I watched the Israel/Iran war heat up all weekend, and I will readily admit that I was very worried about it escalating into a much more severe regional conflict.
The Wisdom Of Crowds
In 1907, at a county fair in Plymouth, England, 787 people guessed the weight of an ox, and the average was within 1% of the actual weight (about 1,200 lbs). What made that so surprising, though, is that the average number was far closer than the guesses of any of the local experts, e.g., farmers and butchers.
On the TV show, “Who Wants To Be A Millionaire?,” audience polls for the correct answer were correct 91% of the time, vastly outperforming individual experts and even the smartest of contestants.
Betting sites also consistently prove to be far more accurate at predicting elections than individual polling firms.
The above are all examples of “the wisdom of crowds” – where the collective judgment of a large and diverse group is often more accurate than that of individual experts.
What the Markets Are Really Telling Us
I share all this because the Kobeissi Letter was all over this today with several posts, including this one: To all who are calling for World War 3: If there were even a 50% chance of WW3 right now, the S&P 500 wouldn’t be 2% away from a new all time high. In fact, the S&P 500 would be down over -30%, gold would be above $5,000/oz, and oil prices would be above $100/barrel. If there were a 90% chance of WW3, the S&P 500 would be down over -50%, gold above $10,000/oz, and oil prices above $200/barrel. Despite all the headlines, markets say we are far from World War 3.
Markets are a great example of the wisdom of crowds. And yes, they can be manipulated, and yes, they are distorted by algorithmic trading, and yes, they can miss black swans (see 2008 and COVID), but the markets are often amazingly prescient.
George Gammon, in fact, likes to point out how the bond market was sending signals about both 2008 and COVID long before the rest of the world caught on.
So, I remain very relieved that hundreds of thousands of diverse investors across the world do not believe the Israel/Iran war will escalate too much.
What the Housing Market Crowd Knows That Experts Don’t
For the purposes of this blog, it’s important to remember that the wisdom of crowds applies to the housing market too.
The surge in buyers coming back into the market right now is a “crowd” that may, in fact, know more than the few “expert crash bros” predicting a housing crash.
Similarly, the bond market seems to be predicting that our economy is going to be OK and that rates will not shoot into the stratosphere, despite our extraordinary deficit problems, tariff issues, and inflation risks.
Markets can be wrong, as I mentioned above, but I still often trust them more than most experts.
