Alfred Dawes | Black swans and inconvenient truths

Michael Burry made a fortune during the housing crisis in 2008. The doctor-turned-investment guru thought that the high-flying housing market would collapse, and made huge bets that it would. However, before the eventual collapse, he lost millions of dollars and faced a revolt by clients who didn’t believe in his bet. Burry was right. He was just too early in being right and that cost him money and the confidence of his clients. After cashing out over $800 million in profits for himself and his clients, he closed his hedge fund.

Burry re-entered the markets with his regular approach of analysis and fundamentals that had allowed him to profit from overvalued dot com stocks and overvalued housing markets crashing. This time, however, he was much more public with what he saw coming. Again he was right about the major stock market crash and impending recession that we are now experiencing, and again he was too early in calling it. This time around, his bet that Tesla stock would crash cost him dearly to the point where he was forced to abandon his put options positions. Had he stuck to his course, he would have seen Tesla stock plunging as he predicted, and his profits soaring with its crash.

Burry predicted the inflation that would follow COVID-19 and he predicted the stock market crash we are now seeing. His habit of being too early in his calls is a result of his purely logical approach to analysis. It was obvious to him, and those who wanted to see, that the fundamentals of the markets were off and that crashes would follow. What he never took into account was that most people didn’t want to see. They are guided by their emotions primarily and facts are not always accepted if they run counter to a feel-good narrative. Money was being made by banks, house flippers, traders and rating agencies at the peak of the housing market. Nobody wanted to believe the party would end. Making money clouds your vision to the fact that it must stop some day if it is not a fundamentally sound business. Even when the cracks appeared, they just kept partying, refusing to believe they were real.

REACHED THE BOTTOM

Even now as the American economy is in the midst of a correction, there are those who believe that they have reached the bottom. This belief alone is enough to prop up a system built on faith and trust, but it cannot stop the inevitable. Another investing guru, Nassim Taleb, made his millions out of economic meltdowns because he simply expected them to happen. He famously wrote on black swan events, “impossible” occurrences, with a very low probability of ever happening, but statistically possible, like seeing a rare black swan. Taleb kept losing money betting on crashes, knowing that they would eventually happen. The gains when they eventually did happen, though, were far more than enough to cover his losses.

Those who follow logic or factor in the inevitability of black-swan events will always be outliers. They are often ridiculed. It is a pyrrhic victory for them when the doom they predicted offers vindication. In spite of past experiences, we still ignore signs and are caught off guard when disasters happen. It is because our subconscious, which guides our behaviours and decisions, wants to protect us from the stress and anxiety of our present or future reality. This is why we will ignore facts that counter a preciously held narrative that makes us feel good about ourselves and our world. It is this wilful blindness why only a few dispassionate analysts can predict and plan for what is to come. This, when others are caught up believing the stories they tell themselves in order to avoid a painful truth about who they are, their flawed core beliefs, and their less than rosy futures.

Pandemics are inevitable. Stock market crashes must happen every few years. Releasing more money into circulation with stimulus packages must lead to inflation. If you cut taxes and borrow to fund the deficit while your Bank of England is raising interest rates, well, you know. Threatening Russian security by expanding NATO to its borders and provoking a fallen empire will eventually lead to war. The nonfungible tokens market had to crash (See my column ‘Nonfungible Tulips’ in The Sunday Gleaner). Having an energy crisis in the middle of a European winter will have significant consequences. America is the victim of an unprovoked attacked before nearly every war they enter.

Locally it is not hard to spot the facts in plain sight that were or are being ignored. Raising interest rates rapidly must put a struggling economy into a recession, with increased unemployment and decreased economic activity. Excluding some members of a society and offering them very limited access to progress must lead to crime and violence as their only opportunity. An ageing, fattening population will have an epidemic of chronic non-communicable diseases. When political parties are no longer separated by ideology or how much they improve the lives of the people, there will be increased voter apathy and vote buying. The list goes on.

Our barriers to addressing our greatest threats reside deep in our subconscious. Our world is how it is because we prioritise immediate gratification, comfort and safety, while rejecting the ego-shattering concept that we can do more. This, complemented with our worth being pegged to our belief that we are doing the right thing, will inevitably lead to our downfall. While we await the inevitable outcomes to our current patterns, the black-swan event we need is an awakening self-awareness.

- Dr Alfred Dawes is a fellow of the American College of Surgeons, and CEO of Windsor Wellness Centre. Follow him on Twitter @dr_aldawes. Send feedback to columns@gleanerjm.com and adawes@ilapmedical.com.