Archive for February 1st, 2009

The Chernobyl disaster is known as the worst nuclear plant disaster in human history, and adjusting for inflation, is the costliest human disaster in history. It also, according to records, released “four hundred times more fallout was released than had been by the atomic bombing of Hiroshima.”

These are all superlative descriptions. How much do we really know about Chernobyl? Would it shock you to know that the worst nuclear plant disaster in history had resulted in about 4,000 deaths and this based on latest estimates–most of this are related deaths (the actual direct death tally is only about 56).

More importantly: does that seem small for a disaster by today’s standards?

In this video, author Michael Crichton  describes the large margin of error we have in predicting the future based on present sentiments. Contrast the actual and estimated death count above with a CNN estimate of 3,000,000 potential deaths.

Crichton also explains how media and general sentiments magnify disinformation. He cites a U.N. report that explained that a large component of the death toll in Chernobyl was due to adverse sentiments brought about by disinformation–he calls them “information casualties”. Due to the prevalence of negative sentiment about the disaster, there was a large number of people who became depressed and invalid due to fears of cancer, deformed births, and all predicted health risks. One compelling statement:

authoritatively telling people they are going to die can in itself be fatal

At the end of the video, Crichton mentions that a very sobering exercise is thumbing through an old newspaper. Most of the people on the news 30 years ago aren’t familiar to us today, but more importantly, most of the NEWS and CONCERNS of 30 years ago, no one cares about today. This underlines the magnifying effect of the media and information in swaying sentiments at the present time.

Just reflecting, as of the writing of this post we have present concerns about the financial crisis which has strangely overshadowed other “pressing concerns” such as the environment, AIDS, poverty. Why do we seem to collectively embrace this “flavor of the month” mentality?

As a side note, going back to Taleb’s black swans–while events that were not predicted are the common definition, predicted events that don’t happen as scheduled also qualify.

Our only check against this irrational bias? Why, critical thinking of course.

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Peter Schiff, whose contrarian opinions about bailouts and intervention as well as his predictions of the financial crisis we’ve featured quite often on this blog, has now been criticized publicly by Mike Shedlock of SitkaPacific Capital Management. In his article “Peter Schiff Was Wrong” on Mish, Shedlock lays some facts and arguments that he says not only contradict Schiff’s ideas and predictions, but also show that Schiff has not fared any better in the markets despite his contrarian views:

Schiff’s Investment Thesis

  • US Dollar Will Go To Zero (Hyperinflation).
  • Decoupling (The rest of the world would be immune to a US slowdown.
  • Buy foreign equities and commodities and hold them with no exit strategy.

12 Ways Schiff Was Wrong in 2008

  • Wrong about hyperinflation
  • Wrong about the dollar
  • Wrong about commodities except for gold
  • Wrong about foreign currencies except for the Yen
  • Wrong about foreign equities
  • Wrong in timing
  • Wrong in risk management
  • Wrong in buy and hold thesis
  • Wrong on decoupling
  • Wrong on China
  • Wrong on US treasuries
  • Wrong on interest rates, both foreign and domestic

That’s a lot of things to be wrong about, especially given all the “Peter Schiff Was Right” videos floating around everywhere. The one thing he was right about was the collapse of US equities and no part of his investment strategy sought to make a gain from that prediction.

Peter Schiff concludes many of his articles, books, etc. with the claim he saw this coming and “positioned his clients accordingly“.

Shedlock’s article is a lengthy read, considering the various sources he cites, but puts into perspective all of Schiff’s statements. However I do note with a slight disdain that Shedlock finishes his critique of Schiff with a bit of self-advertisement. In effect he’s saying: Schiff Was Wrong, so you should listen to me instead. For me it saps a little bit of credibility if you suddenly color your criticism with ulterior motives.

Peter Schiff has reacted to this critique and precisely notes the same disdain I mention: (emphasis mine):

To achieve his ends, this individual has distorted much of what I have been saying and writing, and has twisted the facts to support his own preconceived conclusion. In essence, his piece is nothing more than an overt advertisement (and a highly deceptive one at that) to use my popularity to advance his career. In so doing he has given my critics, particularly some who have been embarrassed by their roles in the “Peter Schiff was Right” video, their moments of retribution. In addition, some members of the press who have never been among my greatest fans are seizing the opportunity to discredit me as well.

Although overall, I find Schiff’s reaction largely sentimental–and I have no doubt he will be further reestablishing his points in the times ahead, a couple of his statements do stand out as particularly important in the context of critical thinking:

I did not expect the huge dollar rally of 2008. But to discredit my long-term view of the dollar based on an eight month move is absurd. So while I believed that a weak dollar would cushion the temporary decline I expected in foreign stocks, a strong dollar ended up exacerbating it. In the meantime, I believed that the high dividends these stocks were paying would make it easier to ride out any correction. The problem was that the dollar fell so far leading up to the crisis (in 2005-2007) that by the time the crisis finally erupted the dollar was poised for a bounce.

Central to the argument that my investment thesis is wrong is the belief that the crisis is over or that the recent trends will continue until it is. But the crisis is just beginning and the movements thus far in the dollar, commodities, and foreign stocks, are mere head fakes. Once the speculators have been flushed from the markets, the underlying long-term trends I have been following should return in earnest.

For me the importance here is that Schiff is willing to admit that his view isn’t absolute and that a large realm of possibilities remain even within the context of his views. And I agree with the short-sightedness of judging a view over a short time frame–but for me the notion of a “required” length of time to evaluate an idea is only secondary to the notion that evaluating an idea based on any historical observation can never be a full insight.

Prediction is a nasty business, primarily because we (a) don’t understand history as fully as we think and (b) we can’t project properly into the future without our biases getting the better of us.

On the whole I’m happy voices of dissent have spoken up against Schiff–just as we were happy to hear Schiff speak up against the government bailouts. The initial shock or controversy will quickly pass–and as always it’s up to the proponents of each side to justify themselves, at the same time as history is taking place behind everyone.

Small note: Marc Faber and Jim Rogers are in similar sides as Schiff–and they’ve been criticized before. It’s simply the way the game ought to be played.

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