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What Will Make You Change Course?



August 02, 2013 – Comments (6)

Board: Macro Economics

Author: yodaorange

There is a recurring theme that recently keeps popping into my mind:

“What piece(s) of information would cause you to change course?”

It is a pertinent question for a lot of topics, for example the Detroit bankruptcy. It is equally pertinent for many investment beliefs that we hold. The recent thread on the Detroit bankruptcy is a good example. [1] From the thread in chronological order:

Yoda: “Detroit is hopeless”

MisterFungi: “Thanks for sharing, Bill Nojay. Your deep insight into Detroit's problems is truly profound. Eight months running DDOT, huh? Wow. Adios. Don't let the door hit you in the a$$.”

Goofyhoofy: “Detroit is not Broken Hills, Nevada. There are still important industries located there (and nearby), and while there has doubtless been mismanagement in the past - and no guarantee of a perfect future - to stand by while it collapses into a miasma of dirt and debris would be shameful.

New York came back. San Francisco came back. Boston came back. And if Pittsburgh and Cleveland have recovered, even if not to their former glory, at least we didn't stand around and applaud their demise when it took so little to avoid it.

Leave it to the Journal to side with the bankers and against the people.”

It appears that Yoda, MisterFungi and Goofyhoofy have different interpretations of the article cited in the OP. The interpretations are strikingly divergent, with little to no commonality. Stated differently, they are 180 degrees apart.

What piece(s) of information are missing that would align the three into the same direction?

Yoda asks: what piece(s) of information did Detroiters need in order to avoid the bankruptcy filing? Population has been in a decline for roughly 50 years. City revenues went down for many consecutive years. Credit ratings by the independent raters, Moody’s and Standard and Poors went continuously down for about one decade.

The trajectory of the city was VERY CLEAR to outside observers. This is why all of the professional municipal bond investors were NOT surprised with the BK filing.

What additional information was needed for DETROITERS to see what many outside observers were seeing? Stated differently, if your flight path is headed straight for the ground, wouldn’t it be a good idea to change something? This was NOT a totally unpredictable event. It was the exact opposite, it was a highly predictable event with a high degree of certainty. That is what the credit ratings were telling everyone.

Yoda has one and possibly only one core competency: failure. I consider myself an expert at failure. I have failed in countless different ways. I have been associated with organizations that have failed in countless different ways. You want to know how to lose >10,000 plus jobs and/or lose > billion dollars, you have come to the right place. You want to know how to pick an investment that suffers a 100% loss, not a problem.

When you have failures, the most productive thing to do is learn something. Hopefully, you will learn what COULD have changed to prevent the failure. What kind of information was missing? Or was the information present, but the interpretation was wrong/incomplete?

Bill Nojay’s comments indicated that Detroit employees were unwilling and/or unable to change. We understand that humans as a species are very resistant to change. For some reason(s) employees were collectively unable to see Detroit’s path towards BK. What information were they lacking to see the bigger picture?

MisterFungi possibly suggested that 8 months as head of the transportation department was not long enough to fully ascertain the situation. I would strongly disagree. Any halfway decent manager should be able to size up the situation in one month at the maximum.

Yoda looked at the decades of lower revenues and lowered bond ratings and formed an opinion. Bill Nojay provided first hand information of the impossibility of getting people/procedures to change. Yoda’s experience is it is darn near impossible to get people to change that do NOT WANT TO CHANGE. I see no indication that Detroiters in aggregate WANT TO CHANGE. Yoda, having been through many failed missions, looked at this situation and concluded it was “hopeless.” Yoda, might be 100% wrong. If so, he needs more data to convince him.

There are many macroeconomic issues that pose the exact same question of change.

1. Higher inflation is a great example. Many people have strongly held opinions that Federal Reserve polices will lead to higher inflation. They thought this in 2009,2010,2011,2012 and 2013. So far, using the official measure of inflation, CPI, it has NOT occurred.

If you are in the higher inflation camp, what piece(s) of data would convince you to change your mind?

2. Gold price is another great example. Many people held strongly head beliefs that gold would head higher, possibly tied to higher inflation. While this was true for a number of years, it has not been true since 2011.

If you are in the higher gold price camp, what piece(s) of data would convince you to change your mind?

There are many other financial questions that pose similar dilemmas. This post is NOT seeking to get a consensus view on Detroit, inflation and/or gold. They were just used to make the point.

BOTTOM LINE is that for every strongly held opinion, you should ask yourself what it would take to change your mind. If the answer is “nothing can be said or done to change my mind” you will likely impair your future results.

You can save yourself a lot of time however. For example, let’s assume you have a strongly held opinion on financial path X. There is nothing you can hear or see that would change your opinion. If so, you should NOT waste your time reading or debating or posting about it. And that includes METAR.

In a business context, this can also save you a lot of time. I once flew ~10,000 miles for a meeting on a single topic. In the first 5 minutes of the meeting, it was clear that nothing could be said or done that would change either side. I declared an impasse and adjourned the meeting. No reason to waste anyone’s time. Go do something more productive with your time. Maybe watch Duck Dynasty.



[1] Yoda METAR post: Detroit is hopeless: First hand account

6 Comments – Post Your Own

#1) On August 02, 2013 at 8:23 PM, constructive (99.97) wrote:

"If you are in the higher inflation camp, what piece(s) of data would convince you to change your mind?"

Economic opinions are a lot less interesting and important than how you express them in investment actions. You need dollars to put food on the table, you can't pay rent by being right on a message board.

Plenty of inflationists have been wrong about the monetary effects but right about the investing effects. Plenty of deflationists (for example, Prem Watsa at Fairfax) have been the opposite.

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#2) On August 02, 2013 at 11:56 PM, Eliz1000 (< 20) wrote:

If the world wasn't having problems with their money, and trying to devalue it for trade purposes, then we would probably have greater inflation.  Agree or not?

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#3) On August 03, 2013 at 11:50 AM, constructive (99.97) wrote:


No, quite the opposite.

Devaluation of currency causes inflation of prices. Inflation is tame right now because deleveraging is deflationary, and is working against the inflationary policies of central banks.

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#4) On August 03, 2013 at 12:10 PM, ETFsRule (< 20) wrote:

"Plenty of inflationists have been wrong about the monetary effects but right about the investing effects."

Not if we count their investments in gold and gold miners. Plus, there are a lot of inflationists like Bill Gross who have been shorting treasuries for the past few years (and getting crushed).

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#5) On August 03, 2013 at 12:11 PM, ETFsRule (< 20) wrote:


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#6) On August 03, 2013 at 12:37 PM, constructive (99.97) wrote:

Right, there are also plenty of people who have been wrong about monetary effects and investing effects. 

Buffett has been pointing out since the 1970s that high quality asset light business are the best all-weather assets in terms of inflation, not gold or other commodities.

Unless you're working on the TIPS desk at an investment bank, there's probably not a direct connection between inflation and your investment assets. Which is a good thing, since most people aren't very good at macroeconomic predictions.

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