more uncertain.
I wonder what is lurking in the plumbing of the financial system that we really haven’t considered.
I wonder if the four-decade trend of disinflation and lower rates has finally come to an end.
I wonder if there is really a good way to explain the value of a dollar. We may have to draw on Plato to help us here.
I think these wonders reflect the times we are living in and the many opportunities and challenges we face. And it is my intention to get into all that in future posts. I will attempt to keep these posts short and concise since we all have so much information to absorb. But I think through curiosity and experience we can explore opportunities that hopefully bear fruit and clarify our understanding to the extent possible. I hope to provide you with a way of looking at the world that you haven’t considered.
To summarize my investment framework currently, I view the environment and the outlook as favoring risk management, but I have a fully deployed portfolio of diversified and, to the extent possible, minimally correlated assets and strategies. I am overweight alternative strategies that are hedged. I think there are several interesting things to do in equities and I have several themes that I am deploying capital. I continue to favor diversification away from dollars, but that is a much longer discussion. And I have a barbell approach (heavily weighted to the front end) in fixed income recognizing the unique posture of the yield curve, with much of my credit exposure coming through private credit. We will get into this and more later, but it is safe to say I remain well hedged. It is a posture that makes sense for me and will undoubtedly change over time as the world shifts around us and my understanding becomes clearer.
So, this is Wondering Aloud. It is my place to call home. And I hope it is a place you will come to rely on. If nothing else, it can be a place where we can ask questions and wonder about the world and what will come next. Thank you for being here and please come back.
Steve Barth
Wondering Macro LLC
I have a couple of recommendations, though without knowing you except here they may be redundant. But I'm willing to risk redundancy.
1. Regarding "I wonder what is lurking in the plumbing of the financial system that we really haven’t considered," I would recommend
a. Al Bartlett's classic lecture, given thousands of times during his career, "Arithmetic, Population and Energy" - YouTube, https://www.youtube.com/watch?v=sI1C9DyIi_8
b. The financial system seems to use GDP as a standard of national financial well-being. But there is missing any concept of NDP. Net Domestic Product would account for the cost of domestic production. And if we go full-tilt-boogie toward fiscal reality, "net cost" would include costs now deemed by economists as "external," i.e. those we foist onto other peoples and ecologies which we can 'afford' to ignore entirely. And despite that lateral arabesque, the harm is done, and we pay for it individually and collectively, as in the consequences of the degradation of the Amazon forest.
2. Regarding "I view the environment and the outlook as favoring risk management, but I have a fully deployed portfolio of diversified and, to the extent possible, minimally correlated assets and strategies…"
Risk management began as a way to assign fire codes, and is not really up to the job of assessing most other risks. Insurance companies, for instance, never speak of risk analysis. They are centrally interested in the cost of consequences. This is embodied in the "precautionary principle." Businesses may well profit from risk analysis, but that must be accompanied by actuarial science to avoid great harm. See for instance the railway disaster at Palestine, Ohio, and its causes.