A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report
What is an economy?
Though answers to this question vary widely depending on the inquisitor’s goals, they all undoubtedly share two of the same elements: interdisciplinarity, and humanity. Economies connect vastly different activities, participants, events and systems, across multiple dimensions of time and space, multiple disciplines and areas of expertise, and through innumerable creative societal innovations in constant ideological evolution; the coexistence is not dissimilar to the semi-independent organs of an (economic) organism. The different environmental conditions (the macroeconomic background) interrelate the natural demands of living beings with accessible resources via a monetary method of exchange, and as such, hold together an imperfect and irreconcilable union between irrational human behavior and rational numerical valuation. Economies are messy and multifaceted superorganisms that span beyond time-space limitations and certainty, but here we are, pretending we understand them nonetheless.
Macroeconomics, as the study of broad-scale phenomena that apply to all companies and consumers in a given market1 , cannot, and does not, seek to define precise and discrete localized details influencing participant-dependent economic relationships; it is an attempt to apply generalized rules and observations in order to provide the kind of information necessary to help “guide the ship”, as it were. Keeping “everything” together requires strong cohesion, so minimizing technical complexity of the central focus is very helpful for all participants. In approaching this challenge, central banks around the world, as the primary arbiters of the task of economic stability, take a rather simply proposed position:
How is the current situation affecting the people? (e.g., employment and wages); and,
How is the current situation affecting the prices of stuff? (e.g., inflation/deflation)
As wage earners and consumers, these two focal points are obviously of paramount concern. But how might we interpret fluctuations within this dynamic as investors? What can one even care about in such widely-beheld announcements that could possibly give an investment advantage over everyone else who is also viewing the same thing? In a way, the whole practice seems like a foolish exercise in groupthink, so let’s pet the cloth and see if we can find a thread to pull…
The US Federal Reserve (the Fed), the world’s most-watched central bank, currently chaired by Jerome Powell, the world’s most-watched central banker, ensnares the world’s attention once about every six weeks with the announcement of FOMC deliberations that decide potential adjustments to the Fed Funds Rate, commonly perceived as the trickle-down rate influencing (via economic Levers and Pulleys) the whole interest rate environment for Americans, and, indirectly, the rest of the world, too. While consumers read these adjustments2 in terms of how they’ll impact mortgage, credit card and car loan payments, investors seem to really care about these rate adjustments for what they imply about the broader state of the economy, information that they believe they can use to adjust their portfolio holdings and investment strategies to maximize returns, which may be in stock equity or fixed income/bonds. Bam! There it was! Did you see that little thread poking out? One of these words is not like the other…
Believe. Belief. Human believing. This word—this idea—does not compute mathematically. Belief is the non-numerical, non-quantifiable, non-comparable filter through which all human behavior is enacted, yet it is fundamentally incompatible with the logic-based arithmetic undergirding the calculus of capitalism-as-usual. When J. Powell announces a rate cut, other interest rates don’t automatically “cut” of their own volition, but rather are individually influenced via reactions precipitated by commensurate adjustments to the subjective and variable beliefs in the humans responsible for managing them. Powell’s announcements aren’t directed towards the interest rates themselves, nor to the portfolios of his audience, nor even to the active awareness of his immediate observers and global listeners, but to their subconsciously held beliefs about the state of affairs. All observers have an appetite for risk that is set against their present beliefs about current macroeconomic conditions, an appetite which is levered in proportion to how subjectively surprising the magnitude of rate adjustment is as the announcement lands. Seeing how risky the Fed thinks things are (by “reading into” the timing and size of rate cuts/bumps) purportedly serves to help market participants more-properly gauge their own appetites for risk. As they all do that, we’d like to take the rest of this TPDEARR Macroeconomic Evolution article to probe into the impacts of belief in markets.
So tell me, Mr. Chairman, how dangerous am I feeling this morning? (We hope you are not surprised that this statement is not just a joke for some people, including perhaps someone who might be making decisions about your pension account.)
The North $tar
As everyone spends the next weeks and months adjusting their portfolios to the Fed’s recent rate drop3, let’s take a step back and ask the seemingly obvious question of why? Why do we invest at all? Money, duh. Sure, there are other things we want to apply the use of our capital to, like trying to spend it directedly to increase familial or friendship bonds, or for the benefit of others, but it is specifically the capital itself that is the central concern in the particular discussion of capital, not the other things affected by capital accumulation. So, very pointedly, we don’t want our money to be less as time goes by, we want it to be more. If we save it in savings accounts, or under our beds, inflation makes it be less, we have learned. If we deploy it into capital markets, it can be more. It’s not guaranteed to be more, but there is a sporting chance; whereas if we hide our cash in a vault, it will never be more. We want our money to grow, and we believe that it can, so we deploy it into markets where it can do so. If interest rate drops make the cost of money cheaper for people to use, peoples’ overall access to it grows, and economic optimism along with it… in other words: hope—belief in positive possibility.
Trying to deploy capital as profitably as possible is the driving impetus for listening to the Fed Chairman, the proverbial North Star of the state of monetary health; and the higher/lower Fed Funds Rate decision, for many, serves to indicate whether stocks or bonds are, supposedly, a more-enticing capital growth vehicle over time. Follow the guiding North Star and all your dreams will come true… I guess… …that is… …if you want to go North. And if “North” equates to profitability, then yes, we do want to go North (we all say, right?), and we thus believe that going North (receiving gains) is possible!
There it is again: belief. We believe that capital gains are possible, and so we deploy our money accordingly. We believe the stock will go up, that’s why we buy it; if we believed it were going down, we would sell. In the deep recesses of our collective unconscious, we all seem to believe hopefully in the perpetuation of the global economy. The fact that equity shares exist at all is attributable to the human belief in their value over time—the belief that the human economy will continue to exist tomorrow (so what we have won’t be value-less), and continue to offer up profitable opportunities. As soon as we, collectively, don’t believe it’s possible for our commercially-based society to exist any longer, cataclysmic stock sell-offs will characterize the fall of global equity markets and the collapse of human civilization; don’t worry, it won’t happen without you knowing. Until that point, and despite whatever terrible atrocities may be presently ongoing around the world at any moment, the existence of the stock market ought to be representative of the existence of human belief and optimism. Belief in profit potential, and human hope, are two facets of the same shape; e.g., the contemporary human.
As long as humans continue to believe, leveling investment decisions against guidance from the North Star will be a continuing and hopeful dynamic for a broad swath of the investing community, a process which will continue to serve as a forceful macroeconomic rudder. But there’s something else about the idea of belief that we must approach… something much less sensible… something Panglossian… something all too… human…
Consider the following, for it considers you:
The Infallibility Fallacy
Complete mathematical understanding of Bayesian probabilities or complex derivatives is not a prerequisite for equity market participation. If it were, virtually no one would qualify, private and public capital would not exist in pools large enough to support exchanges and flow into public companies, and none of our advanced economy would likely exist. It was the modern finance revolution that unlocked access to future capital obligations and allowed capital resource deployment to swell enough to finance the building of the world’s cities on debt. It is because fallible, uncalculating, irrational humans were/are allowed to participate in collective capital markets that this flood of capital (itself, large aggregates of excess income from the wage-earning every-person) was/is made available to companies. The cash from “the little guy” invested into the future is what bolsters public companies.
Although, since most people who invest do not get rich, there is certainly an underlying question of whether or not it’s ethical to allow people to lose their money to investments they don’t understand (and to the benefit of the few). Free-will and free-market advocates color the debate of the relevant ethics as moot to the centrality of self-determination, for better or worse, but we would be remiss to completely dismiss all the relevant implications of this (non-)debate. The sticking point herein lies in human fallibility, particularly our susceptibility to cognitive biases and the use of heuristics to provide mental shortcuts for quicker evaluation of inputs and stimuli. We humans cannot possibly consider all relevant information when making a (financial, say) decision, so we (unconsciously) use mental tricks to try to give us access to solutions that we can’t otherwise compute. These “tricks”, though, are much more heavily relied upon than they ought to be, especially in financial matters.
The representativeness heuristic, set forth by Amos Tversky and Daniel Kahneman, essentially lays out how humans will apply the thinking of one system to another to the degree of how alike they subjectively seem to be—their representativeness. Put one way, behaving across different systems (like social and financial,) aka living in reality, is a constant live experiment enmeshing the subjective behaviors of imperfect individual agents trying to navigate temporally-unprecedented decision making scenarios in constant succession. The law of small numbers, insensitivity to sample size, the clustering illusion, as well as the gambler’s fallacy, the hot-hand fallacy and the just-world fallacy are but a few of the messy tangle of biases that muck up the application of human decision-making, ensuring a constant degree of uncertainty in all of their interactions. All of these overlapping mental “tricks” conflate to convince the human thinker of a falsely elevated sense of certainty regarding future outcomes—that they are ultimately less-fallible than they actually are, and that outcomes are more certain than they could actually be. If you’ll notice, we haven’t had to include any investing-specific caveats in the preceding rash of imperfections as these fallacies apply to all behaviors both financial and otherwise. Unconscious heuristics are equally implicated in virtually all domains of human participation. An extrapolation of this suggests that people don’t try to grow their wealth because they know they can, they do so because they think they can, but that’s all it takes to participate in subjective engagement.
Hopefully you can see where we are going with this. The difference between investing and gambling is semantic: you can call it whatever you want, but the more exposed one is to risk and uncertainty, the more of a “gamble” the implicated outcomes become. It might be more obvious in the casino environment, but both the stock market and the roulette wheel are vulnerable to uncertainty, and they are both populated by participants who are convinced that the odds are (at least) a little less important than they actually are. We bring this up in Macroeconomics for the fact that, as the fundamental background economic conditions brighten (according to the Fed), human optimism follows suit, along with increases in the deployment of human capital from individual actors—people are increasingly pre-disposed to being spend-ier in any given situation thereafter. The more hopeful people become, the more likely they are to send their capital out to try and grow, as opposed to hoarding it for safekeeping. This spendthrift-ish-ness is not siloed into any one discipline either, but rather pervades all of society more broadly; optimistic people will spend on all sorts of ways to try to get even richer, not just in trying to buy stock equity. Furthermore, digitization of the investing arena has simplified and opened up participating in stock markets, so much so that it’s brought the activity down from the elite traders’ desks into the hands of the every person… into a smart phone… an app… sometimes, it even resembles a game. Don’t worry though, individual humans have never overestimated their abilities to predict future outcomes before…
To more fully grasp our investment opportunity herein, we must fold in an evolution in that longtime constitutional frenemy of US society: states’ rights.
Well, It’s a Gamble
Spending money is fun. Even when it’s economically painful, it’s still a rush of its own variety. Though impossible to calculate mathematically, people seem to find a higher degree of thrill satisfaction from spending rush the lower they are on the wealth spectrum. Financial literacy4, we reckon, has an instrumental impact on reversing the effects of this trend, but without incorporation into public education, it’s a futile effort to demand, or expect, such a shift in human behavior in the near term.
Since the US Supreme Court struck down a ban on online sports betting as unconstitutional in 2018, the issue has been officially in play in every individual state legislature. Now, states’ rights reign. Currently, 36 US states allow some form of commercial casinos, iGaming or sports betting, and the majority of these are recently formed operations after the 2018 verdict. Tens of millions of Americans have placed a sports bet in the last 12 months, wagering over $120B, a figure which continues to swell as favorable legislation proceeds to roll out in new jurisdictions and new businesses come online. Each of the three sectors is experiencing incredible growth with 30 out of the 36 jurisdictions posting record annual revenues.
From correlating this data over recent history we can infer that gambling is, at least in the present societal context of moderate inflation, positively-correlated with mild inflation, and so inversely-correlated to the public’s perception of the strength of their spending power. It appears that, as people feel they have less and less financial wiggle-room, as “the walls are closing in”, the emotional cocktail provided by games of chance with economic stimulation becomes more and more attractive. By extension, as economic conditions ease, all people spend more on leisure/entertainment, and as economic conditions tighten, less-wealthy people spend more on games of chance. Both of these dynamics support commercial gaming from one angle or another. Casinos took a hit in the covid-funtimes, but iGaming and sports betting have both seen increasing growth lately, YoY without fail. With fewer “legitimate” money-making options from employment in times of macroeconomic stress in a domestic economy, people exercise their opportunities to strike it rich where they can find them, despite the odds, it would seem. The current US commercial gaming market is seeing such opportunities expand in a blossoming forth that’s being powered by digital and internet-based services and, most significantly, friendly legislation.
The rapid proliferation of commercial gaming enterprise over the past 6 years, coupled with tens of $Billions in tax revenues and hundreds of thousands of jobs, combine to form an expanding front of economic interest that’s difficult to argue against, and will be even more difficult to block access to should states try to restructure their legislations. We’ll try to probe the opposition here to really understand if this is a good investment. Some recent research finds that the likelihood of personal bankruptcies has increased in states newly legislating legal gaming activities, particularly among young men of low-income localities, but it’s not exactly a straightforward blaming game as correlations also persist in the same group between other credit score-impacting elements, such as with credit card and auto payment delinquencies.
Further, addictive behaviors are not relegated to only casino-style games and sports wagers. Opponents of legal gaming claim gambling harbors uniquely destructive features, but a person’s money can evaporate just as quickly in other perfectly legal activities like trading ignorantly in the stock market, or trying to flip a house with no experience, or buying an NFT at auction. Or, is it somehow less destructive by comparison for a person to be addicted to alcohol, cigarettes, opioids or sugar? In the US, it’s not illegal to sell things that are addicting, and it’s not illegal to profit commercially from arrangements that may have a negative impact on the economic livelihood of a small minority of voluntary customers. If excessive gambling may contribute to an additional 100,000 bankruptcy filings in a given year, that absolute figure represents less than one third of one percent of the total number of gaming participants nationally, so it’s tough to classify the industry as inherently villainous to its participants, which is simply not true for the overwhelming majority of them. Gambling does not create financial illiteracy, it just channels it; gambling isn’t making anyone stupider, it’s just inviting their brand of stupid to a seat at the table. And to provide a little context here, the twelve-month period leading up through June 2024 saw ~460,000 total bankruptcy filings in the US. This is nearly 400% less than the 1.6 million filings in 2010 following the Great Recession. The “problem” right now is not unmanageable in comparison to the recent past, nor is it directly attributable5 to a supposed exploitation of human frailty, as many factors influence an individual’s bottoming-out of the financial system. By and large, the vast majority of sports bettors and online gamblers either use the system responsibly, or bow out of participation before they catastrophically implode their own finances. Big picture perspective is equally as important as individualized sensitivities.
This newly-legal industry interest is still in its fledgling stages of scaling up, and some analysts predict >10% Compound Annual Growth Rate over the coming half decade. Technological innovations like blockchain, data analytics and AI forecasting will continue to influence and optimize the efficiency and profitability of betting platforms in an ongoing and iterative stream of continual advancement, making the next few years particularly exciting for market evolutions. Coupled with the guiding North Star of Fed rate cuts, the intermediate-term investing horizon looks particularly juicy for [SEP.24 Squad Asset #3].
Final Thoughts
Belief, as a background feature of economic participation, is ubiquitous, and subjective. It is ineradicable. It is malleable, and fluid, and stubborn, all at once. Macroeconomic practice and theory are not just interest rate figures and algorithms from pencil-pushing suits; it is a real interpretation of the synthesis of human expectations and demands on the environment that supports them; it is certainly not all math.
Remember to use the information and analysis in this article with the other Demographics, Geopolitics, and Natural Elements TPDEARR articles to help construct a more-cohesive picture of the current investment landscape. Whether you choose to align your stock/equity picks with the SEP.24 TPDEARR Squad assets or not, we wish you the best of luck with your investments this quarter. Remember to put your money where your mouth is and direct your capital flows ethically. The world needs intelligent capitalists; don’t disappoint.
Good luck out there, everyone!
- Consider the statement “given market”, to actually be a euphemism for what is, in practice, an intersection of various types of markets. Even in a relatively-simpler contemporary transaction, such as a cash purchase of a single vegetable from a small-plot farmer at a local farmers market, no single “given” market accounts for all the numerous systems that integrate and overlap to provide the opportunity for exchange: monetary and financial markets to support the value of the cash currency used in the transaction; forex markets (all of which interrelate with the $USD) that push and pull against the given currency’s strength and make the value of the vegetable more or less attractive to the consumer in comparison to other vegetables available elsewhere; commodity markets that determine the price of agricultural inputs like fertilizer and influence the retail price point; sprawling transportation networks (anywhere outside of a village context) that enable transit of goods to and from the farmers market, supported by fuel markets and governmentally regulated civil infrastructure services that take care of such things as traffic lights and road construction; social markets of information exchange that generate interest and awareness of the farmers market in local society, and all the manual and software communication equipment industries that provide the materials required to manage and participate in contemporary life. All of these “markets”, and more, unfurl in real-time at the present-moment-frontier of industrial development, everywhere, all at once, supported by varying degrees of access to the billions of unique goods and services distributed unevenly across every region, and perceived differently by every subjective observer. So, sure, a “given” market. The reductive term helps the argument make sense, but diminishes the clarity of its own nature in the process.
↩︎ - Consider the following example of how to read the chain of events following a Fed rate cut: The Fed drops rates, so the cost of accessing money drops, so the appetite for higher-risk financial vehicles rises, so equity looks more attractive than saving or fixed income, so money pours into stocks causing equity-based firm valuations to elevate (for no intrinsic microeconomic reason), so portfolios shift aggregate capital flows into higher risk equity assets, so some firms get earned-but-delayed capital boosts to augment operations, while other firms (buoyed by Fed-rate-reduction-motivated global investor optimism) get un-earned capital boosts that instill bloat and/or unmanageable growth—i.e., bubbles—that result in “true” prices becoming even more obscured as they are hidden by irrational exuberance and optimism, the valuations of which are readily incorporated into the analyses of market participants as they try to get above a “rising tide” of elevated-risk-appetite-unleashed capital. Everything becomes unmoored from its prior positions and uncertainty reaches whole new levels. Whew!
↩︎ - The main implication of the relatively-surprisingly-large half-point cut is that “things are good” (read: market fundamentals appear supportive of commercial profitability) in the domestic economy so it’s a good time (for firms) to start deploying more capital for things like hiring people and expanding operations.
↩︎ - Financial literacy encompasses basic arithmetic, currency and banking systems, interest rate dynamics, economics/supply and demand fundamentals, human behavior/behavioral economics, and global interconnectivity, among other essential topics. Without inclusion in public school curricula (and because the vast majority of the public polity are financially illiterate, and so cannot teach their children the basics,) it requires the knowledge one can gain from about a hundred topic-relevant nonfiction books. The time it takes to accomplish this feat obviously varies from person to person, but it cannot be accomplished in a day, or even a year. Most of the information can be acquired in the place where all information is kept… the public library.
↩︎ - How many bankruptcies in, say 2022, are due to decisions and events precipitated by the covid-years prior? How much responsibility or blame can be given to any one external event, account, action or behavior of a bankrupting person, as opposed to all the other contributing factors? Our financial lives are a mesh of all of our financial behaviors, each influencing all of the others, perhaps most critically, over time. For example, if someone bankrupts as a result of cascading consequences from being approved for a mortgage in a prior year that they weren’t ever realistically in a position be able to pay off, this is an example of over-extension by the underwriter, and it is malfeasant behavior by essentially lying to the customer about the financial reality of their circumstance. So, whose fault is the bankruptcy? The mortgager, typically, is following approval standards organized by the banking institution that they work for, which are tied to lending rates that ultimately trickle-up in their leverage against the Fed Funds Rate. The macroeconomic adjustments of the Fed are the interest rate backstop for all lending behaviors, and thus at least indirectly culpable in all lending behaviors tied to it from all participants in the system. So, again, whose fault is the bankruptcy?
The customer, for seeking a mortgage they couldn’t afford;
the lender, for over-extending to a customer who couldn’t ultimately afford it;
or the Fed, for creating the conditions enabling the legal-but-harmful interaction between the prior two culprits?
How can we compare the risks of one cause of financial ruin to another, like bubbles of gambling debt to years of crashing housing markets? In societies where activities that some deem to be “vices” are officially prohibited, residents typically find unofficial ways of engaging in them nonetheless, so the impacts of those activities persist despite prohibition. Furthermore, all things considered, if the vast majority of people who participate in the system do not experience ruin, but find it as a worthwhile source of entertainment, or food, or thrill, even at a financial cost, how can we even objectively measure something like overall benefit to the public? (Hint: we can’t.) Yes, commercial gaming remains controversial; so does refined sugar, red meat, nudity, guns, education, sex, health habits, bad words, governance, religio—okay, everything is technically controversial in our subjectively-perceived reality….
that’s…
the…
point…
↩︎
tkscm, limited 