#writing **January 15, 2024** Our restlessness is the underlying force behind [[reflexivity]] and [[cycles]]. Markets are all about how subjective realities converge with objective realities. We are seeing several big cycles come to this realization point which is creating a historically unprecedented time of [[uncertainty]]. This is the nature of a Fourth Turning. Gold and Crypto are sniffing this out. Refs: @doomberg @campbellramble Charles McGarragh @choffstein --- In systems theory, a reflexive system is one that influences or changes itself based on internal or external feedback; in psychology, self-reflection is a reflexive process; in philosophy, self-awareness and self-reference are important elements of a reflexive system. [[Feedback Loops]] are reflexive and they make causal reasoning about a reflexive system difficult because they create circular arguments. Simply put, reflexivity is behind the perennial question: which came first the chicken or the egg? The idea of [reflexivity](https://publish.obsidian.md/cedarshillgroup/Reflexivity), as pioneered by [George Soros](https://www.georgesoros.com/2014/01/13/fallibility-reflexivity-and-the-human-uncertainty-principle-2/), is front and center in today's economy and markets. Will the Fed tightening cause a recession that causes the Fed to ease and will that potential easing ignite a second surge in inflation? That causal chain is infinitely complex but there is no shortage of talking heads on CNBC that casually toss it around with a high degree of certainty. The real innovation that Soros discovered in reflexivity is the idea of a subjective and objective realities that co-exist in the financial markets. Some will say the markets have multiple distributions, others will simply say that market expectations and reality often don't align. ![[Pasted image 20240110083012.png]] The process by which the subjective reality of market expectations and objective reality diverge and converge is a frequent topic of this newsletter. The language that these two realities communicate by and the channel through which they interact is price. Whether by the objective reality of physical supply and demand for goods or by the subjective reality of market expectations in both the economy and financial markets supply and demand are balanced by price. Years ago I used the picture below to describe at a high level how the markets work, but overtime I realized this construct was incomplete. This picture is a [[CHG Macro Model|model]] that shows intrinsic or fundamental value slowly increasing over time based on population and productivity growth and economic and market cycles which are heavily influenced by peoples expectations and emotions like fear and greed which move around the intrinsic value line. I would use this construct to identify when markets priced risk inefficiently and created opportunities. The central premise of this model is that the humans behind the markets are inefficient and therefore create inefficient markets. ![[Pasted image 20240113102116.png]] What this construct fails to account for is there are also [cycles](https://publish.obsidian.md/cedarshillgroup/The+Markets/Cycles) in intrinsic value so in reality have a picture that looks something like this: ![[Pasted image 20240113112912.png]] These cycles play out over a longer timeframe and are influenced by the big forces like domestic and internal politics, society, and technology. Ray Dalio's [work](https://www.principles.com/big-debt-crises) on short-term and long-term debt cycles is some of the best work that I know of that starts to scratch the surface of how these cycles have played out over history and provides a useful framework for how to understand how they are playing out today. There are many different types of cycles that have been identified and studied by economists, philosophers, religious scholars, and historians. **The unifying feature of all of them is the restlessness of the human actors in the system.** We are always moving and changing, trying to find safety and be the best we can. This is the underlying force behind all these cycles. We have different cycles playing out over different time frames and every now and then several cycles reach a terminal point at the same time and it is during these times that we have seen big historical moments. We are in one of those moments today; according to Neil Howe and William Strauss a [Fourth Turning started in the mid-2000s and is expected to culminate in a crisis sometime in the 2020s](https://www.nytimes.com/2023/07/08/style/fourth-turning-pop-culture.html#:~:text=According%20to%20%E2%80%9CThe%20Fourth%20Turning,the%202020s%20%E2%80%94%20i.e.%2C%20now.). What the Fed does this year is a sideshow in the bigger picture of the secular change we are experiencing. Current market pricing confirms this as markets remain range bound with low confidence and huge uncertainty as to what the future holds. [We appear to be in the early innings of a great power conflict](https://www.campbellramble.ai/p/conflict-is-inflationary) and other powers are attempting to seize this moment to align the world in a way that is more favorable to their interests. This is natural but few seem to be seeing the bigger picture of how all these otherwise independent events have a high degree of coherence. Worse, those that do see it over extrapolate its meaning and magnitude and take an apocalyptic stance. ![[Pasted image 20240113114748.png]] One of the cycles that is reaching an inflection point today is China’s [emergence as a major power](https://publish.obsidian.md/cedarshillgroup/Emergence+of+Major+Global+Economies). Like Japan in the 1980’s China appeared to be about to dominate the world after the GFC. The Chinese economy recovered more quickly and stronger than the developed world economies and attracted large investment flows into the country. However the growth was uneven within China which increased social pressures and created barriers to further growth. The economy began to weaken in 2020, and by 2022 China’s decline had accelerated and is currently in failure mode. Gold is sniffing all this out but it has yet to make any concrete decision. It looked above the range, found an excess high and returned to range; but short-term traders continue to buy the 50d SMA hoping for an upside breakout. These buyers will not give us the confirmation we are looking for but they may get lucky as some [externality](https://doomberg.substack.com/p/gold-in-resolution) may provide the catalyst for the upside breakout they are playing for. ![[Pasted image 20240113115503.png]] It's also no coincidence that the SEC approved several Bitcoin ETFs last week as crypto and gold both benefit from the same underlying forces of uncertainty. The markets are all about how expectations converge with reality and as we have seen this can happen across cycles and several cycles can be operating at the same time across different timeframes; it's a multidimensional problem. Understanding reflexivity is all about not only understanding the intrinsic or fundamental reality (value) it's about understanding how the subjective realities are formed within the crowd. The feedback loops that operate between all the different cycles are intimately linked to how changes manifests. Charles McGarraugh from [Altis Partners](https://www.altispartners.com/) has a theory he calls ["Asset Duration"](https://www.flirtingwithmodels.com/2023/12/05/s7e1-change-in-the-market-is-acceleratings7e1/) that suggests feedback is more powerful the less it is exposed to the realization of information, or in our vernacular: objective reality. In other words the weighing machine[^1] of the market operates at different wavelengths, we can observe this in the different cycles we see in action, and when multiple of those cycles come to the point of realization it can create a very volatile and uncertain environment. We have reached the point of realization that monetary and fiscal policy are ill-suited to manage the outcomes we desire. This is reflected in the surge in global inflation, the ongoing social and political crises in the US and China, the rise of cryptocurrencies, the increase in frequency of conflicts around the world, and so on. This could be seen as a pushback against the Keynesian policy framework that was widely adopted after WWII, it could be seen as a broader pushback against capitalism, or it could be nothing at all. These are all really big unknowable and uncertain things, and my purpose is only to raise them to your attention and show how they are all connected and for us to see how whether by purpose or by accident this is the message the markets have been conveying to us. Real money is focused on what happens over the next 10-20 years instead of what happens this year, and never in recent history has that ever been less certain than it is today. [^1]: Warren Buffet is quoted as saying "in the short term the market is a voting machine but in the long term it is a weighing machine."