Note how you feel NOW at this very moment; How did you feel during the worst of this?
Afterwards, there is going to be the greatest ever HINDSIGHT BIAS FREE FOR ALL, an after the fact reimagining of what we all swear we knew.
Truth: No one had any idea WTF was going to happen.
— Barry Ritholtz (@ritholtz) April 17, 2020
Back in the middle of April, when everyone was terrified, the economy in full free fall, markets around the world had collapsed, and people had no idea how this thing would play out, my Spidey-sense began tingling.
I recognized the sensation from what took place during the last crisis, when the entire population was completely blind-sided. It was sometime around 2010 that there were signs people completely forgot that they were just blindsided by events they failed to anticipate. Afflicted with the financial equivalent of PTSD, one way of coping was denial: Of course we saw it coming! It was so obvious!
A quick war story:
The CNBC studios on Madison Avenue were more an office than a TV production facility. The recording rooms were closets with cameras, klieg lights and a seat. I had already written about how backwards the economy was, driven by low rates and real estate instead of job creation and wage gains; my Cult of the Bear piece analyzing the impact on the markets of a possible 30% drop in real estate with a downside target for the Dow of 6,800 (from 13,000) was widely excoriated.
I had been doing TV regularly since 2003, and this session was the first time an anchor actually laughed at my commentary and analysis — live on the air, actually guffawed out loud.
Also on the show: Peter Boockvar. The anchor asked Peter what he thought of my absurdity, the mere possibility markets could get cut in half. I have a vivid recollection of Peter saying “Well, no one thought real estate could fall, and that is rolling over. A market crash is more possible than many people believe.”
After the hit, Pete and I walked back towards respective offices in midtown. We marveled at the groupthink, that merely discussing the possibility of a market crash could elicit laughter. We were less than 5 years from the dotcom crash lows, when the tech-heavy Nasdaq lost 80% of its value — and it was already forgotten. “Can you believe that bullshit?” one of us asked the other (and I don’t recall who). “Its as if they cannot even imagine what just happened.”
Fast forward a few years later — residential housing collapses over 30%, subprime blows up, as do all of the securitized structured products built on top of it — CLOs, CDOs, CMOs, etc. Markets fall 56%, Unemployment exceeds 10%, yadda, yadda, yadda. I am at a small dinner in midtown around 2013, with some hedge fund managers, economists, and a Nobel prize winner. Of the 10 people in the room, 6 had published work in advance about what was about to hit in 2008. We marvel at all the people who not only forecast the economic collapse, yet somehow, they never managed to publish on it. One name comes up repeatedly, and I comment “For guy who saw it coming, leveraged long financial stocks was certainly a surprising way to express that view.”
But here is the thing: None of the people who remember calling the crash are liars, they are simply humans. Our cognitive processes evolved to facilitate adaptation and survival on the savannah, not financial decision making or capital risk taking in markets. This is why traders are advised to keep a trading journal, sign a prenup before they make each trade. When they do their post-mortem for a trade gone wrong, they can see exactly what they were thinking in black & white, freed from the vicissitudes of faulty recall and biased memories.
And here we are today, with the exact same scenarios playing out.
Why did we need a lockdown? Why were those models so wrong about the death count? What is with this over-reaction? Why is the cure worse than the disease? And do I really have to wear a mask to go to Costco? To these people who foresaw the future, only one question persists: Why didn’t you express your prescience by loading up when the market crashed?
This is why forecasting is so difficult. Markets are probabilistic mechanisms, collectively allocating capital with imperfect information about an inherently unknowable future. But that’s merely the a priori issue; add to that the a posteriori: our all too human tendency to rationalize, to misremember, to lie to ourselves, which makes learning from our failures all the more difficult.
It is frustrating watching this play out again (and again). It is a reminder that all we can do is try our best (and that not everyone will take to the message). I try to be open-minded to the possibility that I don’t know so I don’t get blind-sided by my refusal to acknowledge that I don’t know…
The first rule of Dunning Kruger Club is that you don’t know you are a member of the Dunning Kruger Club.
Don’t Panic! (March 9, 2020)
Are Markets Wise — or Probabilistic? (March 26, 2020)
Explaining the Correction, with Perfect Hindsight (October 15, 2018)
Congratulations: It’s a Correction! (February 9, 2018)
Ray Dalio on The Fine Art of Failure (December 11, 2017)
Investors and Political Pundits Fooled by Randomness (November 11, 2016)