Dataddiction

When "data" beats common sense

I recently saw passing an article about how geopolitics is irrelevant to investors.

As you can imagine, this got me both interested and highly skeptical of such a claim.

If you are curious about hearing this side of the argument, it is this article by Joachim Klement:

Against Cassandras: World War III

To be honest, this is an author I stopped following a while ago due to his excessive pushing of the ESG narrative out of obvious ideological inclinations, more than any frank interest in an open discussion.

But what got me thinking about a broader problem, is that the entire article is using “data” to support the preestablished conclusion.

Attacking another investor would be a poor use of my time and yours, as this is not a competitive sport. So this is not the point of this article.

But this dataset opened my eyes to a large problem we need to be careful about. Especially the use of this graph below as a “proof”:

If anything, it would show that while geopolitical black swans can cause at best temporary crashes, they are overall irrelevant to investors.

Now this looks pretty true when looking at the above data, right?

Case closed?

Proven Non-Correlation?

Apples And Oranges

The first thing to consider is that it is hardly surprising that the above data shows very little correlation. Most of the geopolitical spikes above were minor foreign conflicts initiated by the US on much weaker nations.

Is it really surprising that the S&P500, an American index, did not care much about million of Iraqis dying while the US Army triumphed and very few US soldiers ever got hurt?

A look at data on investors’ performances in the Middle East or Iraq itself would likely give another result.

Actual scientists know well that statistics and cherry-picked data are the heart of any erroneous conclusion, especially the “solid” looking ones. And a great way to prove anything is by mixing data that have little to do with each other.

Macroeconomists are VERY often guilty of this.

Any actual scientist knows that if we wanted to, he could massage his data until it says the “correct” answer.

This reminds me of the rather funny “proof” that the steep decline in ocean-going piracy is causing global warming:

Worried about global warming?

Then better find yourself a boat and a parrot and go work on the problem. Wooden legs and eye patches are optional but might constitute occupational hazards…

A Very Special Context

Another obvious problem is that every “geopolitical crisis” in the dataset happened at a very peculiar or outright abnormal moment by historical standards.

• They all happen during the “American unipolar moment”.

• They all involve a complete mismatch of power between the belligerents.

• They all are in the last 30 years, a period overall marked by US stock market expansion above the rest of the world’s markets, and a succession of increasingly large bubbles, regularly reflated by central bank interventions.

  • This includes constantly declining rates and increasing financialization of the economy, both boosting stock markets almost no matter what else happened.

So again, is it really surprising to see the S&P500 cruising through “crises” when the S&P500 valuation is supported by expanding money base AND the country whose data we look at was going to be the obvious winner of each of the crises (aggressive invasions and “bombing back to the stone age”) during the period?

Should we also look at England or French colonial wars in Africa, and conclude that no war involving the UK or France in their 1000 years of history has ever hurt its investors?

(Just ignoring the 100-year war, the 30-years war, the wars of religion, the 9-year war, the 7-years war, the Napoleonic war, WW1, WW2, and the Cold War of course…). Data cherry-picking can really do wonders…

Data Veneration Is Often Myopia

Data Is The God Of Modern Man

On any topic, people today will bring you the classical “studies have shown that…” Not only journalists but also most people in the West are basing their entire opinions about the world on such “objective” proofs.

Never mind that these truths are often in total contradiction with common sense and anything every single one of our ancestors has ever believed.

The beauty of it is that with the Internet, there is data to support absolutely EVERY SINGLE OPINION.

No matter the lunacy, you can find books and studies “proving” it. Flat Earth, ancient aliens, gender fluidity non-sense, 5G antennas causing Covid, white privilege"; take your pick, there is a conspiracy theory specifically for YOU out there.

Of course, those are extreme cases only idiots believe in.

The more reasonable people can build elaborate graphs on “serious” topics, showing their masterful insights into arcane topics.

And as a field so open to pseudo-scientific reasoning, economics is just perfect for this approach.

Especially with so many people desperate to find THE dataset that will make them money.

A Changing World

Another key part of how “data” and studies deceive us is the duration of the dataset.

Most easy-to-access datasets (and therefore easy to make pretty graphs with) start in the late 70s at best, often in the late 80s.

Incidentally, it means they cover a period of economic history where:

1. The Soviet Bloc collapsed, opening to capitalist economies hundreds of millions of highly educated and cheap Soviet citizens.

   1. Polish, Czech, and Hungarian engineers would work at recently moved East Volkswagen and BMW factories.

   2. Romanian and Polish doctors and nurses would solve for a time French and British hospital manpower shortages.

   3. Menial farm work in Spain and Italy could be done by desperate uneducated Eastern European workers.

   4. Russian and Ukrainian scientists and engineers would go on and supply brilliant insights into Western startups and corporations.

2. This collapse also gave the world direct access to the vast pool of Ukrainian and Russian natural resources, including grain, oil, gas, coal, wood, and metals.

3. Globalization accelerated with the opening of China, as well as the modernization of the Indian subcontinent, SE-Asia, and Mexico, providing a pool of several BILLIONS of cheap workers to international capital and corporations.

4. Global interest rates went on a steep decline, from almost 20% to NEGATIVE territory.

The obvious thing is that any “scientific” conclusion and “proven” correlation using these datasets must assume these conditions and trends can persist ad infinitum.

IF cheap resources, cheap energy, cheap labor, and cheap capital will go on forever, and more importantly keep getting EVEN cheaper and more abundant, then you can use these data sets to make a valid conclusion.

Tell me how likely that is …

The Pseudoscientific Methods

So if you want to discuss the effect of interest rates, you would want to discuss at least one full cycle of rising and declining interest rates, from bottom to top to bottom again.

If you want to discuss war and investing, you need to look at least at one major power conflict, the last one being WW2. Data sets expanding up to WW1 should be preferred, the Napoleonic wars ideal.

Even then, a data set of only one “experiment” would never get you published in any hard science publication. Trust me, having to manually comb through an Excel sheet of 4 million cells of gene expression levels during my Ph.D., I know…

But it is more than enough in so-called economic sciences.

Short-sightedness

I see it as a clear sign of a failing education system that otherwise intelligent people have zero historical perspectives.

They are not stupid or dishonest, they just never learned to think from scratch on their own.

The consequences are visible in our public discourse.

Every dictator is Hitler reborn. Every great power rivalry is a Cold War. Nothing ever happened before 1939. Every war is for “democracy & freedom”.

The march of history is just an endless path toward more liberalism, globalization, and civil rights; because this is what was true since 1970.

Any interruption on the way is just a little bump on the road, that the forces of good and justice will crush under their avenging feet.

Another level of dumbing down is of course not even referring to real history (too complicated), but only Hollywood franchises of simplified narrative fit for 12-years old children (man-child?).

I feel genuinely afraid when I see institutions like NATO falling to this level:

Same in economics.

At most, the highly insightful investors might know about the Weimar Republic hyperinflation and the Great Depression, with maybe a vague notion of the Tulip mania.

But do they know about:

• John Law?

• The South Sea Bubble?

• The Bolshevik revolution?

• The Cultural Revolution?

• The Terror?

• The Vendean genocide?

• The 30-year War?

• Kublai Khan’s hyperinflation?

• The Cathars?

• The Crisis of the Third Century?

• The Bronze Age Collapse?

If you don’t even know what a proper context or historical parallel looks like, how could you pick the right data for proving any theory?

The short-sightedness of the modern man and investor living in the instant makes him a slave to partial and mostly useless “data”.

Takeaways

Poisoned Data

The first thing I would encourage my readers is to be wary of “data”.

If the data set does not cover at least 60-100 years, but claims a conclusion about events like war and geopolitics, the value of the data analysis is likely negative. Not only will it not teach you anything, but it is also VERY likely to induce the wrong conclusion.

Staying away from incorrect writing is as vital for the mind as staying away from poison for the body.

Finding The Right Comparison

Because everybody can be a history nerd, I will occasionally work on showing proper analogies to analyze our troubled times. And trying to keep things as simple and short as possible.

This will not replace the regular geopolitical focus on one country, or the stock deep dive, but complement them by providing a little bit of global forecast on trends that will affect every investment strategy for the next 10-20 years.

Some of the topics will likely be:

• The American Republic and the New Caesar

• The Already-Started 30-Year War

• Military Technology and Democracy’s Future

• The End of Overseas Conflicts

• Industrial Power as a New Civilizational Archetype

• The Theocratic Third Roman Empire

All will look at past events spanning many decades and how they can inform us of the coming evolution of our era.

Tell me in the comments what might be of most interest to you and would like me to cover first.