The Outliers

173
Mon, Feb 24, 2014 - 8:31am

In any naturally occurring population there is some degree of variation between individuals within that group. When the variation is genetic, then the subtle differences between individuals can sometimes equip a few of them to survive better than others- for example, a small number of moths born with slightly more pigmentation of a color which makes them harder to spot by predators. If that difference has enough of an effect on their inclusive fitness to allow them to pass on their genes differentially, then that trait will be slightly more common in the next generation. If this happens for a long enough period of time, the entire nature of the population will change. This is what is familiarly known as natural selection.

This dynamic is not confined only to genetic inheritance, and in some cases can apply to variations in behavior as well. Within any large group of individuals there will be a wide range of differences in behaviors, values, goals, comportment, strategies, etc. Find something that people do, and if you study it closely enough you will quickly realize that there is great variety in how different individuals choose to go about doing that thing. Some may even choose not to “do that thing” at all! What is interesting is that, through the exceptional power of our brains, human beings do not have to wait for thousands of years for these differences to slowly work their way through the genetics of the population- if they can observe that behavior X is beneficial to those who have adopted it, they can also choose to adopt it, often with great rapidity. When large numbers of people suddenly start doing something that only a few had done previously, this is called a preference cascade.

A preference cascade is a uniquely human phenomenon. It happens, in part, because we are NOT purely rational actors, always weighing costs/benefits and choosing based on this analysis. Instead, we are intensely social creatures and tend to be influenced to a great degree by what others around us are doing. In normal times people look around, observe how most others are behaving, and copy that behavior themselves. This usually works fairly well as an adaptive strategy because the totality of individuals can usually be assumed to be doing just fine, so if we do what they do, we assume we will be just fine too. Additionally, activities that are perceived to be outside the mainstream often carry a degree of social or cultural stigma, thus imposing some costs on the people who adopt them – there are significant negatives to being perceived as the “weirdo” because you are behaving differently or deviating from the accepted. So most people just do the “usual” thing and don’t think much about it… right up until they observe their peers suddenly doing something differently. Then they quickly perceive not only that it is “OK” to do that thing but they also will not be acting alone if they do it, and a preference cascade ensues.

University of Tennessee Professor Glenn Reynolds has written about the phenomenon of the preference cascade over the years, and in this article he gives two interesting examples of it in action. Reynolds writes:

(Prior to 911), the people who didn't have flags on their cars weren't necessarily unpatriotic - but displaying a flag on one's car was associated with particular political and social categories that aren't especially popular on campuses. After 9/11,enough people started flying flags to make other people feel safe about doing it too. Now you can see a lot of flags on the cars in that garage. Have people become more patriotic? Maybe. But more likely they've just become more willing to show it. This illustrates, in a mild way, the reason why totalitarian regimes collapse so suddenly. Such regimes have little legitimacy, but they spend a lot of effort making sure that citizens don't realize the extent to which their fellow-citizens dislike the regime. If the secret police and the censors are doing their job, 99% of the populace can hate the regime and be ready to revolt against it - but no revolt will occur because no one realizes that everyone else feels the same way. This works until something breaks the spell, and the discontented realize that their feelings are widely shared, at which point the collapse of the regime may seem very sudden to outside observers - or even to the citizens themselves. Claims after the fact that many people who seemed like loyal apparatchiks really loathed the regime are often self-serving, of course. But they're also often true: Even if one loathes the regime, few people have the force of will to stage one-man revolutions, and when preferences are sufficiently falsified, each dissident may feel that he or she is the only one, or at least part of a minority too small to make any difference.

Understanding the dynamics behind the preference cascade is particularly important for gold and silver. If we think about the behavior that we call investing, we can quickly discern that at present, people who place a portion of their savings into physical gold and silver are “Outliers” in terms of investing behavior among the general public. The vast majority of people who invest do so in equities (through 401k’s, trading accounts, mutual funds, etc), and many own bonds or own funds that invest in bonds, as well. The idea of investing your saved wealth in physical gold and silver outside the system is still a practice that is comparatively rare. This makes all of us at TFMR unusual exceptions to the norm… we are the odd outliers within the larger population of investors.

So far so good… but I think a key insight comes from understanding WHY there are a comparatively small number of gold and silver investors, and more precisely why such an outstanding, traditional investment vehicle is now considered so outside the mainstream. When one considers how precious metals are portrayed and discussed, however, it makes perfect sense, particularly when one thinks about who, precisely, controls that mainstream narrative. You can tell what a power structure fears most by observing the energy and resources they deploy against that thing, and the ‘thing’ the fiat currency regime fears most intensely is a preference cascade to real money.

Consider the vast array of resources deployed today against gold and silver investing. First, we see a regular drumbeat of negative articles, the full weight of the mainstream financial media and legions of writers on financial websites brought to bear to convince people NOT to buy gold and silver. We see variations of the same hackneyed articles year in and year out, regardless of the state of the markets or the price. These constant attempts at shaping opinion and sentiment employ misleading arguments, ignore contrary evidence, and use every rhetorical trick in the book to convince people that gold and silver are “risky” and “speculative” (Anatomy of an MSM Hit Piece on Gold), when the reality is that they the most historically stable stores of value known to man. We also see mainstream brokerage houses issuing sell recommendations year after year, for assets which ironically they never told their clients to buy in the first place (It’s Never a Good Time to Buy Gold). All of these operate within a conventional milieu of financial advisors emphasizing “traditional investments” (i.e. fiat based, fiat supporting) while going out of their way to dismiss gold and silver – think Berkshire Hathaway’s Charlie Munger claiming “Civilized people don’t invest in gold” for a fairly standard example. If you think about the totality of the effort used to try and manage the public perception of gold and silver, you start to get a sense of just how intensely these things are feared by the Fed/Finance/Political regime.

But wait, there’s more! Consider, too, the extraordinary energy and enormous wealth deployed against the price of gold and silver over time. Look at the long history of price suppression, from the known and historically established facts of the London Gold Pool (link) to the extraordinary actions of the last five years (The Golden Ostrich, Chris Powell speech on price suppression). I think people in the general public would be shocked at the sheer amount of effort, the degree of secrecy employed, and the vast amount of wealth expended towards suppressing PM prices over time. This, above virtually everything else, makes it crystal clear what an enormous threat that a large-scale adoption of gold and silver by the investing public would be to the current power structure.

Reality, and particularly mathematical reality, has a way of asserting itself. Inevitably, the truth of the real nature of the present system will become apparent to everyday investors. At some point the broader public will look around and grasp that the current system has been siphoning their productivity and labor for generations, and has been doing so well beyond the publicly acknowledged and democratically chosen practice of taxation. They will realize that the “value” of everything they have earned or saved has been remorselessly diminished by the hidden confiscation tax of currency devaluation over time. They will see that as the politicians spend the produce of their labor without limit and the enabling Fed prints to pay those bills, their paychecks buy less and less and the value of their pensions shrink. With every dollar printed and every TBTF bank bailed-out, in every investment they own they are slowly being bled dry. At some point people will wake up and understand that although they are following the rules (and following the herd when it comes to investing advice) they are swimming against the tide, and the tide is winning.

And when this becomes plain to them, people will look around and see that there is a small group of investors who have managed to protect their saved value through physical gold and silver in their possession, and that this has insulated them, over the long term, from wealth confiscation via inflation. And I firmly believe that when this happens, and when the obvious benefits of the behavior of these investing “outliers” becomes crystal clear to the broader population, we will see a preference cascade to end all preference cascades into the metals. That, I think, will really be something to behold.

Then and only then, when the awareness of these things has become so widespread that my idiot neighbor is talking about ASE’s and everyone and their brother is trying to buy gold and silver, will I start thinking about selling some of mine. I hope to do so at a healthy, and possibly ridiculous, profit.

Until that day comes, protect yourself and your wealth in the present. Keep stacking.

About the Author

  173 Comments

Feb 24, 2014 - 4:27pm

Completely OT, but funny (if it weren't so creepy)

Warren Buffett is voicing his own character in an animated TV series called 'Secret Millionaires Club'. The series was created in 2010-2011, I just saw an episode recently -- so it's still being aired.

"The Secret Millionaires Club is an animated series that features Warren Buffett as a mentor to a group of entrepreneurial kids whose adventures lead them to encounter financial and business problems to solve. The program teaches the basic of good financial decision making and some of the basic lessons of starting a business."

While certainly a better topic for kids programming than many of the other pieces of mindless/detrimental trash that is on the market today, I figured the audience here would get a chuckle out of this one.

ag1969
Feb 24, 2014 - 4:29pm

Motley

The main point of my post was that the gold market is already broken, and we don't need J6P to help break it, but maybe we just have different definitions of when the gold market breaks.

Point taken that maybe I am not J6P. I don't drink anyway, so I guess I don't really buy 6 packs. But yes, I guess the fact that I have been stacking already makes me different from J6p.

Edit, By the way, the little 69's are on school vacation this week, and I took them to see "Frozen" this afternoon. The first thing I noticed, of the 20 or so women that were there with their kids, they were all fat. Not just overweight, fat. They all had buckets of popcorn and 32 oz. soft drinks. The second thing I found interesting was the upcoming muppets movie being all about the CIA.

Muppets Most Wanted Official Theatrical Trailer (2014) - Muppets Movie HD
ag1969
Feb 24, 2014 - 4:33pm

JY

My Mom visited us this weekend. She had been planning to visit since before Christmas, but the Polar Vortex kept her home until this past weekend. You may get a kick out of the fact that she had clipped out a glowing article on what a great guy Warren Buffet is and had saved it for me for two months, thinking she was doing me a great favor by preserving this clipping for me. LMAO. She meant well. It;s the thought that counts.

Motley Fool
Feb 24, 2014 - 4:42pm

ag1969

"but maybe we just have different definitions of when the gold market breaks."

I'm pretty sure we do. At present I can still buy gold at close to the spot price. Ignoring considerations of the backstory, this to me is functional. The day I can't by gold at close to spot + manufacturing costs I will consider the market broken.

It being sustainable is of course another matter. We agree this state of affairs cannot continue. That it will be broken in the near future does not equate to it being broken right now imo.

"But yes, I guess the fact that I have been stacking already makes me different from J6p."

Yup.

ltcolkilgore
Feb 24, 2014 - 4:44pm

18 Trillion... and counting...

I found this to be some interesting perspective...

What's the difference between a million, a billion, a trillion?

A million seconds is 12 days.
A billion seconds is 31 years.
A trillion seconds is 31,688 years.

A million minutes ago was – 1 year, 329 days, 10 hours and 40 minutes ago.
A billion minutes ago was just after the time of Christ.

A million hours ago was in 1885.
A billion hours ago man had not yet walked on earth.

A million dollars ago was five (5) seconds ago at the U.S. Treasury.
A billion dollars ago was late yesterday afternoon at the U.S. Treasury.
[Note: this was pre-Obama]

A trillion dollars is so large a number that only politicians
can use the term in conversation... probably because they
seldom think about what they are really saying. I've read that
mathematicians do not even use the term trillion!
Here is some perspective on TRILLION:

Trillion = 1,000,000,000,000.
The country has not existed for a trillion seconds.
Western civilization has not been around a trillion seconds.
One trillion seconds ago – 31,688 years – Neanderthals stalked the plains of Europe.

Bollocks
Feb 24, 2014 - 4:51pm

Pining

Excuse me if I don't comment on your article this time.

Can't be arsed.

Feb 24, 2014 - 5:03pm

Well...

We certainly wouldn't want you to be arsed, Bollocks. That would be terrible!

Uh, at least I think it would. Or maybe not... wait, is that a bad thing? You Limeys need to learn some English so we can understand what the heck you're saying. So to sum up, if being arsed is a bad thing then I hope you're not arsed. If it is a good thing then I wish you all the arseing you can handle. So to speak.

Bollocks
Feb 24, 2014 - 5:08pm

Too complicated Pining

My brain is about the size of a pea.

I can't be arsed to explain why.

Bollocks
Feb 24, 2014 - 5:16pm

Pining

"You Limeys need to learn some English so we can understand what the heck you're saying."

Look up something called "Monty Python" on youtube. You'll find it impossible to understand - but do stick with it. It can be jolly good fun.

ALSO they do a sketch about a parrot which, incredibly, has the line "pining for the fields"in it. How amazing a coincidence is that? Same as your name!

I'd post it here but I can't be arsed.

dgstage
Feb 24, 2014 - 5:24pm

Ten Stories

10 Stories From The Cold, Hard Streets Of America That Will Break Your Heart

https://theeconomiccollapseblog.com/archives/10-stories-from-the-cold-ha...

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