Smooth as Silk
The intellectual elite told us the housing market was contained just moments before the biggest housing crisis in U.S. history. They told us the stock market had reached a permanently high plateau weeks before the biggest stock market crash in U.S. history. They told us the world was running out of natural resources just prior to an epoch productivity surge in the production of natural resources. They told us inflation was transitory while it took root in the U.S. economy.
Who the heck are these people?
As investors, we need to proactively identify members of the intellectual elite. Only then can we totally ignore what they say.
A tip of the hat to the economist Thomas Sowell, who taught us about the intellectual elite through his writings. Much of what follows are either his ideas outright or were inspired by his writings.
According to Sowell, the intellectual elite are people that specialize in the packaging of ideas, not in the quality of the idea itself.
The most basic element of effective packaging is what Sowell calls articulation. Articulation is the way in which the message is actually delivered: the choice of word, the organization of materials, the adherence to scholarly form. The intellectual elite are pros at articulation. They are proficient with the turn of phrase, the one-liners. Soundbites roll off their tongues like Fords off the assembly line.
Evangelists come to mind. All evangelists are not members of the intellectual elite and certainly not all members of the intellectual elite are evangelists, but most evangelists have a talent for communication that is common with members of the intellectual elite. They know how to connect with people. They know how to convincingly deliver a message.
A second element of effective packaging is what we call the platform. The platform consists of all the trappings that accompany the message, particularly the resume and pedigree of the one delivering it.
Ben Bernanke, for instance, has two degrees from Harvard, one from MIT, and was a tenured professor at Princeton prior to becoming the 14th Chairman of the U.S. Federal Reserve in February of 2006. He became a Nobel Laureate in 2022. Nice resume. For an economist, it doesn’t get any better.
When somebody of Bernanke’s stature speaks, we tend to listen. Who are we to question the Chairman of the Federal Reserve with all those medals and distinctions hanging around his neck?
Ben Bernanke’s resume, in short, makes him uniquely qualified to be the expert in macroeconomics. Not many can top his credentials. That is why when he says the U.S. housing crisis is likely contained, we believe him without question. The trappings that surround the message – the resume and pedigree of the person giving it, the institution that he or she represents, the nature of the people genuflecting before him – are so impeccable and creditworthy that no one feels the need to verify the actual idea behind the message. We just accept it and assume it has been thoroughly vetted. Big mistake.
Irving Fisher was a Yale graduate and had tenure as a Yale professor when he said that the stock market had reached a permanently high plateau.
The professors that gathered in Rome in 1968 and told us we were running out of natural resources all represented famous prestigious institutions from around the world.
Colin Powell’s reputation was beyond reproach when he warned us of Iraq’s weapons of mass destruction.
Like Bernanke’s comments about U.S. housing, each of these ideas was flawed, yet the pedigree of the person delivering the message made the idea itself more believable. Colin Powell, in fact, was chosen to deliver the message on weapons of mass destruction for exactly that reason: he had a stellar reputation and his poll numbers were high. He was believable. No one would challenge him.
Articulation and pedigree, while important characteristics of the intellectual elite, do not alone define the intellectual elite. Plenty of people in society are articulate and have stellar resumes, but are not members of the group. The defining characteristic of the intellectual elite lies in the third element in the effective packaging of an idea: selecting the right message.
Here the intellectual elite really set themselves apart.
Members of the intellectual elite, if they want to remain members of the intellectual elite, cannot deliver just any message; they are constrained in their messaging by their base. All members of the intellectual elite have a base of support, a group that largely controls the rewards that flow to the members of the group. The message delivered by a member of the intellectual elite must be acceptable to his or her support group.
Politicians, for instance, have to appeal to voters. Voters control the power and financial rewards of holding office. Politicians don’t get elected by delivering messages that are inconsistent with those of their base. The message a politician chooses to articulate is therefore confined to those messages acceptable to his or her base, the voters. Good politicians know their base and craft their messages accordingly.
Likewise, a professor seeking tenure has to appeal to his or her fellow professors. They control the financial rewards associated with tenure. The heads of powerful administrative departments have to appeal to those that appoint them. Members of the intellectual elite can’t just blurt out any message, not if they want the power and prestige that comes from being a member of the club.
The support group, in other words, has a very strong influence over the message.
We don’t think Ben Bernanke, for instance, actually believed that the housing crisis was contained. He isn’t that incompetent. Evidence was popping up everywhere that a crisis of global proportions was brewing. Yet, he delivered the message anyway. Why? Because saying anything else would have been suicide. If you are Ben Bernanke testifying before the U.S. Congress, you can’t just come out and say the situation is spiraling out of control. That message would have been woefully inconsistent with Bernanke’s base of support, which included politicians, his team at the Federal Reserve, and central bankers from around the world. Bernanke had no choice. He had to deliver a message that was acceptable, even if it meant being less than totally transparent.
When Colin Powell made his comments at the United Nations Security Council, he was likewise in an impossibly difficult situation. His support group included both the President and the Vice-President of the United States, both of whom desperately wanted Iraq to be guilty of harboring weapons of mass destruction. Powell was faced with a decision of either delivering a message that was acceptable to his support group or being excommunicated from that group.
As Sowell so insightfully points out in his writings, the need for a member of the intellectual elite to appeal to his or her base in order to achieve power and money invariably at some point conflicts with basic human principles like ethics, honesty, and transparency. It also conflicts with certain cognitive processes like the testing and verification of the idea behind the message. At some point along the line, messages acceptable to the base conflict with these human and cognitive principles. The support base wants one thing. Conformance to the principles call for something else.
The unique and defining characteristic of the intellectual elite is they chose the message over the principle.
They choose the message over honesty, transparency, and ethics. They choose the message over the testing and validation of the underlying idea. Members of the intellectual elite choose the message over practically everything.
This is one of those soft issues with investing that has material effects on the investment record. As investors, we simply must be aware of the intellectual elite and make sure their messages do not affect our decisions. An articulate super-smooth person with a challenge-proof pedigree making a convincing argument that plays to his or her support base has zero informational content. At KP7, we ignore them.