Australia is a valley of the clueless: get your money out!

In the far east of Germany lie two infamous valleys. One is the far northeastern tip of the country. The other is the area around Dresden. Together, they are known as the Valleys of the Clueless.

Not because the people there are unusually stupid. At least, not only for that reason.

The Valleys of the Clueless got their name because of their topography. A quirk in the local terrain meant West German television broadcasts couldn’t reach them. They were therefore cut off from the world, with only their East German state broadcaster to mislead them.

This led to a parallel existence, even when compared to fellow East Germans. People in the Valleys only ever got one side of the story.

While the rest of East Germany kept a fragile link to reality and the outside world, those in the Valleys were left in the dark.

As a result, they didn’t know how bad they had it. Nor what to prepare for as the imminent reunification of Germany became ever more obvious.

Once reunification hit, it required the people in the Valleys of the Clueless to catch up on decades of history, technology and living standards. They had to ‘unlearn’ a great deal too.

By many measures, they still haven’t caught up.

But before you judge them, consider…

Are you living in a Valley
of the Clueless?

Valleys of the Clueless take many forms. We hear all about one of them from our own state sponsored media: the dangers of social media and its echo chambers.

Last month, energy market analysts at Doomberg gave a strange interview that went wildly off track. Doomberg revealed their secret strategy for predicting how the war in Iran would unfold with extraordinary accuracy.

Doomberg’s team bought a new iPad, set up arms-length social media accounts, and spent countless hours convincing the social media algorithms that they were, in fact, Iranian loyalists.

This was a herculean task given Doomberg’s actual ‘flyover America’ persona. But they had fun doing it. And it worked.

The results were stunning.

It was like a parallel universe opened up.

The social media algorithms began feeding Doomberg analysts the other side of the story. One where Iran’s regime laid out its war strategy in detail on government accounts and in propaganda videos.

As a result, Doomberg knew about Iran’s planned attacks on other countries in the Middle East long before they were a surprise for the rest of us.

Iran’s intention to attack other countries in the event of a war was broadcast on Iran’s national TV, after all. Investors in the West just weren’t listening. The ‘topography’ of our social media and Western media left us in a Valley of the Clueless.

The decentralised command structure of Iran allowed for its leaders to be killed without impacting combat readiness and pre-planned responses. Cutting off the snake’s head was never going to work.

That was a very deliberate national policy, after all. We just weren’t listening…or able to listen…when Iranians told us about it.

The use of cheap and inaccurate Iranian missiles to deplete and test missile defence systems was a published Iranian tactic before the war. The real Iranian strikes were always kept for when the weaknesses had been identified. The initial feeble response was about finding those weak spots.

So, there was always going to be a more powerful and effective second strike from Iran. We just weren’t paying attention to those trying to tell us about it – the Iranians.

The list goes on. So much of what came as a surprise to us was public knowledge inside Iran and on the ‘other’ side of social media. For Iranians, the war unfolded as anticipated.

And they weren’t trying to hide what’d happen. They were shouting it from the rooftops. But not everyone was in range. We were in Valleys of Cluelessness.

Investors could’ve turned this information into an exceptionally profitable strategy by going long energy stocks early on in the war, knowing Iran would eventually go after energy infrastructure around the Middle East using cheap drones that are surprisingly good at evading depleted defence systems.

That was, after all, their published intention. Yet it surprised everyone except Trump’s oil trading buddies and Doomberg subscribers.

Our current Valleys
of the Clueless

Social media is just one powerful force creating Valleys of the Clueless. There are many other ways Australian investors are living in blissful ignorance. The viability of the energy transition is a classic example.

But the one I want to highlight is downside tail risk. The chance of something going terribly wrong.

In 2015, I faced a choice between working for Fat Tail Investment Research in Australia or its sister company in the UK.

I decided in favour of UK because more things go dreadfully wrong more often there. Downside tail risk is taken more seriously by investors.

Warning about double digit inflation in 2021, or a sovereign debt crisis in Italy in 2018, is something people want to hear about. Australians care about making quadruple digit gains from the IPO of Starlink.

In the end, I managed to juggle the two roles in both countries. Which is how I discovered I was right about Australians’ mispricing of downside risk.

Our ‘she’ll be right’ attitude leads investors to focus on ‘good news story’ gains over anything else. After all, Australia isn’t known for having recessions or house price crashes.

But you can’t run an economy on luck forever.

Crises really do happen

European investors remember what a severe economic crisis looks like. Surprise bank holidays, ATM withdrawal limits, capital controls, double digit inflation and governments defaulting on their bonds.

These things actually happen in Europe. They are very real. Yet they are unimaginable to Australian investors.

That’s why our country has piddling fuel reserves. Why it risks a gas shortage while exporting gas. Why our water crisis is never solved. Why our Eraring coal power station is always on the cusp of being closed, but never is. Why our retirement system is a giant punt on the stock market. Why our banks are so overvalued.

Australia is a Valley of the Clueless when it comes to what can go drastically wrong in financial markets. We don’t price it in.

It took decades of faux stability, but in the end the two German Valleys of the Clueless couldn’t escape history. They were swept up in the reunification of Germany.

It exposed their blissful ignorance to be more ignorance than bliss. Like I said, by many measures, they still haven’t caught up with the prosperity of West Germany.

Can you afford to do the same?