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Quotable – Note: A long quote today, but thought it too brilliant not to share in its entirety for those of us sickened by the “liberal elite” no-holds-barred attack on what remains of our culture and the ongoing destruction of our universities.

“It is worth acknowledging that the demand for ‘safe spaces’ has a deep moral or intellectual component. What these battalions of crybullies want is to be protected not only from physical harm but also from anything that would challenge their settled ideas of virtue regarding race, sexuality, ‘the environment,’ political responsibility, the Second Amendment (and, increasingly, the First), and so much more. It used to be that the very pattern of a liberal arts education was set by the figure of Socrates calling his interlocutors to debate about essential questions. What is the good life? What is virtue? Can it be taught? What is truth? How do we recognize it? How can one justify going to war? What is the best way to organize society?

“Those were the sorts of questions that, once upon a time, those who were privileged enough to go to college paid good money to think about seriously. By acquainting one with the great debate conducted from the dawn of recorded history until the day before yesterday, a liberal education initiated one into a never-ending conversation. ‘Being educated’ meant immersing oneself into the stream, if not the scrum, of that debate and understanding that one’s own position on the tiny lip of the present moment offered but a poor resource for understanding the important questions that confront us all as imperfect and mortal creatures.


“Today, by contrast, a college education, apart from whatever technical or administrative skills it may impart, seems geared to reinforcing a set of intellectual and moral clichés and protecting its charges from confronting any idea that has not received its Good Housekeeping Seal of political correctitude. Enforcing a regimen of intellectual timidity fired by ravenous moral resentment, today’s colleges are in fact factories for the production of sclerotic, politically correct conformity on any contentious moral or intellectual issue. The spectacle of college administrations first inculcating and abetting this timidity and then capitulating to the groundless anger that it feeds upon would be comical if it were not blighting the lives of those it pretends to help. ‘We are,’ as G. K. Chesterton observed in another context, ‘on the road to producing a race of men too mentally modest to believe in the multiplication table.’”

–Roger Kimble, The New Criterion

Commentary & Analysis

Currency perversity or dimension reduction?

What if a central bank said the following?

  1. Risks to the financial stability outlook have increased further in the past six months…
  2. Many farmers now face a third season of negative cash flow with heavy demand for working capital.
  3. Imbalances in the housing market are increasing.
  4. A future sharp slowdown could challenge financial stability given the large exposure of the banking system.
  5. Internationally, credit spreads have widened, placing upward pressure on the cost of funds.
    The level of problem loans in the dairy sector is expected to increase significantly over the coming year.
  6. But don’t worry, the system is resilient.

If you haven’t already guessed, these were my selected excerpts from the Reserve Bank of New Zealand news release yesterday: Housing and dairy risks to financial stability. It hit my email box at 5:02 p.m. ET.

Given the set of goodies laid out by the RBNZ, you would of course expected the currency to surge, right? Say what?

Well, the New Zealand dollar did surge last night (as I was enjoying my second attempt at a frittata with my wife) and continues to rally today.

Buy the rumor sell the news, you might say. But there was no rumor RBNZ was going to “sound” so negative. Maybe a rally because we all know the downside, so any surprise will likely be positive, so why not buy. Well, hmmm….

I noticed this comment from the Bank of Canada today:


That is the point: There are so many reasons why the economy in New Zealand can get a lot worse (did I mention China?). And watching the price action in the New Zealand 10-year benchmark interest rate, I thought that was what was happening…

Maybe it’s just a random technical retracement, allowing Mr. Market to suck in more longs near-term. But a close above the 21-day moving average at 0.6863 might be problematic to the retracement idea:

You might imagine from this rationalization I am short NZD/USD. You would be right. My narrative–this is perverse—is another way of me talking my book. Post-facto attempt to provide causation from what we can see.

Nassim Taleb, in his book, The Black Swan, did a good job of summarizing what we do as traders every day in markets.

Remembrance of Things Not Quite Past

Our tendency to perceive—to impose—narrativity and causality are symptoms of the same disease—dimension reduction.

By a mental mechanism I call naïve empiricism, we have a natural tendency to look for instances that confirm our story and our vision of the world—these instances are always easy to find. Alas, with tools, and fools, anything can be easy to find.

[W]e will tend to more easily remember those facts from our past that fit a narrative, while we tend to neglect others that do not appear to play a causal role in that narrative.

…So we pull memories along causative lines, revising them involuntarily and unconsciously. We continuously renarrate past events in the light of what appears to make what we think of as logical sense after these events occur.

Consider that two people can hold incompatible beliefs based on the exact same data.

Well, based on the price action today, it is clear at least two people hold incompatible beliefs based on the same set of pronouncements from the RBNZ.

But here is the rub: if we didn’t develop narratives (fundamental, technical, astrological, etc.) we wouldn’t have anything known as a trading edge.

So if you accept we are all stricken with dimension reduction, and I don’t know how one can argue otherwise, assuming one isn’t a politician or lawyer, we should accept what the late great Mark Douglas, author of Trading in the Zone, told us:

We need to develop a probabilistic mindset.

A probabilistic mind-set means you don’t know what will happen next. Every edge has a unique outcome that we don’t know, so you should have no expectations; therefore it is simply a probability bet, you are risking a certain amount of money to play a future outcome.

Damn I hope I’m right. 🙂