Pilots and air traffic controllers use a term — “having the bubble” — to describe having a clear sense of how a complex dynamic situation is evolving in real time, which enables a sense of control and confidence in the decisions they make.
Do you need an intellectually stimulating holiday gift for someone who is anxious about “having the bubble” in our increasingly complex and uncertain world?
Here’s an idea. Buy them a subscription to The Index Investor, where we believe in diversifying broadly and anticipating downside risks far in advance of their impact on financial markets.
We’ve been publishing our monthly research again since August. Between 1997 and 2011, we provided subscribers with monthly insights on evolving macro risks and their implications for asset class valuations and returns. We provided early warning of both the 2000 and 2008 financial crises.
After leaving Index Investor, I spent four years on the Good Judgment Project team (made famous by Professor Philip Tetlock’s book, Superforecasting”), and cofounded Britten Coyne Partners, to provide clients with consulting and education services focused anticipating, assessing, and adapting in time to emerging strategic uncertainties and threats.
Back issues of The Index Investor since 2000 and lots of other information about asset allocation, risk management, and active versus passive versus index investing (they’re different) are all available for free on our website.
Our new Research Library is also free. Investors can browse our curated content on a wide range of issues affecting medium and long-term asset class valuations, including technological, economic, environmental, national security, social, demographic, and political trends and uncertainties, as well as potential “grey swan” wildcards like environmental, infectious disease, cyber, and large-scale electromagnetic events.
We’ve relaunched The Index Investor because, as former Bank of England Governor Mervyn King has so aptly described it, “we now live in a world of radical uncertainty”, that has become a much more dangerous place for investors. Former US Treasury Secretary and Goldman Sachs Co-Chairman Henry Paulson shares this view, noting that “we are living in an age of unprecedented risks.”
In recent years information overload, anxiety, and fear have all grown exponentially worse, and the synthesizing meaning and insight from everything that is happening around us has become harder than ever.
Perhaps more importantly, the exponential increase in connectivity the world has seen over the past 20 years has made global economic, political, and financial systems far more complex, and therefore uncertain. Research has demonstrated that in such circumstances, evolution has primed human beings to become more prone to conformity and to place more emphasis on imitating what others are doing (so-called “social learning”).
Paradoxically then, as uncertainty increases, people — including many sophisticated investors — are more likely to become attached to a smaller (not larger) number of dominant narratives and expectations about the future.
This makes the highly interconnected systems very vulnerable to small changes in information, feelings (fear is transmitted between human beings far more quickly than greed), and behavior that are all rapidly transmitted to many people, amplified by algorithms of various kinds, and whose impact is therefore increasingly both rapid in speed and exponential in size.
In the complex, uncertain world we live in today, accurate prediction depends on our ability to deliberately integrate forecasts from a wide range of sources that are ideally based on different underlying methodologies and information.
We’re publishing again to help our subscribers “have the bubble” in our rapidly changing, uncertain, and non-linear world, where threats to corporate and investment goals and strategies abound.
Our mission is to help our subscribers develop an edge in anticipating downside risks, accurately assessing them, and adapting to them in time to avoid large losses.
Our forecasting methodology focuses on how endogenous system dynamics can cause regime changes, even in the absence of exogenous shocks.
Specifically we focus on key system stocks (e.g., debt levels), and how ongoing system flows (e.g., government deficits) can eventually cause them to exceed critical thresholds and produce non-linear effects.
Our methodology analyzes stocks and critical thresholds in five areas whose effects tend to follow a rough chronological sequence (albeit with many feedback loops), from technological change to economic, national security, social, and political changes and effects.
For example, the political developments we observe today tend to occur at the end of this process, while today’s technological changes precede future economic, national security, social, and political effects.
Our forecasting process is based on tools learned on the Good Judgment Project and Peter Pirolli and Stuart Card’s information foraging and sensemaking model (see their classic article, “The Sensemaking Process and Leverage Points for Analyst Technology”):
Here’s what subscribers get in each monthly issue of the new Index Investor:
(1) Estimated asset class over/under valuations, and updated market stress indicators, using the same methodologies we’ve used in the past.
(2) Narrative forecasts and quantitative probability estimates for macro system and financial market regime changes over the next 12 months. In our forecasting methodology, possible regimes include the Normal Regime, where equities perform well; a High Uncertainty Regime, where negative asset class valuation changes of 20% or more can quickly occur; a High Inflation Regime, and a Persistent Deflation Regime.
Our forecasts take the form of a contingent probability tree, an example of which is shown below. Our goal is to help subscribers have a good sense
(3) A comprehensive, chronological “Evidence File”, that contains high value information (key indicators and significant surprises) that we have used to update our monthly forecasts. This information is categorized by month, and divided into separate sections covering developments in technology, the economy, national security, society, politics, financial markets, and out three “wildcards”: energy and the environment, infectious disease, and cyber and electromagnetic events. The Evidence File helps subscribers to better understand the trajectory and dynamics of developments in each of these critical areas.
(4) In between monthly publications, we will publish flash updates — on our blog, via email, and via our Twitter @indexllc — if and when we obtain high value information that results in a substantial change to a forecast probability.
(5) A feature article providing an in-depth analysis of either a key macro-uncertainty (e.g., how close the system is to one or more critical thresholds) or an aspect of making good investment decisions in the face of complexity and uncertainty. These articles typically synthesize a broad range of academic research and practitioner experience to provide thought provoking insights about critical issues facing investors and their advisors.
In a complex system that is constantly adapting and evolving, the accuracy of statistical or machine learning based forecasting methods declines exponentially as the time horizon lengthens, as the historical data set on which they were trained bears less and less resemblance to the distribution of outcomes the system is likely to produce in the future.
Under these circumstances, accurate forecasts beyond the short-term must be based on causal and counterfactual, and not just statistical reasoning.
In order to increase accuracy, our forecasts can (and should) be combined with forecasts subscribers obtain from other sources. Ideally, these forecasts will be based on substantially different underlying information and methodologies.
We provide subscribers with tools that enable them to combine forecasts to improve predictive accuracy, including the “extremizing” methodology used by the Good Judgment Project.
In sum, our goal is to provide you with an ongoing understanding of the complex dynamics driving asset class valuations and returns, as well as downside risk probability forecasts for broad asset classes, that are based on an explicit methodology which facilitates their combination with forecasts from other sources.
So please consider giving a subscription to The Index Investor to those people on your list who want to “have the bubble” in the year ahead.
