No Journal was published Sunday, Dec. 14, 1930. This week's sermon is on the subject of pattern recognition. A couple of items from the past week:
Dec 20:
The Old Timer: “When you feel gloomy and discouraged ... just remember that you felt the same way back in 1921, 1914, 1907 and other years of depression. You may rest assured that what you possess today will be worth much more a year from now. A man without patience, and with no faith in the country's ability to recuperate from depression, never accumulated a huge fortune.”
Dec 17:
Precedent indicates we're in “culminating phase of the prolonged depression”; conditions are similar to those in 1907 and 1921 that “marked the climax of the dislocation in business and securities.”
Of course, there are any number of previous similar items - this is one of the themes that strikes me most reading the 1930 Journal. The lesson I take from this is the danger of depending on historical patterns. This I think is for two reasons. First, there's the data mining problem - the fact that detecting patterns is a survival skill, so humans are very good at finding them, whether they are real or not. However, this can probably be compensated for with some care. The second problem is more insidious. Even if the pattern you find is real and not a statistical mirage, if you don't have a good understanding of the causes that drive it, then those causes can go away without your awareness - and goodbye pattern. The amusing metaphor Taleb uses for this is:
A turkey is fed for a 1000 days—every days confirms to its statistical department that the human race cares about its welfare "with increased statistical significance". On the 1001st day, the turkey has a surprise.
Another metaphor might be the rogue wave. The height of the vast majority of deep ocean waves follows a reasonable mathematical distribution based on prevailing weather, commonly reaching heights of 20 feet or more in storms and up to 50 feet in extreme conditions. However, eyewitnesses long told of the occasional much higher wave approaching 100 feet - a wave that could sink a 500 foot cargo ship, and one that might be expected only every thousand years using the usual statistical distribution. For many years these legends were dismissed, possibly due to those other sailor legends about the existence of krakens, mermaids, and Eskimos. However, in the past 10 - 15 years, these waves have been found to happen with a frequency considerably greater than one per thousand years - in fact, one study found ten in a three week period.
I think I like the rogue wave metaphor because it has something of the flavor of longer cycles superimposed on shorter ones - while I don't buy into soup-to-nuts long-cycle theories like the Kondratiev wave, I do think there may be something to a longer-term debt cycle that plays out over 50-70 years (for example, 1870, 1930, 2000). The generations that were adults or grew up during the bust want no part of debt for the rest of their lives; the next generation born 20 or so years later still has some of that culture; the next generation, knowing of the bust only from their grandparents' stories, are probably ready to abandon all caution again. It may not be entirely random that the Jubilee year commanded in the Old Testament, during which all debts were forgiven, happened once every 50 years.
End of sermon. My two favorite items of the week, from Dec. 16:
Reminiscence of the 1907 panic: A reporter asked one of the most prominent brokers what started the panic and received the terse reply: “Somebody asked for a dollar.”
And, of course, from Dec. 19:
Humpty Dumpty sat on the wall, Humpty Dumpty got a great fall;
All Morgan's money and Henry Ford's men
Can't put Humpty Dumpty together again.
What made Humpty Dumpty fall? Nobody knows for certain at all.
Some say the cause was the stock market crash,
And the call which the brokers sent out for more cash. ...
Some think Humpty was filled up with gas, And thus it was that it came to pass,
Inflated with credit, high prices and rent, And call loan interest at 20 percent. ...
Some say that Humpty had lived far too high
On Good Times cake and Prosperity pie.
Had too much to spend and to much to eat,
Causing surplus production of cotton and wheat. ...
Of things to see and hear and drive - Radios and motorcars, sakes alive!
'Twas little wonder he ... fell from the wall; But nobody knows for certain at all.
Can Humpty be put together again? So far all efforts have been in vain;
... they'll succeed without a doubt;
But when they'll get him back on the wall, Nobody knows for certain at all.
Finally, the Youtube oddity of the week - Campus Vamp, a Mack Sennett silent comedy short, starring a young Carole Lombard - including a mildly risque beach softball scene in glorious early Technicolor.
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