Choose Your Own Probabilities

Photo: Choose Your Own Probabilities

If you are sovereign, then who cares what the economy is doing?

Even on the Joe Rogan podcast, debates are occurring about whether or not the economy is in recession. In a recent episode, he and his guest were arguing between the “evidence” of a recession, being two consecutive quarters of negative GDP growth and the “counter-evidence” - Fed Chair Powell and President Biden stating that despite the GDP numbers, the US was, in fact, not in a recession.

The “controversy” was what the definition of a recession was and included a few interesting data points, such as the Wikipedia definition of a recession mysteriously changing two weeks ago to align with the US administration. (Up until two weeks ago, Wiki had used the Harvard Business School definition of two consecutive quarters of negative growth.)

Recession, no recession, I will argue that it doesn’t make a difference. The point of the story is that macro-finance debates are occurring everywhere these days.

Over the last two years, there has been a surge of mainstream hunger for a better understanding of macro-finance and economics.

This has come from a convalescence of forces.

In 2010 an increasingly disenfranchised and populist uprising began to take the stage with the Occupy Wall Street movement - an alignment formed around one general question - “Why is wealth consolidated in the 1%?”

In 2016 a reality TV star became the most powerful man in the free world, turning politics into a spectator sport - complete with home team vs away team rivalries. Political coverage overtook music and movie stars as the dominant theme across late-night talk shows, cheesy tabloids and every form of entertainment media.

Cryptocurrency created a culture of monetary hobbyists armed with a gamified tool to bet against the US dollar.

COVID lockdowns led to the combination of free time paired with government stimulus cheques and inspired a new breed of day traders and pop culture-focused “meme stocks.”

The list goes on - but over time, pop culture has increasingly merged with historically “boring” subjects like monetary and fiscal policy.

This is a net positive - people should have a vested interest in the policies that shape their future and an understanding of how money shapes the world.

But more often than not, attention gets pulled into the inequities - people's attention is quickly transformed into finger-pointing, with a relentless effort to call out the “enemies.”

Case in point - the 2010 Occupy Wall Street Movement was 100% warranted. Reckless US banking thrust the world into a global recession, causing over 10 million Americans to lose their homes, jobs and self-worth. Yet, in the aftermath, the conductors of the crises were bailed out by the government and subsequently distributed record-setting dividends among themselves.

Civilians had purchased homes that they could not truly afford, were forced to default, and learned a hard lesson. But the banks who underwrote the billions in highly profitable loans with zero diligence were saved from learning the hard lesson - government bail-out and record-setting dividends followed. People had every right to be angry.

But the anger ended up pointed not at the bankers or the Government but at “the 1%” - grossly speaking, anyone who had “made it.” The easiest targets were the owners of large corporations - which, when dissected critically, is dominated by small business entrepreneurs who sacrificed, persevered and eventually built something extraordinary - a vital component of the working class.

The energy created (anger) was justified, and the direction of the energy (condemn the rich) was misdirected (in this author's view).

There are parallels within the surge of “meme stock” day traders over the last few years - initially, armed with a shelter-in-place mandate, an abundance of free time and some government helicopter money, millions of people had the space to start watching the stock market. And what did they learn? Over the last decade, the market has done one thing - go up. Sometimes it corrected, and then it went up again. So rush in - and buy something - don’t get left behind.

The energy created - in this case, a desire to participate in capital gains, was justified, and the direction of the energy - rushing into meme stocks for fear of missing out, was misdirected (in this author's view).

In both examples, and dozens of others, people were swept up by a new idea - a productive and vital idea - but then were swept astray by the herd mentality.

This is important and is why it does not matter whether or not we are in a recession.

Herd mentality is highly valuable - ask any new parent. Community and collaboration make life better. But stepping outside our primal needs and into our modern world, herd mentality has diminishing returns.

I don’t care about the government's definition of a recession because my energy is better spent not taking part in it.

You cannot insulate from disaster. History books are filled with billionaires who went broke when their country went to war. You can live your entire life dedicated to healthy habits yet still develop cancer. There are no guarantees or absolutes in this world.

But you can alter the probabilities. And that is your best shot.

Don’t Go Broke - Decrease the Probability.

I am reckless. I have always been reckless. When I began investing, this manifested as reckless gambling. When I had kids, I became a reckless saver. I often put myself into uncomfortable cash crunches in exchange for long-term stores of wealth. I have watched too many people generate strong cash flow and not save enough for their future. This possibility haunts me in my dreams.

Banks go broke when they over-leverage relative to their reserves. Do you think about your wealth picture the same way? Are you your own bank? You are 100% capable - complete with your own risk management policies. I am old school; I like owning physical gold as my reserves. Not because I expect it to make me rich, but because I expect it to prevent me from going broke.

Generate Wealth - Increase the Probability

Jeff Besos attributes his success to “At bats” - he swings at more pitches than any other entrepreneurs he knows. He understands that success is never guaranteed, but the more he swings, the higher the probability - and this is what he focuses on.

Here is an alternative perspective - Brad Pitts's acceptance speech at the 2020 Screen Actors Guild Awards:

“I've been banging away at this thing for 30 years. The simple math is that some projects work and some don’t, and there's no reason to belabour either. Just get on to the next. Enjoy the evening because tomorrow it's back to work.

Extend Your Game - Increase the Probability

I used to want to live forever, but Marcus Aurelius and Nassim Taleb talked me out of it. I would rather live an epic 100 years than 300 conservative ones. So I want to live as healthy as possible for as long as possible, taste all the adventures life offers, and then get carried out on my shield.

I obsess over staying fit - triathlon, martial arts, weight training. My family and friends often mock me for my refusal to eat processed, packaged or otherwise unrecognizable “food products.” If it is not organic, whole food - beat it.

I do not drink alcohol - yes, many studies show a positive correlation between one alcoholic beverage per day and an increased healthy life span - but I know very few people who are that disciplined 100% of the time.

Also - there are no absolutes; in exchange for whatever benefits come from having a drink, you receive an abnormally large blood sugar spike, disruption to REM sleeping patterns and compromised motor skills for 36 hours.