Sand Piles
Posted on Sunday, August 15th, 2021
If you were concerned we can report that the girl’s trip went just fine. They enjoyed their time spent away from the grind and the Georgia heat. As for the dog – he probably only missed one meal. I did find some time to weed the bed in the backyard. My brother Brendan will think this is funny as he says that every time I do yard work something bad happens. The joke is especially poignant because Brendan is an expert outdoorsman. Me? Not so much. The only reason I go outside is to go to the beach or the golf course. Brendan on the other hand lives to go outside. He is a mountain climber and summits Mt Washington several times a winter. To understand how impressive that is you need to know that Mt. Washington in New Hampshire is known as having the worst weather in the world due to a confluence of geographic idiosyncrasies. He is also an expert ice climbing instructor. He makes fun of me because every time I go in the back yard I get Lyme Disease or a serious case of poison ivy. Well, we are back to the ivy. Seriously, Diane cannot leave me alone for 10 minutes. I guarantee Brendan is howling with laughter as I try not to scratch.
Over 25 years ago I asked my friend and mentor Arthur Cashin what authors I should be following. The first name that he gave me was John Mauldin. I have been reading John’s weekly letter ever since. John reviewed one of his most popular letters and subjects this week. It has had a profound impact on my investing ever since I first read it 15 years ago. Here is the link to this week’s letter. You can subscribe to John’s letter for free here.
I’ll be quoting from a very important book by Mark Buchanan called Ubiquity, Why Catastrophes Happen. I HIGHLY recommend it if you, like me, are trying to understand the complexity of the markets. The book isn’t directly about investing—although he touches on it—it’s about chaos theory, complexity theory, and critical states.
As kids, we all had the fun of going to the beach and playing in the sand. Remember taking your plastic bucket and making sandpiles? Slowly pouring the sand into ever bigger piles until one side of the pile starts to collapse? Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. …Well, in 1987, three physicists named Per Bak, Chao Tang, and Kurt Wiesenfeld began to play the sandpile game in their lab at Brookhaven National Laboratory in New York…. Not that they really cared about sandpiles; they were more interested in what are called “nonequilibrium systems.”
They learned some interesting things. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found out there is no typical number: Some involved a single grain; others, ten, a hundred, or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur. The pile was indeed completely chaotic in its unpredictability. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever.
In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size.
If you are still with us that explains markets. Investing markets are in a continually unstable critical state. There is always a possibility of the sand pile collapsing. Sometimes you would swear that an event would bring it all crashing down but the event happens and the pile stays stable. Other times a seemingly innocuous event occurs and all hell breaks loose. The lesson is that all of the external news events and financial narrative being sold is meaningless as price is the ultimate arbiter and landslides in the market depend on the market’s critical state. That has us over the last 15 years adjusting to a new normal where bond yields are close to zero affording limited protection and outsized cash holdings and option strategies are our biggest allies in the world of sand piles.
We are itching to get back to work and the last days of August are the time to prepare. The Federal Reserve will be meeting in Jackson Hole, Wyoming in the next fortnight and that is the clue to get back to work. Blu- The dog will be fine. He needed to skip a meal anyway.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.