The Digest #135

Published on September 17, 2022

The Futility of Forecasting

“Even if you somehow manage to get an economic forecast correct, that’s only half the battle.  You still need to anticipate how that economic activity will translate into a market outcome.  This requires an entirely different forecast, also involving innumerable variables, many of which pertain to psychology and thus are practically unknowable.”

— Howard Marks, The Illusion of Knowledge

Howard Marks could not have picked a better time to release his latest memo. The Illusion of Knowledge was published just a few days before the Bureau of Labor Statistics released August inflation data on Tuesday, September 13. The CPI-U increased by 0.1% over the course of the month and is 8.3% above its level a year ago demonstrating that inflation is well entrenched in the economy. 

Market participants expected the CPI-U to decline by 0.1% in August. Core inflation, which excludes food and energy prices, rose 6.3% over the past year which led many investors to believe that the Federal Reserve would be more aggressive with interest rate increases at the September and November meetings. Stocks proceeded to take a nosedive with the S&P 500 falling 4.3% on Tuesday. The yield on the closely watched two year treasury note has increased sharply this week. The thirty year mortgage rate is now above 6% for the first time since the financial crisis.

In retrospect, it seems crazy that the two year treasury note yielded a microscopic 0.23% one year ago. Market participants were forecasting very minimal rate increases. But so was the Federal Reserve itself! The following “forward guidance” was released by the Fed after its policy meeting on September 20-21, 2021:

Source: Summary of Economic Projections, September 2021

As we can see from the highlighted rows in the table, the FOMC expected the fed funds rate to barely increase during 2022. The forecasts for inflation were wildly incorrect as well. I’ve written before about the Fed’s epistemic arrogance and there’s no better example than their wildly incorrect forecasts over the past year. 

Why does the Federal Reserve continue to provide “forward guidance” and why do market participants continue to not only take forward guidance seriously but make their own variant forecasts as well? There could be no better illustration of the points made by Howard Marks in his latest memo.

As Mr. Marks points out, most forecasts tend to be based on extrapolations of current trends, but even if such forecasts turn out to be correct, they are not necessarily valuable if everyone else is making similar forecasts. For a forecast to be useful in financial markets, it must be both correct and feature a non-consensus view. 

Despite the abysmal record of forecasting, people cannot resist trying to peer into what the future holds in store for us. Human nature guarantees the perennial demand for forecasts and where there is demand, there will be supply.

Listen to Howard Marks discuss his latest memo in a recent podcast


How a CEO Rescued a Big Bet on Big Oil; ‘There Were a Lot of Doubters’ by Benoît Morenne and Cara Lombardo, September 10, 2022. This article discusses Occidental Petroleum CEO Vicki Hollub’s leadership of the company. It’s an interesting story even though many elements related to the involvement of Carl Icahn and Warren Buffett have been reported in the past. Unfortunately, the authors misinterpreted a recent 13G filing and stated that Berkshire had increased its holding of Occidental in recent days. This was not the case. The WSJ quickly corrected the error, but many other sites have not. Berkshire’s ownership level remains the same as documented in Berkshire’s Ownership of Occidental Exceeds 20%, which I published on August 11. (WSJ)

Patagonia Has No More Owners by Matt Levine, September 15, 2022. Yvon Chouinard, the founder of Patagonia, has given away his economic interest in the company. While this story has been widely reported this week in the Wall Street Journal and elsewhere, I found Matt Levine’s take on the situation insightful. The ultra-rich are indeed not like the rest of us. They have unique problems, even when it comes to giving away their money. Chouinard achieved his objective of no longer having an economic interest in Patagonia, channeling the company’s profits to his chosen causes, and doing all of this in a tax-efficient manner. (Bloomberg)

How Europe Stumbled Into an Energy Catastrophe by Benjamin Hart, September 13, 2022. This is an interesting interview with the anonymous writers behind Doomberg, one of the most successful financial newsletters on Substack and a major presence on Twitter. It has been quite obvious for some time that the writers behind Doomberg have significant expertise in the energy industry, and we are provided some background in the interview. The bulk of the discussion is related to Europe’s energy crisis and how Doomberg believes western political leaders have misread the situation and played into Vladimir Putin’s hands. (New York Magazine)

Berkshire Hathaway Energy Invests $500 million in West Virginia ProjectPress release dated September 13, 2022. BHE Renewables has agreed to purchase 2,000 acres in Ravenswood, West Virginia to build a renewable energy microgrid powered industrial site. In an interesting twist, Berkshire Hathaway subsidiary Precision Castparts will be the first company to locate on the site and will build a titanium melt facility using 100% renewable energy to manufacture titanium products. Although a small deal for Berkshire Hathaway, the details are interesting to read about because the deal involves cooperation between two Berkshire subsidiaries.

Interview: Christopher Leonard, Author of “The Lords of Easy Money” by Matt Taibbi, September 7, 2022. Christopher Leonard’s book, which I reviewed in January, could not have been timed more perfectly. Leonard’s book features Thomas Hoenig, former President of the Kansas City Fed. Hoenig was warning about the possibility of Fed induced asset bubbles in the early 2010s at a time when such views were completely ignored. Hoenig’s warnings proved to be prescient, but he still gets little attention in the mainstream media. In this interview, Leonard discusses the genesis of the book and how it has been received in the months since publication. (TK News)

It’s Supposed To Be Hard by Morgan Housel, September 9, 2022. It is difficult to outperform the market, but that’s the way it is supposed to be, and it would be weird if it was somehow different. “Wouldn’t it be strange if every slightly ambitious investor could pick a few stocks and earn returns capable of generating dynastic wealth with other people’s money? Or even most of them? How and why could that world possibly exist? The reason Warren Buffett is interesting is because there’s only one of him.” (Collaborative Fund)

25 Habits That Will Guarantee You Success by Ryan Holiday, September 14, 2022. There are many good ideas in this article. This one on persistence is probably my favorite: “There is an old German word sitzfleisch which means basically sitting your butt in the chair and not getting up until the task is complete. Even as it goes numb, even as one by one, the people around you call it a day. Showing up yourself, day after day, until your back aches, your eyes water, and your limbs turn to mush.” (

  • Related Quote“Another thing you have to do, of course, is to have a lot of assiduity. I like that word because it means: sit down on your ass until you do it.” — Charlie Munger, USC Law School: Commencement Address, h/t GrahamValue.

The Finality of Everything by Lawrence Yeo, September 2022. “Tomorrow is not guaranteed for any of us, yet we live life as if a fresh day awaits us each morning. This is the paradox of our existence: we are aware of our finiteness, but view life through the lens of the infinite. Perhaps this was evolution’s way of patching up our minds to keep an existential crisis at bay. After all, if we truly lived everyday like it was our last, we’d find ourselves in enough precarious situations to prevent the spread of our species.” (More to That)

The Machine Stops by Oliver Sacks, February 11, 2019. Shortly before his death in 2015, Oliver Sacks wrote this essay which was published posthumously by The New Yorker in 2019. Many passages are quite profound, but this one related to technology and social media struck me in particular: “Everything is public now, potentially: one’s thoughts, one’s photos, one’s movements, one’s purchases. There is no privacy and apparently little desire for it in a world devoted to non-stop use of social media. Every minute, every second, has to be spent with one’s device clutched in one’s hand. Those trapped in this virtual world are never alone, never able to concentrate and appreciate in their own way, silently. They have given up, to a great extent, the amenities and achievements of civilization: solitude and leisure, the sanction to be oneself, truly absorbed, whether in contemplating a work of art, a scientific theory, a sunset, or the face of one’s beloved.” (The New Yorker)

An Insignificant Letter by Lindsay Chervinsky, September 15, 2022. History inevitably focuses a spotlight on the men and women who have made the greatest impact on the world. Being related to these giants of history is not always easy. In this article, historian Lindsay Chervinsky writes about Thomas Boylston Adams, the youngest son of John and Abigail Adams. Thomas was overshadowed not only by his father but by his older brother, both of whom served as President of the United States. “If we focus on history as a list of names, dates, and events, we risk missing the complexity and kaleidoscope of experiences that surrounded the big names.” (Imperfect Union)


GE: Lessons From the Rise and Fall, September 14, 2022. The rise and fall of GE is one of the most important business stories in history. This podcast focuses on the Jack Welch era which began in 1981 and the rise of the company in terms of business results and perception on Wall Street. The subsequent fall is discussed in some detail as well. There were references to Berkshire Hathaway and Warren Buffett and the differences between Berkshire and GE. This angle to the conversation could make it interesting for Berkshire shareholders. (Business Breakdowns)

Nick Gillespie — The Lou Reed of Libertarianism, September 15, 2022. This is an interesting discussion regarding the rise and fall of libertarian attitudes within the United States. Libertarianism can be understood as an anti-authoritarian political philosophy. I found the discussion of the ebbs and flows of support for libertarian philosophy interesting. In my opinion, both political parties in the United States tilt toward authoritarianism today, albeit with very different priorities regarding the use of authoritarian power. (Infinite Loops)

Rivian: RJ Scaringe, September 12, 2022. Whatever you might think of Rivian’s market value, the company’s origin story is fascinating to listen to: “Rivian’s journey has taken RJ from an old warehouse in Florida to a massive Midwestern car manufacturing plant; and from years of stealth planning to months of anticipatory buzz from buyers and the industry. Rivian rolled its first trucks off the line in 2021, and is hustling to fulfill tens of thousands of vehicle reservations from excited customers. There have been pivots, sleepless nights, and, of course, multiple supply chain issues, but today, Rivian is valued at $30 billion and is a major player in the electric vehicle industry.” (How I Built This)

Video: Taleb on the Fed and Interest Rates

This interview took place on CNBC on September 15, 2022:

This Week on Twitter

This week’s thread from 10-K Diver is all about the P/E Ratio:

This is a smart approach to hedge NFT exposure:

Photo of the Week

Venice, Italy — September 16, 2015

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The Digest #135