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Bad Predictive Models & The Three Little Piggies

predictive models

Below we look at the comical disaster of predictive models in everything from professional pollsters to market timers.

What the Pollsters Got Wrong

As the MSM declares Biden the winner of the recent U.S. Presidential election, it doesn’t take a degree in psychology, law or political science to expect Trump to challenge the results, as he himself has made quite clear.

Some see him as the poorest loser in U.S, history, others as a victim of left-wing fraud and a “fake” election.

Obviously, we have no interest in entering this divide/debate.

What we can all agree upon, however, is that once again, the professional pollsters and their “air-tight” predictive models of a massive “blue wave” for 2020 were comically wrong in the lead-up to an election with a red/blue race that saw states won or lost by a matter of tenths of a percent.

In short, no party, red or blue, saw a clear “wave,” and the U.S. remains highly divided.

Whatever your political color or post-election mood, we can plainly see that the much-touted “blue wave” predictive models employed by the vast majority of professional polling agencies were flawed by massive margins.

Wider Lessons to be Gleaned

The pollsters and their highly complex math simply got it wrong—which has implications for all predictive models, be they about viruses, markets, portfolios or politics.

In short, predicting the immediate future based upon arrogant projections rather than making allowances for the humbling complexity of living organisms is often a fool’s game.

The pollsters will say their data and predictive models were impacted by uncertainties that distort their otherwise brilliant algorithms.

They now point to uncertainties created by the COVID impact on voter behavior, or the distortions created by individual state ballot policies that impacted voter turnout—which despite COVID, was the highest voter turnout in U.S. history, and percentage-wise, the highest since 1900.

The pro’s, for example, had Biden winning Florida by 7% margins, when in fact, Florida went Red by a margin of 3%, thus destroying any credibility of the complex predictive models leading into 2020 in much the same way their predictive models missed the bullseye in 2016.

Then there’s the problem of the data itself. Was it gathered by folks who actually vote? Or was it just opinion shopping?

Did people answer their phones when pollsters called, and if so, who and why? How many did not? Impossible to say…

Again: telling the future with predictively models is often a comical exercise.

Why?

Because no projection and no predictive models can measure the great mystery that is the human mind and the vast menu of emotions within it.

The Rolex Theory

The near future of human behavior is beyond complexity and hence beyond precision, unlike, say, a very complex yet precise Rolex watch.

That is, Rolexes, despite their complexity, can be measured, verified and repaired. Their ticking is quite predictable for one simple reason: They are not human, they are machines.

Voters, however, are not machines. Nor are investors.

They are imbued with emotions, ego’s, insecurities, secrets, doubts and prides which are beyond full disclosure, full measure and hence the full scope of predictive models.

This makes human voters and human investors impossible to predict with precision, even if herd behavior is otherwise obvious to the eye, and even if the vast majority of trades on the S&P are performed by machines not homosapiens.

That is why complex models seeking near-tern certainty with regard to human emotion are little better than a coin toss.

Market Models—Totally Useless?

Which brings us to the matter of the U.S. markets and the forces which influence it.

As I’ve made annoyingly clear for years (some things are worth repeating), these rigged markets are now driven largely by the Fed (imbued with its own complex personalities).

Amazingly, the Fed is still trusted by investors, who are also highly complex beings driven by the twin emotional drivers of greed and fear as well as a forgivable amount of awe for fancy buildings and fancy titles.

Stated otherwise: Many have faith in the Fed.

This makes them beyond complex, and again, impossible to measure using predictive models—in the near-term.

Humans, under the influence of cognitive dissonance, can ignore what they see, trusting instead those revered institutions and the creative writing and predictive models they produce.

That is why it’s so easy to poke fun at the Congressional Budget Office, the Bureau of Labor Statistics or the World Bank or the IMF whenever they come out with a budget model, growth model or even an inflation model—as it’s all just patent guessing at best, or deliberate manipulation at worse.

We’ve rolled up our sleeves and shown how inaccurate those models are on everything from inflation to employment, GDP growth to earnings.

Nor are these agencies, including the Fed, reliable when it comes to warning shots, as not one of them has ever warned of a recession or even called a single one in advance. Not one. Not once.

They are lagging indicators at best, or just fiction writers at worse.

Investor behavior is no less complex, and no less unreliable. Let’s turn to them next.

Market Investors—Heads Comfortably in the Sand

We’ve said many times that this rigged market of unlimited QE to pay for unsustainable debt levels can continue as long as investors still have faith that a central bank can solve a debt problem with more debt, paid for with money created out of thin air.

Although such fantasies sound to good to be true simply because they are too good to be true, the majority of otherwise clever investors tend to bury their heads in the sand when it comes to confronting boring yet horrific topics like debt, GDP and market bubbles.

We get this.

Most people are not market trackers and have more than enough on their minds just making it through the month.

There’s little time to become armchair economists or delve into the history of debt-driven market implosions.

It’s both tedious and scary—so why bother?

This naturally causes trusting folks to trust their “experts” in DC (or their local financial advisor’s office) to do the hard-thinking and hard-work for them. Again, a totally normal expectation and reaction.

In short, good people trust the experts to guide them. They have faith.

And faith, as we’ve argued, is impossible to track, measure or predict, and thus, so are the near-term market trends and their bogus predictive models.

Even with all our complex tools, indicators, and data feeds, Tom and I can not predict with anything close to certainty what the markets will do today or tomorrow.

Again, predicting near-term market direction is a fool’s errand, as are most all predictive models.

Debt and Fiat Money—Easily Predictable

But here’s the rub: We’re not interested in near-term trends, nor are we interested in near-term outperformance or underperformance.

Why?

Because we are investors, not gamblers, and we see making money as a careful marathon, not a knee-jerk/breaking sprint.

Why?

Because the long-term market IS predictable.

How so?

Well, history and market forces, like math, have patterns that are not subject to uncertainty, emotion or chance, but hinge on economic laws regarding debt and fiat money that are as real as the laws of physics or basic biology.

Take biology, for example. Have you ever heard of a human system than can drink a bottle of whiskey without a hangover?

Or physics. Have you ever heard of an apple that falls up, rather than down, from a tree?

Or history. Have you ever heard of any empire, from ancient Rome to 18th century France, or 17th century Spain to the 20th century Germany, that was able to survive on debt, war and deficits by simply creating unlimited money with a mouse click or a money printer?

Name one.

I can’t. Neither can you.

Enter the History-Defying Fantasy Pushers

Well, as for the 21st century, the U.S. and it’s desperate Fed is trying to upturn all the foregoing laws of math, physics, history and debt “biology” in one grand and media-ignored sweep of fantasy-pushing and market steroids.

You betchya.

The Fed, and a politician near you—be it a past blue President or a past red one—has been driving U.S. debt levels to drunken highs with all the enthusiasm and brazen stupidity of a 1st year Frat pledge, yet promising voters since 2009 that it can drink a hundred debt shots without getting sick.

Their secret solution?

Easy, those same experts are telling you they can print endless amounts of fake money without seeing inflation or a market crash, effectively promising that they can actually drink a bottle of QE whiskey without suffering an economic or market hangover.

If you actually believe in such miracle solutions, there’s no need to read further.

In fact, there’s no need to read at all. Just buy some magical beans and let your traditional stock and bond portfolio ride a wave of fantasy forever.

Good on ya.

Speaking to Sanity

For the rest of you, however, you know better.

You know how it all ends. We’ve shown you this here, here, here and countless other places, including in our best-selling book, aptly titled “Rigged to Fail.”

So yes, we know that all market bubbles end. And we know how they end. Everyone. Every time.

Markets driven by debt always crash in equal or greater proportion to the level of debt which brought them to their apex, followed by an equally brazen nadir.

It’s like a basic principle of physics: “For every action there’s an equal and opposite reaction.” Too much debt equals a market crash in the same way that Force = Mass x Acceleration (F=MA).

Again, debt makes markets, economies and even empires predictable. They rise on debt and fall in debt.

Today, the world in general, and the U.S. in particular, is experiencing the greatest debt binge in the history of capital markets.

Knowing what we know about the laws of physics and markets, the size, duration and extent of the pain to come is thus historical and mathematical, not “modeled” or “theoretical.”

That’s why, in the midst of the most hated (and entirely artificial) bull market in memory, Tom and I build portfolios for the long-game, not the near-term, and we seek investors of similar common sense and similar respect for math and history.

When It All Ends? We Don’t Have a Clue

But as for predicting the moment (day, month, quarter or year) of the great hangover ahead, we don’t know, as never in the history of the Stars and Stripes has a central bank fought so hard to pretend that Capitalism has no dark size.

But real capitalism without recessions and market crashes is like Christianity without Hell—you can’t have one without the other. Healthy capitalism, the kind the Fed killed years ago, actually requires occasional pain, in the same way a healthy immune system requires an illness now and then.

Which brings us back that odd but so real issue of faith…

The current disconnect between tanking economies and rising markets ends when faith in central bank fantasy ends, ushering in a period of inflation, rising rates and a moment of cyclical financial karma seen in prior economic lab-tests, from Japan to Bear Sterns

But measuring and predicting faith in fantasy, including faith in the Fed, is, of course, too complex for us or anyone else.

We are not here to time such an historic loss, but simply to prepare for it.

Brick Houses and Big Bad Wolves: Remember the Three Little Piggies?

Like the little piggy who built the brick house rather than the straw or mud house, we take the big bad wolf of debt, currency devaluation and central bank dishonesty seriously.

Thus, when that big, bad market wolf comes to “huff and puff and blow your portfolio-house down,” would you prefer a portfolio made of brick or straw?

For those favoring brick-house portfolio’s, simply take a look at how we do things by clicking here.

Brick portfolios can be boring, but they are stable. They don’t always rise to the moon like a tech stock, but they don’t get blown away when markets get ugly.

And remember: The truest way to make money in the markets is to not lose money in the stock markets.

For those looking for straw portfolios, there are thousands of financial advisors waiting to take 1% of your assets to accommodate you and ride indexes on the oh-so fun way up, and then collectively blame “black swans” and “normal corrections” when those same markets tank.

These markets will tank, and like the Nikkei of 1989, will not see the V-shape “recovery” of the S&P post 2008, for the simple reason that the US is too broke to pay for another bag of steroids.

Your choice: Brick house or straw house? Short-term fun or wolf-free security?

In the meantime, stay informed, stay safe, and stay away from straw portfolios.

Best,

Matt and Tom

 

3 thoughts on “Bad Predictive Models & The Three Little Piggies”

  1. Then according to the accuracy of long term economic projections as you conclusively define, and your learned expertise,
    …. do you guys observe potential leverage for a Biden presidency to continue this US economic Ponzi scheme much longer?
    …. That is, how much potential remains for the US economy to protract its inevitable date with its economic ‘Waterloo’ moment, in your estimation?

    • I wish I could answer that question, but as indicated above, I am now humbled by the duration of the current Ponzi scheme–I never felt it would last this long. Again, I am humbled, as our report “Trust But Verify” explains. But I am also sickened, for the damage central bank “accomodation” has done to society, markets, social unrest and currencies is beyond doubt. Rather than time the expiration date of this Fed experiment, we can instead prepare for it by simply managing risk without being “gloom and doomy” as well as assume some risk without being bullishly romantic. The key metric is interest rates and the cost of debt, and so long as CB’s can artificially repress the same, the debt rollover which sustains the stock markets will and can continue, as our recent “Market Melt-Up” report addresses.

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