**December 20, 2021** #writing [[Decision Making]] | [[Investing versus Trading (Speculation)]] You know that line from Inception about the power of an idea? It’s such a great line and a very underappreciated truth. Here it is: >_“An idea is like a virus. Resilient. Highly contagious. And even the smallest seed of an idea can grow. It can grow to define or destroy you.”_ This became very real for me last week. If you are on the mailing list for this newsletter you get an email from me and I usually add some comments in the body of the email (btw….if you are reading this and not on the mailing list please consider subscribing by signing up on the website or just email me…I will never try to sell you anything, or sell your info to marketers, or anything like that…so there is no risk and you can unsubscribe at any time). So anyway, back to the story….in last week’s email I mentioned that I thought the seasonal vortex will suck stocks higher into year-end. I saw a comment like that on Friday on Twitter and it was an idea that stuck in my mind and grew. I have had a high success rate trading the ES recently and was feeling the mojo, so I got the idea in my head that we were going for the ATH. On Friday, when I read that, I didn’t realize that we had all these central bank meetings coming up but at that point it was too late for me. The bias was in my brain, and I couldn’t shake it even if I wanted to. That idea changed the way I viewed the market on Monday and Tuesday and led to some substandard trading, luckily, I recovered by Wednesday, but it is just a great example of how an idea, no matter if it is right or wrong can influence how you see the world. On Monday, after the spike higher from Friday didn’t find any continuation, the odds were high that we were going to get long liquidation which is exactly what we got. Instead of seeing it for what it was I was trying to buy the dip on Monday which was the wrong way to go. Tuesday gapped lower and there was a rally on the open that was clearly a short opportunity, but I couldn’t take the trade because 1) I was still stuck on the bullish bias and 2) I was now starting to doubt myself. This is how ideas can grow to define or destroy you. My behavior changed because of that idea. That idea changed my beliefs about the market. We’ve been talking about the psychology of inflation this year and that is another example of the power of ideas. During the pandemic, when we first started to experience shortages, it was a shock to the system. But over time we got used to the idea that the store might not have what we needed. We got used to not being able to freely do what we once had been able to do. We got used to scarcity. So now that “supply chain” has become a normal part of the public discourse and there are persistent shortages we are getting price increases. And instead of waiting or checking Amazon we are paying the higher prices because we aren’t sure that we can get whatever we wanted again. This is what is going in with housing and autos right now. There aren’t enough cars because of the chip shortage so people are lifting any offer they can. This is not something we have seen in a very long time; this is an entirely new dynamic for an entire generation of people out there. This is why inflation is so difficult to fight once it takes root and why Volker had to nearly destroy to economy to arrest the inflation of the 1970s. It is more than just accepting the idea of higher prices, it is the idea of scarcity, the fear of being without, competition against your fellow citizens for highly coveted goods and services. Imagine the insanity of a Black Friday at a Walmart year-round.   This is bigger than COVID, the supply chain, and a lot of the transitory elements of the inflation we are experiencing right now. The fertile soil for inflation has been laid down in the years after the GFC and leading into COVID. Inflation is inevitable just like death and taxes, it was only ever a matter of timing. The idea that policymakers had defeated inflation was the height of intellectual arrogance. By managing to positive outcomes in the markets and the economy policymakers have only increased the willingness of people to pay higher prices for things they want because they have been trained to not every have to do without.  Affordability is not relevant anymore because of the government backstop but also because the real value of things is dropping as inflation increases. There will come a time when the inflation destroys demand and eventually itself, but right now it is a benign inflation that is increasing demand. Just like the seasonal vortex idea blinded me to what the market was really doing inflation, blinds you to what is really happening in the economy by distorting the signaling quality of prices. At first rising wages feels good and the price increases are tolerable and easily explained away as transitory, and maybe they are transitory and after shortages are corrected prices come down, but the economy has reset to a higher wage level so maybe the prices don’t go all the way back down to where they were before. Once wages go up, it is very hard to take those raises back. So maybe prices come off the boil a bit, but they never go back to the old levels. This can happen slowly, or it can happen quickly. We are going to have to wait to find out what it will be this time around.   Sorry, I didn’t mean for this letter to be a soapbox rant on inflation. I am confident of the long-term path of inflation, but I am not confident at all in what the timeline looks like. This could play out over the next few years or decades. The seeds of the last great inflation were planted in the 50s and 60s and it took a decade or so for that inflation to really get going, so who knows what that means for this cycle. Hopefully this letter helps you understand a little bit better how the psychology of inflation works or maybe it will help you understand how ideas and biases can creep in and impact the way you see the world. Maybe it will help you understand how the reality we perceive isn’t always the reality that we are looking at. Maybe you will see the parallels here to life away from the markets and the economy. Just think about anytime you have every gotten frustrated at a friend or spouse or someone important in your life because you feel like they let you down or didn’t do something you wanted them to do. In that moment, you are incapable of being a true friend or a loving spouse because you are so wrapped up in your own self-centered world view you are blind to what may be going on with them and not able to give them the support they may need from you. One of the hardest tasks we face daily is to free ourselves of our biases, judgements, insecurities, and anxieties so that we can focus less on justifying ourselves and focus more on helping others. Trading and Life are high performance activities and in both the more you can get out of your own way the more likely you will be able to be the best version of yourself. With that I want to wish everyone a Happy Holidays, Merry Christmas, and Happy New Year. You probably won’t hear from me until mid-January, but I am working on publishing my 2021 “Macro Model” which I will post on the website and send out to this distribution. I hope this past year has been full of blessings for you and I hope that you can enjoy the holidays with family, friends and loved ones.