Why We Need Zero Hedge

Bloomberg reporters Tracy Alloway and Luke Kawa managed to get one of Zero Hedge’s ex-employees to tell them some inside stuff about what it’s like to write for the site. It’s a big story on the financial web today. Zero Hedge clapped back with a deeper look at the disgruntled ex-employee’s background and possible motives for wanting to trash his former employer.

I’m going to talk a bit about why we need Zero Hedge, and why I continue to link to and read the site. This is key stuff, in my view, so hear me out.

In 2014, journalist and media scholar Dean Starkman set out to answer the question of how it could be possible that the financial news media could miss the biggest crisis in 70 years. After all, weren’t there thousands of reporters covering Wall Street and the economy? Weren’t there hundreds of daily, weekly and monthly publications, websites and TV channels looking at every single story in the markets and behind the scenes at the nations banks and brokerages?

Starkman concluded in his book, The Watchdog That Didn’t Bark, that it was a classic agency problem that caused the big whiff.

Sometime in the 1990’s, the mainstream financial media became almost wholly dependent on the selling of mutual fund advertisements and, as a result, budget resources within the news industry shifted more toward content for investing rather than for the public at large. Journalists were doing less of the kind of investigative work that didn’t really pay the bills and ended up upsetting big advertisers.

Heading into the crisis, there certainly were some articles about the failing Bear Sterns mortgage funds, the drying up of credit and the bubble in real estate prices. But given the magnitude of the situation, there should have been more. A lot more. You’d have expected to have seen a lot more skepticism too. Instead, the media was skeptical of the skeptics and the band played on. “Who should we believe? Dick Fuld or some guy with a blog?”

This was the tone right up until the eruptions of the summer of 2008, when all hell broke loose. And on the other side of this, Zero Hedge was born.

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Tyler Durden started his blog during the same month I started mine, November of 2008, give or take a few days. We both shot into the public consciousness at around the same time, let’s say January or February of 2009. Our blogs, and several others, were being looked at as a counterpoint to the prevailing Wall Street message. Things were decidedly not alright, in our view, and thanks to the explosion of social media use among investors and professionals, ours was a message that could now be heard.

Now, of course, this is where the similarities between The Reformed Broker and Zero Hedge ended. My blog was, from day one, centered around my own take on things, which is….let’s just say, sardonically optimistic. I think we know where Tyler & Co are, in contrast.

To which I say Good. Someone has to be on the other side of the mainstream. Someone has to be on the other side of the trade. And if that publication or person is interesting, smart, quick-witted and utterly engaged – all things no one would say Zero Hedge is not – then so much the better.

Prior to the ZH phenomenon, there wasn’t nearly enough skepticism in the media. Now, there may be too much. But this is a pendulum that’s been swinging back and forth ever since Ida Tarbell went after John D. Rockefeller’s business interests a hundred years ago. You can disagree with the Zero Hedge conclusions about what is happening in the markets (and quite profitably, these last few years), but if you’re an open-minded market participant, it’s certainly healthy to come into contact with them.

Now, if you’re someone who can’t read something or hear something without going completely over the edge and changing your entire investment process because of it, then you shouldn’t blame ZH or any other place where opinions are published. You should blame yourself. Moreover, you should find a professional to help you because you’re not competent in the investing sphere.

If you’re an enlightened, humble investor with a process, you can absolutely come into contact with contrary information and opinions and continue on unscathed, but perhaps wiser. In fact, you probably should. Having a healthy dose of the opinions and viewpoints of others keeps you sharp. It forces you to examine and re-examine what you believe. If you’re not second-guessing things from time to time, your brain may not be properly functioning.

And nobody does the bear case quite like Zero Hedge. Even if you’re an optimist, there’s something to be gained by checking it out from time to time – even if it only serves to confirm your existing disposition. In fact, especially if it can serve to do so.

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My friend Phil Pearlman, a trained psychologist and former hedge fund manager, taught me a long time ago that good investing was the ability to hold several contrary thoughts in our head at the same time, compartmentalizing some while indulging others – and knowing when to do which.

This brings to mind the White Queen from Lewis Carroll’s Alice in Wonderland, who attempts to help our heroine adjust to her new surroundings:

‘I can’t believe that,’ said Alice.

‘Can’t you?’ the Queen said in a pitying tone. ‘Try again. Draw a long breath and shut your eyes.’

Alice laughed. ‘There’s no use trying,’ she said. ‘One can’t believe in impossible things.’

‘I dare say you haven’t had much practice,’ said the Queen. ‘When I was your age I always did it for half an hour a day. Why, sometimes I believed as many as six impossible things before breakfast.’

This is important if only for the reason that impossible, far-fetched things happen to the markets and the economy from time to time. As Jeff Gundlach likes to say, “As soon as you hear people in the investment business start saying ‘Never’, that’s when you know it’s about to happen.” Negative interest rates being just the latest example of an impossible thing. And yet, here they are – around the world. A stock market making new all-time highs while earnings collapse is yet another.

It is only in the aftermath of inconceivably bad events happening that we all trace back the reasons for why they should have been obvious possibilities after all. This is called the hindsight bias.

At least someone is considering these impossible possibilities. Zero Hedge serves that role for everyone. Even if we’re smart enough not to trade on it.