**October 18, 2021** #writing I was reminded of this old interview question from SIG last week. The [Monty Hall Problem](https://en.wikipedia.org/wiki/Monty_Hall_problem) is based on the old game show Let’s Make a Deal and has been hotly debated amongst academics since the 1970s. You have a choice of three doors, behind one door is a car and behind the other two are goats. Once you pick a door, the host, Monty Hall, opens one of the doors you did not pick to reveal a goat behind it and then offers you the option to switch. The answer relies on Bayesian probability theory and can get very complex but simply put, you are supposed to switch doors once the host reveals one of the other doors. This is because when you originally picked the door the odds of you being wrong were 2/3 and now that there are only two unknown doors the odds are 2/3 that the prize is behind the door you did not pick. This simple problem gives people lots of problems and that is why it’s a great interview question and also why it continues to be [debated today](https://moontowermeta.com/moontower-121/). I believe this is because our brains operate under a “team of rivals framework”(_David Eagleman, Icognito_) where our conscious mind acts as the CEO of a large corporation and decides among alternative solutions put forward by the different rivals operating in our brain. Once our conscious minds decide we anchor to that decision. This is why probabilistic thinking is so difficult: math and biology don’t mix well. There is also a philosophical angle to this problem of anchoring captured best by Maria Popova in her [review of Buddhist teacher and peace activist Thich Nhat Hanh’s book Fear: Essential Wisdom for Getting Through the Storm](https://www.brainpickings.org/2021/10/10/thich-nhat-hanh-listening-love/?mc_cid=2d1ba0b2a0&mc_eid=201e871fac): >_“Part of why this is so challenging to the Western mind, with its individualistic ideal of self-reliance that too readily metastasizes into self-righteousness, is that we grow incredibly insecure at the prospect of being wrong and feel incredibly unmoored by the fact of having been wrong. In a culture conflating who we are with what we know and what we stand for, the Eastern contemplative traditions can be so salutary with their gentle, steady practice of releasing the clutch of selfing and unclenching the fist of righteousness into an open palm of receptivity.”_ --- I have been thinking about the Fed a lot lately. This whole personal trading scandal with the regional bank presidents could be a big deal for the independence of the Fed. The regional bank presidents are not political appointees and that has gone a long way to maintaining the independence of the Fed over the years, but now there will be calls for making the presidents political appointees. [George Friedman correctly points out that “Institutions exist to reduce social and economic pain”](https://geopoliticalfutures.com/forecasting-and-living/), but it is becoming more widely accepted that institutions like the Fed have not reduced social and economic pain, and in fact may have contributed to creating more pain and inequality. Elizabeth Warren recently [admonished Powell](https://www.cnbc.com/2021/09/28/sen-warren-calls-fed-chair-powell-a-dangerous-man-says-she-will-oppose-his-renomination.html) during his Congressional Testimony that he is a “dangerous man” for making the “banking system less safe”, and said that she would oppose his renomination. Elizabeth Warren has become [very powerful in the Biden Administration](https://www.politico.com/news/2021/03/15/elizabeth-warren-aides-biden-administration-475653) and opposition like hers could initiate serious change at the Fed. The politicization of the Fed is likely to see a continuation of extreme monetary policy and a firmer embrace of MMT; all this with the CPI printing 5.4%. So, what does this mean for the markets? This is where I think the Monty Hall problem can help us out. During my entire career we have been operating under the assumption that the Fed is credible and independent. This is door #1. Door #2 is that the Fed is not credible and not independent. We also assumed that door #3 was some version of door #1 so the odds were in favor of monetary stability and the dollar enjoyed the benefit of being the global reserve currency, facilitating the majority of global trade. All the adherents to the [Austrian School](https://en.wikipedia.org/wiki/Austrian_School) of Economic thought believe door #3 is the same as door #2 and that we have been duped all these years (apologies for the crude oversimplification of Austrian Economic Theory) but they have been in the minority. My fear is that this trading scandal is synonymous to Monty Hall opening the other door and seeing that door #3 was in fact the Fed is not credible proving the Austrian’s correct. This changes the probabilities of our original assumption about the Fed drastically. It does not mean the Fed is not credible, it merely increases the odds that they are not and increases the odds that they will lose their independence. I have no clue what is going to happen here but my antenna always go up when something potentially big like this doesn’t garner a lot of attention initially and the impact is asymmetrical. As I mentioned earlier CPI just printed above 5% again and bonds have rallied….again. At the same time the global supply chain is literally falling apart all over the world. This may in fact dwarf the whole Fed issue in the long run. We have a dollar centric global trading system that is being torn apart right now and will have to be rebuilt. What happens if nations choose to use this as an opportunity to move trade out of US dollars? I don’t think this will happen but the fact that this question and questions of the Fed’s independence are being seriously considered today is astounding. I’ve mentioned before that back in my Penn Mutual days we had this long-term thesis around inflation and deflation and believed that to truly get inflation we needed to endure a long period of deflation first. This would change the social, economic, and political attitudes towards inflation. It would also pave the path for inflation psychology to take hold which is the most important part of inflation. In some of our old Investment Strategy meetings we would doom plan for some seriously nasty scenarios, but never did we imagine what we are seeing today (well maybe we did, but we never took it seriously). Things are moving really fast these days. We squeezed five years’ worth of gains into one year in the post-COVID equity bull market. The helplessness of our institutions to protect us from ourselves is widely accepted. This is [Fourth Turning](https://www.cedarshillgroup.com/blog/chg-weekly-commentary7511830) type stuff for sure. The mosaic the markets and global economy are putting up right now is one of extreme uncertainty. The past influences the odds of what may happen in the future, but it doesn’t guarantee anything. Last week we saw a violent two-day rally in the market which was mostly short covering. Focusing on the process instead of the outcome is important to keep perspective of the broader context of what is happening currently. The Fourth Turning can seem bad, but the good news is it leads to the [First Turning or _The High_](https://en.wikipedia.org/wiki/Strauss%E2%80%93Howe_generational_theory)_._ >_“[[Sometimes the market needs to break before it can rally]]” - Unknown_