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Disproving A Negative

04/16/2015

How can I promise the world will not end tomorrow?  How can I promise the stock market will not drop 50% tomorrow?  How can I disprove something negative?

A friend in Europe sent me an interesting article titled “Damned if they raise, damned if they don’t:  The Dilemma of U.S. Central Bank” by Stewart Richardson.  It begins with a quote from well-known perma-bear Marc Faber, who lives in Thailand and writes the “Gloom, Boom, and Doom” newsletter.  Enough said!  Faber is paraphrased as saying:  “equity markets are going to fall a long way but it could be from a higher diving board.”  How can anybody promise that will not happen?

It also quotes Ray Dalio, manager of the world’s largest hedge fund, as saying …“We don’t know — nor does the Fed know — exactly how much tightening will knock over the apple cart,…What we do hope the Fed knows, which we don’t know, is how exactly it will fix things if it knocks it over. We hope that they know that before they make a move that could knock over the apple cart.”  Of course, we don’t know!  If we knew everything, there would be no uncertainty.  In graduate business school, we called it “conditions of uncertainty.”  There is always uncertainty!  And, Ray Dalio knows that as well as anybody.  (I don’t know where his quote comes from but suspect it is taken out of context.)

Yes, if the Fed doesn’t raise interest rate enough and soon enough, we do risk asset inflation, especially in the stock market.  Yes, if the Fed raises interest rates too much and too soon, we do risk going into another recession.  And, yes, that is always true anyway.  This is not a unique situation.  Since the Fed was born in 1913, it has occasionally erred between too tight or too easy.  But, the last time I looked, we’re still here?

So, the argument becomes — until we have perfect certainty, bad things may happen.  Just the opposite, I can promise that bad things will certainly happen —  but does that mean they will happen tomorrow?  Does that mean anybody knows which particular bad things will happen?  (Believe or not, there is more to life than stock markets.)

Rather than ask for a promise against uncertainty, think about an action plan for when something bad does happen, because it will.  In the meantime, continue as if the bad things will only happen later.  The alternative is to go back to bed, pull the blanket over your head, and suck your thumb!

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