A landscape of brown hills and far off mountains framed by the entry of a cave

Beyond Our Cave

July 26, 2026

By Stephen Stofka

For the past few weeks I have been writing about the political polarization of voters based on where they live. Last week I wrote that voting behavior depends on our prediction of how a particular candidate or party will affect our own well being or that of  our family, our community. A choice is the result of a prediction. A vote is a choice. Those who vote for a Republican candidate are making different predictions than those who choose a Democratic candidate. To understand the polarization in this country, I want to understand the prediction process itself. How much information do we need to feel like we have enough knowledge to make a prediction? That depends on many things – the circumstances and the consequences of making a prediction.

The Pool of Possibilities

The future is an infinity of possibilities. We cannot gather enough information in the present to flawlessly predict the future. What do we do? Take a small sample of the present and trust that that small sample will reliably represent the future. But how do we decide the size of that sample? Some voters meticulously research candidates and issues before voting. Some people vote by the dominant political party that represents their interests and values. However, in states that allow citizen ballot issues, there may be no clear party line. Some voters rely on a media source to do the research and make recommendations.

Some cities were large enough to support two daily newspapers. The editorial board of one newspaper would present a conservative position on candidates and citizen initiatives. The other newspaper would  present a liberal perspective on candidates and issues. Some people grew up learning only one perspective because their parents subscribed to that newspaper. People who moved to a city soon learned which of the two perspectives aligned with their personal values. The newspapers did the work of filtering all the information.

The Media Jungle

From 1970 to 1990, the circulation of daily newspapers peaked at over 60 million, almost the same number as the number of households in the country. By 2020, estimated circulation was about 25 million. Here’s a chart from Pew Research (Source).

In addition to local and national news, the newspaper had that day’s TV listings, the daily weather forecast, and the results of yesterday’s sports games. Readers checked their horoscope, read cartoons and played the games in the back pages of the newspaper.

Today, digital algorithms serve up news sources and content that engages a reader. We are like donkeys endlessly walking in circles, powering a flour mill as social media dangles a carrot to keep our attention. Like cute cats? Here’s more. Like hearing about Trump’s latest outrage? Here’s more. Before we show you that, here’s a commercial.

The General and the Particular

A President has a relatively small impact on the personal circumstances of most voters. People often vote based on their prediction of whether a particular candidate will be good or bad for the country as a whole, or an industry. Gallup conducts two separate polls for opinions on the general economy, the Economic Confidence Index, and people’s individual financial circumstances, the Personal Finance Survey.

The Economic Confidence Index plunged into negative numbers at the onset of the pandemic and was still negative on the eve of the 2020 election. Sentiments recovered somewhat shortly after Biden took office, then plunged again as inflation climbed to 9% in the summer of 2022. As inflation declined, those polled grew more optimistic. On the eve of the 2024 election, that index was still negative and voters elected Donald Trump, who promised to restore economic confidence. However, a few months after he took office, Trump initiated his “liberation day” tariffs. Public sentiment and the stock market both fell in response. While the stock market recovered, people’s confidence has not. Confidence in the economy is now lower than when Trump left office in January 2021 (Source).

What about people’s personal financial circumstances? In a poll conducted during the first quarter of this year, a third of those polled were “very worried” that they would not have enough money for retirement. Another third were “moderately worried.” Sixty percent of respondents were worried that they could not cover medical bills in case of a serious illness (Source).

Party Loyalty

Some people make voting easy. They vote for each candidate from one of the two dominant political parties. Researching the electoral platform and record of each candidate can be time consuming. Also, many voters do not pay a lot of attention to politics until a few months before an election, so this strategy is practical. Mike Rosen was a conservative radio talk show host in Denver until 2016. His experience working in Washington helped him understand that party politics drove the legislative machinery. Party cohesion, power and connections gets legislation passed. Party affiliation is more important that the merits of individual candidates. Because of that, he endorsed a voting strategy of “party over person.” Having to choose between two dominant parties makes prediction much easier. Each party constructs a brand from a platform of policies meant to strengthen attachment with current members and to attract newcomers.

Attachment

As social creatures, we instinctively seek attachment. Branding is a marketing strategy that promotes attachment between consumers and products or voters and political parties. The Republican Party brands itself as the party of low taxes and low regulations. It promotes larger military spending, which helps support local communities in the southern states where Republican support is strong. The Democratic Party stresses equality and fairness for all. They promote programs which assist lower income families in urban areas where housing and other monthly costs are relatively high. Both branding strategies rely on predictions of the future. Elect our candidates and the future will be better, each party says.

Religion

Religious conviction relies heavily on predictions of the future. The Christian religion evolved from its Jewish roots but stressed individual salvation in contrast to the Messianic culture of the Jewish people that predicted a group salvation. Religious and political affiliation manifests the human desire for attachment. It is understandable that one or both dominant parties would incorporate religious sentiments into their brand.

In the mid-19th century, the Democratic Party promoted expansion of the country into the western lands occupied by Indians and held by Mexico. Expansion of land was necessary for the expansion of slavery, a cornerstone concept championed by the party. The party justified expansion under the banner of Manifest Destiny, an idea that the U.S. had a divinely ordained mission to spread Christian and republican government throughout the continent (Source).

In the past several decades, the Republican Party has absorbed a diverse group of Christian conservatives and evangelicals into the fold. The party has endorsed policies that outlaw abortion and same sex marriages, supported exemption from laws that conflict with one’s religious beliefs, and the rights of religious schools.

Postdiction

The past, particularly the ancient past, is almost as hidden from us as the future. We sample our present circumstances and often invent origin stories to explain the present. We speculate on the creation and composition of the cosmos, the formation of our world, the Earth, and how what is came to be. These speculations are like predictions but they come after the fact. Perhaps we should call them postdictions.

Organized religions promote an attachment to certain origin stories, claiming a divine authority and imprimatur on the opinions, values and interests of that religion’s congregation of believers. There are many religions and religious sects but only two political parties to absorb those congregations.

History

We are a politically divided country because the framers of the Constitution glued two different countries and cultures, north and south, together. Historians note the many dichotomies and contradictions of those founding documents. Thomas Jefferson penned the words “all men are created equal” in the Declaration of Independence, but owned 200 slaves. Article IV, Section 2, Clause 3 of the Constitution itself contained a fugitive slave clause, recognizing and treating human beings as property like domesticated animals (Source). That same declaration grounded government in “the consent of the governed,” but excluded women, blacks, Indians and poor white men.

Although the founders valued liberty and private property, many states allowed the imprisonment of debtors. Governments protected creditor rights above the property rights of farmers. Creditors were usually from urban areas. Debtors, mostly farmers, were from rural areas. From the beginnings of our country, there was a propensity for voters to sort themselves into two interest groups, rural and urban. Because we have a “winner-take-all” election system, this naturally leads to the formation of two political parties. A proportional representation system of elections gives formal recognition to marginalized communities. In our country, minority interests must work within either the Republican or Democratic parties.

Errors

Our actions today represent our predictions of the future, but our predictions aren’t always accurate. How do we cope with the errors of our conclusions? That’s something I want to take a look at next week, and I hope to see you then.

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Photo by Maria Lupan on Unsplash

Ominosity

January 10, 2016

Happy New Year!

Wait, get rid of the exclamation point.

Happy New Year.

After this week!  What are you kidding me?!  Get rid of the Happy.

New Year.

Ok, that’s better.  The New Year was not so happy when the market started its first day of trading last Monday.  For the tenth consecutive month, manufacturing activity in China contracted, which weighed down commodities (DBC down over 4%), energy stocks (XLE down 7%), emerging markets (EEM down more than 8%) and the broader market, which was down 6%.  Even stocks (Johnson and Johnson, Coca-Cola) regarded as relatively safe dividend paying equities suffered losses of more than 3 or 4%.  Investors and traders were re-pricing future profits and dividends.

December’s powerful employment report buoyed the mood for a short time on Friday morning but traders soon turned their attention again to China and the broader market fell about 1% by day’s end.

Given the decline in stocks, one would guess that the price of bonds, hard hit during the past few weeks, had showed some strong gains.  TLT, a popular ETF for long term Treasuries, gained more than 2% during the week but remains range bound since last August.  Treasuries are a safe haven for risk averse money, but the prospect of rising interest rates mutes the attractiveness of long term bonds.

Growth in the core work force aged 25 – 54 remains strong, up over 1% from last year.  The number of people not in the labor force dropped by 277,000 from last month, a welcome sign.  However, we need to put aside the politics and look at this in a long term perspective.  For the past twenty years, through good times and bad, the number of people dropping out of the workforce each year has grown.

This demographic trend is more powerful than who is President, or which party runs the Congress.  Depending on our political preferences, we can attribute this 20 year trend to Clinton, Bush, Obama, Democrats or Republicans. The job of the good folks running for President this year will be to convince voters that their policies and prescriptions can overcome this trend.  Our job, as voters, is to believe them.

The Bureau of Labor Statistics recently released a report of a ten year comparison of the reasons why people have left the work force.  Based on this BLS analysis, a Bloomberg writer who had not done their homework mistakenly reported that there has been a dramatic increase in the number of 20-24 year olds who had retired.

This “statistic” points out a flaw in BLS and Census Bureau data. BLS data is partially based on the Current Population Survey, or CPS.  Interviewers are not allowed to follow up and challenge the responder.  Both the BLS and the Census Bureau have been aware of the problem for at least a decade but I don’t think anyone has proposed a solution that doesn’t present its own challenges.

Looking at Chart 3 of the BLS report, the percentage of retired 20-24 year olds was .2% in 2004, .6% in 2014. The number of retired 16-19 year olds was .2% in 2004 and .2% in 2014. Do we really believe that there are almost 200,000 retired 16-19 year olds in this country? See page 16 for the BLS discussion of this problem.

Now, let’s put ourselves in a similar situation.  We are 22 and have recently graduated from college and are having trouble finding a job that actually uses our education.  Because of this, we are staying at our parent’s home.  We answer our parent’s landline phone (Census Bureau is not allowed to call cell phones).  Somebody from the Census Bureau starts asking us questions.  In response to the question why we are not working, we are presented with several choices, one of which is that we are retired (see pages 16 and 17)  Sarcastically we answer that yeh, we are retired.  The questioner can probably tell by our tone of voice that we are being sarcastic but is required to simply record our response.  How valid is that response?

Understand that problems of self-reporting and questionnaire design underlie all of the data from the monthly Household Survey, including the unemployment rate. This gives those with strong political views an opportunity to claim that government statistics are part of a conspiracy.  Claims of conspiracies can not be disproved, which is why they are so persistent throughout human history.

Each year some research firms predict a global recession. Ominosity is the state of sounding ominous and this year is no different. Adam Hayes, a CFA writing at Investopedia, gives some good reasons  that he believes such a widespread recession is possible. All of these risks are present to some degree.

What makes me less convinced of a global recession is the strength of the U.S. economy.  Just as China “saved” the world during the financial crisis, the U.S. may play the role of the cavalry in this coming year. Let’s look at some key data from the recent ISM Purchasing Manager’s index.  This is the new orders and employment components of the services sectors which comprise 85% of the U.S. economy.  Growth remains strong.

Recessions are preceded by a drop in new orders and by a decline in employment.  When payroll growth less population growth is above 1%, as it is today, a recession is unlikely.

Let’s climb into our time machines and go forward just 11 months.  It is now December 2016 and the IMF has enough data to make a post-facto determination that the entire world’s economy went into recession in March 2016.  We look at the SP500 index.  Holy shit!  We climb into our time machines, go back to January 2016 and sell all of our stocks.  Missed that cliff.

What about bonds? Should we sell all those?  Darn it, we forgot to check interest rates and bond prices when we were ahead in the future.  Back into the time machine.  Go forward again.  U.S. Fed halted rate increases in March 2016, then lowered them a 1/4 point.  The ECB had kept interest rates negative in the Eurozone and bond prices have stayed relatively flat.  OK, cool.  We get back in our time machines and go back to January 2016 and decide to hold onto our bond index funds.  The interest on those is better than what we would get on a savings account and we know that we won’t suffer any capital losses on our investment during the year.

We take all the cash we have from selling our stocks and put them entirely in bonds.  Wait, could we make a better return in gold, or real estate?  Back in the time machine and back to the future!  But now we notice that the SP500 index in December 2016 is different.  So is the intermediate bond index.  What’s going on?  The future has changed.  Could it be the Higgs boson causing an abnormality in space-time?  Maybe there’s something wrong with our time machine.  But where can we find a mechanic who can diagnose and repair a time machine?  Suddenly the thought occurs to us that a lot of other investors have gone into the future in their time machines, then have returned to the present and bought and sold.  That, in turn, has changed the future.

The time machine is called the human brain.  Each day traders around the world make decisions based on their analytical and imaginative journeys into the future.  The Efficient Markets Hypothesis (EMH) formulated by Eugene Fama and others postulates that all those journeys and decisions essentially distill all the information available on any particular day.  Therefore, it is impossible to beat a broader market index of those decisions.

Behavioral Finance rests on the judgment that human beings are driven by fear and greed which causes investors to make mistakes in their appraisals of the future.  An understanding of the patterns of these inclinations can help someone take advantage of opportunities when there is a higher likelihood of asset mispricing.

Each year we read of those prognosticators who got it right.  Their time machine is working, we think, and we go with their predictions for the coming year.  Sometimes they get it right a second year.  Sometimes they don’t.  Abby Cohen is a famous example but there are many whose time machines work well for a while.  If I could figure a way to fix time machines, I could make a fortune.