The Roux of Absurdity, Three Filters of Clarity, and Exploding Transformers

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It is all really quite absurd.

It is absurd when you step back and take a dispassionate look at the world and the life we all lead as residents of this particular biosphere.

Next time you find yourself sitting in the house in the aftermath of your second hurricane in less than a month with unstable power (more on this later) and flickering internet, take a legal pad and jot down some of the absurd things about life.

They make no sense and defy rational or even mythological explanations, yet they are.

We live in the context of time, a mysterious concept that none of us can truly define.

Considering the billions of biological connections, mistakes, misfirings, accidents, and encounters that had to occur just for you ever to exist, it is absurd that we are even here.

Makes no sense at all.

We all have junk drawers full of safety pins, rubber bands of various sizes and densities, random screws, nuts and bolts, different types of tapes and glues, and who knows what else, just in case.

We believe things we know cannot be true just to fit in with a collection of people. There is safety in the herd even when the herd is heading full tilt Gonzo for the cliff.

We have a political system that forces alleged legislators to spend far more time campaigning and fundraising than they ever do legislating.

Speaking of politics, our founding fathers created an almost perfect system of checks and balances.

Their sons, grandsons, and other descendants invented filibusters, executive orders, and gerrymandering to circumvent those safeguards.

More than a few of us believe that the forced confiscation of wealth increases the standard of living.

Quite a few believe that there are no environmental consequences to any of their actions.

We moan about the loss of the stores operated by the little guy, the locally-owned grocer, butcher, and bookshop. We usually have this discussion while driving across town to Walmart or Kroger because it saves us enormous cash.

Sometimes, we have it while waiting for the last bestseller to download onto our Kindle.

We want the benefits and conveniences of today and the feeling of yesterday.

We spend our entire lives looking for the meaning of everything, and the universe merely shrugs, saying, "Who knows, and who cares?"

When I sat down to write this piece, I intended to explore the philosophy of absurdism as outlined by its best-known proponent, the French philosopher Albert Camus.

As Camus defined it, absurdism simply states that there is a fundamental conflict between our desire for meaning and the world's apparent meaninglessness.

However, Camus does not view the absurdity of it all as absolving us of the responsibility to live life to its fullest or of our commitment to being decent people.

He did not accept the argument that the lack of meaning shown by the world gave us license for immoral behavior or to mistreat our fellow humans.

He was especially critical of anyone who claimed to have definitive and absolute answers and despised totalitarianism of all stripes.

Why am I writing about all of this on a financial page?

First, I warned you that I would write about what I wanted when I wanted to.

Second, I am taking the long way around, and there is a financial point to all of this. The concept of absurdity is displayed in all its inglorious finery in the financial markets and financial media, and I think it is worth exploring.

I will say that the original idea for this post, conceived mid-hurricane, goes down too many rabbit holes for a single post on Substack or anywhere else.

I have a hint that it might make a fantastic book, and I shall explore that idea further.

For now, let us focus on one of the largest playgrounds of absurdity: the financial markets.

Once you take the interactions of finance, add politics, fear and greed, you have what I choose to call the Roux of Absurdity.

Now add in bias and personality, along with every physiological tic and mania known to man, and you have the perfect dish of Absurd behavior.

Everyone will tell you to buy low and sell high. Almost no one does it.

A massive percentage of people involved will quote Warren Buffett. They pay no attention to how Warren made his money.

Another substantial percentage will quote Jesse Livermore. They have no idea how or what Jesse traded or that he went bust several times and finally lost so much he offed himself in a hotel cloakroom.

In a system that generously rewards long-term growth, most participants focus on the price action for at least a few days.

The evidence against short-term trading is enormous.

As every nine-year-old boy is certain they will be the star center fielder, starting point guard, or Super Bowl-winning quarterback, every retail trader thinks they will be the one in a million who becomes a gazillionaire day trading clinical-stage biotech stocks or some other such nonsense.

Cash flow into the professors' and economists-approved passive investing strategies will wildly distort prices and valuations, creating the seeds of the wealth destruction they were meant to prevent.

Wall Street will create derivative instruments to achieve specific outcomes and hedge client risks. They will need speculative investors who have no idea how they work to take the other side of this trade to make it work.

Speculative investors and wannabe traders will happily oblige.

Billions of dollars will be bet every quarter based on the trader's guess about the accuracy of someone else's estimate of massive corporations' sales and profits over three months.

Just to make it more fun, an entire industry will be created to sell advice doled out by people with no skin in the game and no concern about the profitability of that advice.

Some of them make millions facilitating the elimination of customers' wealth.

It is absurdity on steroids with a crack addiction.

Camus suggested that the best way to deal with absurdity in life is to recognize that it exists, engage with life, and avoid anyone who claims to have all the answers.

He also suggested avoiding false consolations or escaping from the reality of the absurd.

Persevering in our efforts to live a good life while we are here, being if not kind to each other, at least not harming them, and embracing the world as it is are also part of the solution according to the philosophy of the absurd.

Let us look at the absurdities of the financial markets. We can look to this advice for suggestions that help us persevere and overcome the absurdity that exists in financial markets to help meet the goals that allow us to live a life that has meaning to ourselves and those in our immediate circle.

Running everything through value, trend, and momentum filters in markets will remove much of the absurdity.

Defining your personal margin of safety and strictly adhering to it will remove a significant amount of the remaining absurdity.

The rest of it we just have to deal with as it cannot be removed.

Financial markets are a psychological soup in the short run, an economic cipher in the intermediate term, and the sum of the two in the long run.

If you can model and test it, embrace it.

If you cannot, avoid it.

Always remember no one gets out alive, and there is no such thing as high returns with no risk.

Embrace incentives. The bias of others can impact your results.

Nobody wins all the time. A 60%-win rate will make you a fortune.

Always make time and volatility your friends, not mortal enemies. This is critically important and will be the subject of further discussion.

Never stop learning and testing.

The three-filter approach, an understanding of incentives, and a close personal relationship with time and volatility can help you profit handsomely in spite of, and maybe even because of, the market absurdity.

There is a good chance it will produce enough cash to help you develop the tools to deal with the rest of life's absurdities.

Now, about those power outages.

If the day Milton made landfall was day zero, then today (when I wrote this) is day five. There are still outages in Lee County.

Most of the county experienced tropical-storm-force winds.

I was walking the dog in the darkness on Thursday morning, and we could see the lights being put out by exploding transformers even though the storm had passed.

The reported tornados had a limited impact on population centers.

This area is subtropical. Tropical storm-force winds are to be expected.

Instead of wasting money on inefficient solar farms and wind turbines, why not spend a couple of trillion and bury the power lines in areas impacted by hurricanes, wildfires, and ice storms?

It could create jobs, make coastal communities safer, and eliminate the economic costs of power outages.

If done correctly, we could achieve the optimal mix of above-ground and buried power lines across the United States for about $10 trillion.

That sounds expensive until you realize the expected cost of carbon net zero is about the same.

Both would be massive job creators, but the positive impact of a stronger, more efficient grid would be enormous.

Power outages can cause economic damage of up to $50 billion a year, so eliminating this would significantly reduce the damage.

So will the tax revenue from all the jobs created and the efficiencies achieved by the industry.

The massive increase in the value of homes and land in the affected regions will also help.

We waste so much money on so many things that it is hard to justify the type of infrastructure failures we have seen across the country in the past few weeks.

Burying power lines is a net positive for the economy and can save lives.

The American Society of Civil Engineers has been telling us for years that we must repair and replace critical infrastructure.

The electrical grid should be one of the top priorities.

(By the way, for a quick guide on how to invest in infrastructure and real estate, check out our Big Five REITs free special report.)