System Malfunction: When Over-Simplification Meets Reality

Reality is chaotic and largely unpredictable. Most people (e.g., economists) like to model everything into clean theoretical algorithms. As the global economy has become a Mixed Bag, over-simplifiers seem to be having a major system malfunction.

Make no mistake: the global macro picture is ugly. The sovereign debt crisis continues to unfold as this week Moody’s (NYSE: MDO) downgraded Portugal. Growth in China (NYSE: FXI) has slowed. The UK and EU are moving forward with plans for austerity. Housing markets have cooled again. And, most frighteningly, deficits and debt-to-GDP levels are astronomical.

However, there are many emerging signs of a classic bottoming of the business cycle. Credit markets are functioning again. Corporations are sitting on piles of cash after cutting costs to the bone. Business spending on tech has starting to rebound. CEO hiring confidence has drastically improved year-over-year. M&A has picked up nicely. The system is flush with liquidity and backstop protection. New startups are making headlines everyday. And cyclical bellwether Intel (Nasdaq: INTC) just reported their best quarter ever (i.e., 42 years).

Unfortunately, this is a scenario which causes smoke to emerge from the ears of most people. In theory, we can look at macro economic data and make clean conclusions. In reality, human beings are extremely unpredictable and trillions of variables escape our over-simplifying eye.

Thus, we end up with two camps: bulls and bears. The bulls ignore the ugly macro picture, focus on the legitimate green sprouts, and optimistically imagine a future in which entrepreneurial zeal and consumption resurrect from the ashes. On the other hand, the bears ignore the positive developments, marginalize growing catalysts for growth, and pessimistically envision a future in which the entire system of blind faith in finance spontaneously combusts in a fiery apocalyptic finale.

As with just about everything, the truth probably lies somewhere in the middle when there is a Mixed Bag of data points.

As a media outlet, we know the shock of great depression and the awe of materialist utopia increases views and clicks. That’s why the mainstream media can’t wrestle itself from the addiction of the polarized circus.

However, if you want to make money — real money — the secret is to ignore the economists and showmen. Instead, spend your time doing the hard diligence which leads to successful investments. That way, if the market crashes or irrationally blasts off, you will win. Or, if the market chops for years, you will still win. All the unilateralists will win only when their broken clock briefly aligns with the sun.

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