Thread by @MacroOps

1/ Druckenmiller's first mentor, Speros Drelles, would often tell him that "60 million Frenchman can't be wrong."

Here's a thread on what that means and how to know when you should listen to or ignore the "Frenchman" (market)...

2/ Drelles was teaching the young Druck about the wisdom of the market, which is based on the idea that the crowd is collectively smarter than any one individual. This collective intelligence was first stumbled upon by the late great statistician, Francis Galton, who...

3/ ...in 1906 observed a competition at a local fair where approx. 800 people tried to guess the weight of an ox. To his surprise, the avg of all the guesses was 1,197lbs. The real weight... 1,198lbs. Countless studies have been done since. All show similar results...

4/ Crowd > any individual. Scott Page, in his book "The Difference", lays out the "diversity prediction theorem" to explain how this works and what variables are needed to make a crowd wise. The theorem states that: Collective error = avg individual error - prediction diversity

5/ The implications of this are 3-fold:

1. A diverse crowd will always predict more accurately than the avg individual

2. A crowd is often smarter than even the best of its individuals

3. Collective predictive ability is equal parts accuracy & diversity

6/ Takeaway: Crowds are smarter than any single person, as long as there's a diversity of opinion. This theorem is based on math and is always true. @mjmauboussin has a great paper on this for those of you who want to explore more operators.macro-ops.com/wp-content/upl…

7/ To take this back to markets. Here's Soros explaining why it's KEY to know when to be a part of the "herd" (ie, follow the trend) and when to disengage & be a contrarian

8/ You want to be a trend follower when there's a lot of people saying "this move makes NO SENSE" and a contrarian when people are saying "this makes so much sense". This is why a bull climbs a wall of worry & a bear falls down the stairs of hope. Trends are driven by (dis)belief

9/ But... and this is important. You ONLY want to be a contrarian once the tape STOPS confirming the consensus narrative. Reading the sentiment tea leaves is as much an art as it is a science. And when in doubt, defer to the market.

10/ Blake LeBaron, an economist, modeled how this diverse opinion/wise crowd & consensus/dumb crowd works in markets to create trends and crashes. Here's his paper people.brandeis.edu/~blebaron/wps/…

11/ He built a computer model and imbued "agents" with decision-making rules such as: make money, try not to lose money, don't underperform the average for long periods etc...

12/ What he found was that "During the run-up to a crash, population diversity falls. Agents begin to use very similar trading strategies as their common good performance begins to reinforce... This makes the population brittle...Traders have a hard time finding...

13/ ...anyone to sell to in a falling market since everyone else is following very similar strategies." This confirms Page's "diversity..." theorem and explains the mechanics of why markets trend and revert, or move in sine waves.

14/ Trends that "make no sense" = robust. Trends that become consensus = fragile. Soros thought of this phenomenon as high and low "distortion regimes". High distortion regimes = when price & sentiment form a reflexive loop, which then creates a budding consensus.

15/ Low distortion = diverse opinion. This price/sentiment loop, or what I call the "Narrative Pendulum" becomes obvious once you learn to look for it.

16/ Example, watch this video I clipped together last year that shows the dramatic shift in the dominant narrative that occurred in just two-weeks time

17/ Price drives sentiment which drives price, ad Infinium. And THERE IS NO "SMART-MONEY" other than the mrkt itself.

All of us are part of the "DUMB MONEY" crowd. The 2 "Bond Kings" calling the end of the bond bull at the exact bottom in 18' is case in point. THIS GAME IS HARD

18/ So that's what Drelles meant & also what makes Druckenmiller so good. He learned early on to listen and respect the market, to harness the wisdom of the crowds, and to only step in to fade a trend once a consensus was clear & the tape no longer confirmed it.

/Fin