Ever since I can remember, I've been a contrarian. Don't know why, exactly, it's just in my DNA. I became a Yankees fan because every other kid in my class was a Mets fan. This was in the 60s, mind you, when the Yanks stunk and the Amazin' Mets sent 9-year old hearts aflutter. I liked Nixon when I was 12 because everyone else was for McGovern, at least where I went to school. (I have since given Nixon - a crypto-socialist - a major downgrade, but that's beside the point.) In high school, I didn't drink or do anything pharmaceutically adventuresome, putting me in a distinct minority. My abstemiousness was not driven by a desire for monkhood - heck, the other kids did look like they were having fun - I just didn't like others defining for me what was cool. Going along seemed like a cop out. I was pretty stubborn about it.
Perhaps this is why I gravitated toward the investment business, where it is widely accepted that being contrarian is useful, although this is interesting because so few investment professionals actually are. This is because it is truly difficult to go against what lots of other people are saying. It's uncomfortable, and sometimes worse.
This has led me over the years to be highly suspicious of what I call the "lazy consensus." It comes in many forms, and not always financial. I have found that behind every lazy consensus is a core of true believers who rigidly manage their orthodoxy and punish dissenters. When you see this, you should smell a rat. Good ideas should stand on their own merits.
All this got me thinking that while we have seen great financial bubbles in recent history, we have recently also witnessed the greatest "intellectual" bubble of our lifetimes...
What is an Intellectual Bubble?
Is it just me, or do others also want to deliver a 2 x 4 to the head of the next person who uses the word "sustainable?" Has a word ever been more over-used, or become more loaded with alternative meaning? Google the word and you get 67 million hits. But wait, here's something interesting:
Google Search Volume for the Word "Sustainable"
Source: Google Trends
Even as web searches for the word "sustainable" have been declining over the last few years (top graph), media references have exploded (bottom graph). My take on this is that while the media remains fully committed to the global environmental agenda, the rest of us are experiencing eco-fatigue. We are tired of being hectored for just living our lives. Polls support this. No more self-righteous twaddle, please.
The results are even more pronounced for the word "environment":
Google Search Volume for the Word "Environment"
Source: Google Trends
So, I know I don't have to tell anyone about "Climategate" (13 million Google hits, up from zero two months ago), which has dealt a devastating, deserved, blow to the global warming - er, climate change - industry.
The man-made global warming furor has had me pondering a notion, which is that bubbles exist outside of finance. Call them "intellectual bubbles," and they tend to dominate the societal or academic conversation for periods of time, and only one point of view is officially tolerated.
I have written extensively over the years about one intellectual bubble, that of Efficient Market Theory (and all its corollaries). EMT won for its champions a passel of Nobels and became accepted as fact in faculty lounges everywhere. And yes, its dissenters were dealt with harshly, usually in the form of academic rustication or denied tenure. Accordingly, many skeptics quietly towed the line in the name of self-preservation. Interestingly, this persisted for years - perhaps decades - after EMT was dismissed as poppycock everywhere else, i.e. in the real world where the rest of us are trying to make a living.
This seems to be a defining characteristic of intellectual bubbles: the elites hold on to their beliefs long after the rest of the world has moved on. In this respect, intellectual bubbles differ from financial bubbles which tend to end more suddenly when asset prices tank.
The graphs on the previous page are splendid evidence of this reality gap; if we accept the media as the "elites," you can see they are getting more worked up about the sustainability/environmental "movement" even as the general public grows weary.
How does this happen? It's not hard to see, really. The elites get highly vested, either financially or reputationally or both, in a certain outcome. With global warming, you have a large number of people who actually want global warming to happen, even though they are the same voices warning of its dire consequences. I offer as exhibit one the following email from the Climate Research Unit:
“As you know, I’m not political. If anything, I would like to see the climate change happen, so the science could be proved right, regardless of the consequences. This isn’t being political; it is being selfish.”
- Phil Jones, CRU Director
Yikes. The CRU had staked its entire reputation on global warming, not to mention the fact that more grant money seemed to flow every time they sounded the alarm more urgently. If global warming panned out, the world might lose, but they would be big winners.
Or how about Al Gore? No one has staked his reputation on global warming more publicly than Gore. More than this, he has made major investments in companies that will prosper if he succeeds in scaring the world sufficiently enough to spend enormous amounts of money on the green technologies he says we need. So of course he will continue to parrot the party line long after facts and logic have left the room.
The U.N.? They will be huge beneficiaries in any new global climate scheme as they will administer the trillion dollar transfer of wealth from the first world to the third (precisely the agenda in Copenhagen as I write). Think Oil-for-Food on steroids. Don't expect them to change their tune.
Scientists? They want to keep the gravy train of grants going. The CRU's grant money had tripled since the 90s.
Governments? Fuhgedaboutit. They love the carte blanche to involve themselves in the private economy. For instance, no person on the planet thinks we can achieve 80% carbon reductions by 2050 (a la cap and trade), but the mere fact of it becoming law would give government the legal right to intrude everywhere in the name of reaching the target. It is this "right" that they are really after.
Understand people's incentives, and you understand how illogical, even harmful, agendas can persist for so long.
Financial bubbles also persist for longer than seems possible for much the same reasons. Think of the mortgage bubble. Way too many people were making money originating mortgages for anyone to question what was going on. Same thing in the internet bubble. Remember all research analysts who kept making ever more bullish calls? Reputation and money are powerful motivators.
What are some other intellectual bubbles of the past? How about overpopulation and food shortages? The Club of Rome issued its famous report called the Limits to Growth in 1968. Piling on to this were other Malthusians like Earth Day founder Paul Ehrlich, who wrote books with cheerful titles like The Population Bomb, The End of Affluence, and Extinction. The bubble's general theme predicted an overcrowded planet with widespread food shortages/riots by the mid 1980s. A good chunk of the world's population bought into it, including an enthusiastic U.N. (sound familiar?). Much to their disappointment, food became cheaper and more abundant than ever, and if anything, low births rates (at least in industrialized countries) became more of a problem than overpopulation.
Then there was DDT, yet another environmental bubble. A book called Silent Spring in 1962 practically created the modern environmental movement and led to DDT being banned globally under the Stockholm Convention. To this day, most think of DDT as a poison, and yet its absence in Africa is causing something like one million deaths a year in Africa from malaria, mostly in young children. DDT is effective at mosquito control, and yet the international community - those pesky elites, again - threaten to withhold aid from Africa if they ever use DDT.
The "No Nukes" movement was another bubble in the 70s and 80s. Public opinion has long since moved on as years of data and safe operating histories have undermined the movement's premise, and yet movement elites - e.g. Greenpeace - stubbornly resist giving up the ghost.
Fear seems to be a common theme with intellectual bubbles. A few elites - say, scientists - write a paper or testify before politicians eager to script new law and journalists who are equally excited about selling papers by promoting some new, lurking danger, and that's often all it takes.
The public takes these elites at their word because, really, how are they going to independently verify anything? With global warming, there only three original data sets in the world, and one was just declared lost by the CRU. (They "accidentally" threw it out with the trash when they moved. And the dog ate it.) The other two won't let anyone else look. Layered on top of this are wildly complex models that are impenetrable to all other than the authors.
So, we rely on the self-appointed experts for how to think. Here's Laurie David, who produced An Inconvenient Truth, that masterful bit of agitprop:
"The predictions of the world's best scientist are coming to terrifying life. Scientists are certain that these deadly events will only become more common -- and more extreme -- as the earth continues to heat up. More intense rainfall, more extreme flooding, more crippled infrastructure and unsanitary conditions, more homes and businesses lost. More, more, more..."
No fear mongering there. No, sir.
(Note: the one exception to the "fear" precondition is EMT, so I admit I haven't come up with a perfect explanatory model, but I'm working on it.)
So, how do we spot bubbles, financially or otherwise? Well, it's not supposed to be easy, otherwise the bubbles wouldn't happen in the first place. The best advice is, I suppose:
- Look at how proponents behave. Do they have quiet confidence in their convictions, or do they tend to shout down at those with differing opinions? Do they willingly share their data and analytical processes with others, or do they shun transparency?
- Consider the incentives of those with the most strident opinions. No one is above responding to personal incentives, and that includes scientists and journalists who are supposedly above such things. All journalists have a philosophical view of the world they are invested in, whether left or right, and their work is infused with it. Sometimes it's subtle, sometimes it's not. With scientists, the left has long accused those being paid by corporations to study, say, cigarette smoke, of being bought and paid for. Now they have discovered their own scientists have a "for sale" sign hung around their objectivity.
- Use common sense. Again, this is hard when everyone at cocktail parties says you're being stupid. But along the way, it's good to listen to your inner voice that asks things like:
If markets are really efficient, how can stocks be revalued by 25% in one day in the absence of any news? (1987)
Does it make sense for a company with no operating history and no real business plan to be worth a billion dollars? (1999)
Is something amiss when banks don't ask mortgage applicants for any down payment or even a personal financial statement? (2006)
Can we really project climate trends 40 or 50 years into the future when the weatherman can't even tell me whether I'll get rained out of golf this weekend? (2009)
Sadly, we humans go collectively insane more often than we should. None of us are completely immune, but if you go against the grain even once or twice and get it right it can have a profound positive impact on your life. Just ask John Paulson.