I Know It Was You, Fredo
December 8, 2015·0 comments·adaptive investing
The Central Tendency, the assumption that outcomes cluster predictably around an average, still dominates how we model markets and predict returns. Yet political polarization is accelerating, market liquidity is hollow, and "impossible" events keep happening together. The gap between what our models promise and what actually unfolds has become a fault line in modern investing.
- Political polarization is structural, not cyclical. Government debt maintenance policies inevitably widen income inequality, which fractures electorates into opposing camps. The middle doesn't hold; surprising outcomes push left or right, not toward the center.
- Market liquidity looks real but isn't. Dodd-Frank eliminated bank inventories, and algorithmic trading provides liquidity only when profits are certain. When shocks hit, liquidity vanishes instantly, collapsing everything it was supposed to support.
- Our risk models say impossible things happen constantly. Credit Suisse data shows market dislocations that shouldn't occur together over a million years of trading happening every few years. We watch them occur, then keep using the same models.
- We've confused respect for econometric modeling with trust in it. Hyman Roth always made money for his partners. Michael Corleone learned you can do business with someone without trusting them. We've stopped making that distinction.
- The problem isn't the models. It's our conviction that they still describe how the world works. When outcomes are bimodal instead of bell-curved, betting on the middle isn't prudent; it's how you end up caught between two extremes with nothing that works.
The Why of Epsilon Theory
- Make more informed decisions as an investor and citizen.
- See through the nudges of Big Politics and Big Media.
- Become a better consumer of news.
- Maintain your autonomy of mind in a swarm of narratives.
- Join a community of more than 100,000 truth-seekers.
Unlock instant access to this and hundreds of other evergreen essays that explore the world of narrative through hard science and human wisdom.
Looking for Deeper Insights?
Unlock exclusive market intelligence, trade ideas, and member-only events tailored for investment professionals and active investors with Perscient Pro.
VISIT PRO
DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
