By Bill Bonner, billbonnersdiary.
The Dow is still climbing. It poked further into record territory yesterday. Gold did nothing.
What to make of it? Be cautious, dear reader. This is the most manipulated market in history. It could up higher, much higher. But you can’t trust it.
Did we finish explaining how the world works?
Probably not. We either forgot to explain it. Or forgot how it worked…
We took up the question on a long walk down the beach.
“You’re not disputing the importance of Aristotelian logic are you,” Elizabeth asked.
“No. It’s a useful approach to solving problems in a logical and
rational way. But if you have a neighbor who is making noise late at
night, you have to use something more than just logical and rational
thinking. You have to use your brain. Logic will tell you that you need
to do something to turn the music off.
“That is a simple problem. You could solve it in several ways. Even a
robot could solve it. Call the police… break into your neighbor’s
house and turn it down yourself… or possibly just ask the neighbor
politely to keep it down.
“All of those ways might work. Logically, you will select the one
that involves the least expenditure of energy on your part with the
most likelihood of success. That could be as simple as taking out a
shotgun and blasting your neighbor’s electrical box. Or maybe whacking
the neighbor himself, so the problem goes away forever.
“Is that a good idea? Logically, the answer is ‘maybe.’ Because you
don’t know much more about the future. And since you don’t know what
will happen — no one does — your decision should be based, logically,
on only what you do know, which is that the noise will go off.
“But here’s where you have to use your head. We follow rules that
aren’t necessarily logical but that make civilization possible. ‘Thou
shalt not shoot up thy neighbor’s junction box’ is not necessarily
logical. But it is nevertheless a useful guide to noise abatement
issues.
“These rules evolved over a long period of time… each one of them
distilled from the rich juice of mistakes, corrections and experience
of many generations that came before us. We ignore them at our peril.”
“But you can perfectly well incorporate the lessons of history in
your rational analysis,” countered the distaff, and wiser, half of the
Bonner household. “You don’t have to rely on an illogical “Thou Shalt
Not.’ You can just think it through.”
Ben Bernanke’s Pseudo Logic
We didn’t answer. Most people will think Elizabeth is right. You can
try to think it through. You see a banana peel on your front step…
and you can see a lawsuit headed your way. You take the banana peel
off… and you probably have made for a better future.
But there are many things that just don’t allow such simple
analysis. I probably chose a bad example, because on the noisy neighbor
level you probably can have a reasonable shot at knowing what is going
on.
“Thou shalt not drop money from helicopters” is probably a better
prohibition. It is not logical. We don’t know exactly what outcome it
will produce. And logically — or at least pseudo-logically — if
people don’t have enough money, it seems to make sense to give them
some.
This became the evolved wisdom of central banking… discovered by
trial and error over many centuries. Many times central bankers tried
printing money. Never did it produce anything but misery.
You could find a similar rule in the stock market: “Buy low. Sell
high.” It’s a rule, backed by long experience and bitter setbacks. It’s
illogical, in the sense that you never know what will happen.
According to the most serious academic work, we never know whether
prices are going up or down. And when they’re going up, we feel a huge
emotional tug to get in on the trade. But the rule tells us to do something else.
Will obeying the rule protect us from losses? We don’t know. But if we could know, we wouldn’t need the rule.
It’s not that Aristotelian logic isn’t useful. And it’s not that you
can build a bridge with old wives’ tales. (You can’t.) It’s just that
each has its own limitations. Don’t try to romance your girlfriend with
logic. And don’t try to go to the moon on instinct and intuition.
Regards,
Bill
