#writing --- **June 2, 2025** In his _Pensees_, Blaise Pascal differentiates between the mathematical mind and the intuitive mind. He describes the principles of the mathematical mind as clear but removed from common use, whereas the principles of the intuitive mind are both clear and commonplace, however because they are so numerous some must inevitably be missed. When any principle is missed it leads to error and seeking accuracy the mathematical mind only concerns itself with the clearest but most remote principles. Therefore, all mathematicians would be intuitive if they had broader vision and the intuitive minds would be more accurate if they could turn their attention towards the principles of mathematics to which they are not well accustomed. While Pascal sorted people by this distinction, the late Daniel Kahneman described how these two minds interact with each other within each person. He distinguished between our fast, intuitive System 1 mind and our slower and more deliberate System 2 mind; what Pascal called the mathematical mind. While Pascal and Kahneman gave us models of the processes of thought the actual anatomy of the brain also plays an important role. The triune brain theory advocated by the late Dr. Paul MacLean, a former evolutionary neuroanatomist and senior research scientist at the National Institute of Mental Health, states that the brain is made up of three distinct sub-brains: the reptilian, the limbic, and the neocortical. The reptilian brain is the oldest part and the fastest functioning part of the brain while the neocortical brain is the youngest and slowest functioning part of the brain which also happens to be the largest. Developing after the reptilian brain that houses vital control centers such as breathing, swallowing, and heartbeat, the limbic brain evolved as mammals split off from reptiles and started forming attachments to other mammals. Under this theory, it is the limbic brain where things like love and intuition originate, and it is the neocortical brain that reasons. In ancient times, when science was non-existent or undeveloped because our neocortical brains were less developed, nature was viewed as the divine: Rain was a gift from the gods and things like famine and drought came on those people who had offended the gods. Over time this naturalism evolved into determinism: the nobility was thought to be divine, and the poor were sinners; your lot in life was largely determined by your lineage. As history wore our neocortical brains developed better reasoning capabilities, we made more scientific discoveries, and we developed better models and theories of the world around us. Perhaps one of the most significant, but largely unrecognized for its significance, is the theory of probability. Emile Cailliet states in _Journey into Light_: "The calculus of probabilities would aim at reducing to numbers, as far as feasible, both the perplexing aspects of the universe about us and of the uncertainties of life." In other words, the things that once gave us meaning have been reduced into indeterminate probabilities which give us both an accurate answer but also little certainty. Probability and science have drawn back the curtain and given us a glimpse of the gods that once dictated our experiences. Realizing that chance was not the will of the gods, harnessing the power of the atom, and now creating thinking machines has moved us from uninformed confidence to informed uncertainty. As we peeled back the layers of nature the realm of the divine and its radical indeterminacy, as characterized by Heisenberg, has come into focus and the foundations of belief and meaning have been weakened. If mere statistical laws can explain all that used to provide meaning, then the only gods that matter are us. The idea of absolute truth has become absurd, and relativism has taken its place as our ability to enforce fair and equal outcomes, once left only to providence, has grown with our neocortical brains. We have, in a way, grown too smart for our own good, as we have become increasingly unhappy as a society despite our ability to manage the world around us to our liking. Alex Karp and Nicholas Zamiska frame this problem succinctly in their book _The Technological Republic Hard Power, Soft Belief, and the Future of the West_: "The problem is that tolerance of everything often constitutes belief in nothing" and without belief we struggle to find meaning in anything. ## Markets Round Up The markets have returned to calm in time for summer and we have seen correlations fall across the board. ![[Pasted image 20250601133207.png]] The strongest correlations today are those between gold, the dollar, stocks, and the yield curve, which means these are the markets in the driver’s seat. They have also been the ones to see the most change over the last twenty days as correlations have come down in general. ![[Pasted image 20250601133419.png]] The market has settled into the dollar being a risk asset and now apparently bonds are as well. ![[Pasted image 20250602094356.png]] The recession theme does not appear to be a primary concern when looking at these correlations because of the bond market but it does emerge when we look at crude oil. Crude has underperformed this year (down just over 11% YTD) as the risk to growth and increasing trade barriers have presented dual headwinds for crude. Typically bonds rally in expectation of a recession, and the yield curve steepens, but the uncertain impact of trade policy on inflation has anchored bonds. However, if we look across the USO line in the correlation matrix above we can see that the largest negative correlations are still against the bond ETFs. This creates an interesting pair-trade between bonds and oil as we have the unusual occurrence of both oil and bonds both trading at the low end of their respective ranges, which has resulted from the market pricing in an increased risk of stagflation. Therefore, that risk premium superficially appears to be attractively priced as oil is already pricing a recession which will cause bonds to rally eventually, and if there is no recession oil should rebound strongly while bonds could stay in range. ![[Pasted image 20250601140139.png]] ![[Pasted image 20250602095333.png]] ## Chart Crimes I was recently asked about switching from an actively managed fund to an index fund to save fees which made me think of this Substack account that has been popping up into my feed that highlights the cumulative outperformance of different strategies through the use of the ubiquitous "cumulative return of $1 invested" charts. While explaining the virtues of reducing fees and the benefits of compounding over long periods of time it struck me that I could commit a sort of reverse chart crime to make this argument. ![[Pasted image 20250602091643.png]] Here we have a chart that shows $100 invested in two identical strategies that both return 10% annually and the only difference is that one charges a 1% annual fee. We can see the miracle of compounding at work here as that 1% a year grows exponentially over time and results in ~50% difference after 45 years. With the help of some fancy marketing, we see charts like this used to raise billions of dollars all the time. In the quest for the next hot investment investors overlook the sure-fire, but less sexy strategies that deliver consistent and reliable returns. ![[Pasted image 20250602092743.png]] However, they only see this version of that same chart when looking at "boring" investments. It's as if our minds were wired to dream exponentially and reason logarithmically. It is important to acknowledge how fluid our perceptions are to these sleights of hand. Both charts represent the same data but tell very different stories. When chasing novel strategies investors would be well-advised to look at things logarithmically, but when being penny wise over fees they should also remember to think exponentially to avoid being pound foolish. It is all too easy to get anchored in one absolute truth or another, but what is required is a balancing of all these truths at the same time.