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It’s Never a Straight Line Up

July 8, 2010 Leave a comment

I don’t care if it’s early cycle, mid-cycle, or late cycle in an economic expansion (assuming you believe in the idea of predictable economic cycles at all, personally I’m dubious), economic growth is never a straight shot up.

Maybe you’re an optimist and say U.S. Retailers’ Sales Rise at Fastest Pace in 4 Years is super bullish, and a signal we won’t have a double-dip recession. Or, maybe you see that the ISM Non-Manufacturing (aka “Services”) composite fell more than expected in June, and decide yes, we are going to have that double-dipper, as is vogue these days.

I don’t think either one is telling. So what if retail sales were the strongest in 4 years? And so what if services were more sluggish than hoped? (Note: they didn’t contract, just didn’t grow as fast as expectations.) Both grew, and both are single economic data points that when looked at on a year-over-year or sequential basis can be highly erratic. Heck, check outquarterly GDP growth—during expansions it’s all over the place and one quarter doesn’t tell you much about what the relative strength will be the next.

Particuarly after an initial bounce off the bottom of a recession, a slowing and erratic pace of expansion is normal.  Media and analyst reaction will latch on to these reports as emblematic of whatever serves their purpose. But the point is, they grew.

Euro’s Tax Base is the Key

April 29, 2010 Comments off

It’s a certainty that Greece is going to have to get leaner from a government perspective—rein in costs and keep fighting unions. That’s just a reality of their situation.

But when it comes to thinking about the future of the European Union and its broader debt woes, and whether or not this becomes a “contagion”, paring back expenses isn’t everything.

Debt for gigantic sovereign nations or groups is a different thing than debt for individuals. We tend to think about them as equals, but that’s wrong. If you have too much credit card or mortgage debt, for example, you probably have to focus on paying it down, get frugal, start eating rice and water for every meal, and so on until you dig yourself out. That’s mostly because folks generally can’t increase their earnings significantly enough year over year to otherwise surmount the issue.

That’s not really as important for big governments. What is more important is the tax base from which they get their revenues to fund operations and service their debt. Because that can shift rather radically from year to year, and is most often where the biggest fluctuations in government fiscal health come from. Don’t get me wrong—I’m no proponent of profligate bureaucratic spending binges. Quite the opposite. But debt is something governments of the world are going to use—that’s the world we live in and it ain’t changing. And that’s always been fine (and still is) if those governments are able to meet their recurring payments.

We just went through a big global recession, so tax receipts have been lower. So, why, after the chaos of the last few days, are European stocks rallying? Probably two big reasons:

Europe’s economic recovery has been weaker and slower than much of the rest of the world, but it’s still recovering. Which means tax receipts will grow, which means they can service their debt and pay their expenses easier. This applies for states like California and other municipalities, too. Economic recovery is the thing to focus on right now—increasing the tax base.

Granted, this is one facet of the issue, but it’s a big one. Others include the ability to tap capital markets and the yield a country must pay to do so ( Greece ’s debt costs have spiked lately). But it’s basically always been true that if you increase taxes on something you get less of it. And if you lower taxes on something you’re likely to get more of it. So, lower taxes on your economy—its people and corporations—and you’re likely to get better economic growth, which actually will get you higher tax receipts in the long run. (Thank you, Mr. Art Laffer!)

Fisher Investments Analyst’s Book Review: Starting with a True Classic

April 16, 2010 Comments off

Over the next year this column will review contemporary and classic economic, business, and investing books. I won’t endeavor to find the definitive investing “Bible.” There is no hallowed list or canon of investing literature. I’ve known many folks over the years—across a variety of disciplines—who search for “the” texts. As if an investing Holy Grail is out there waiting to be uncovered.

No such thing. The process of investing is about—at least in part—the spirit of exploration. Not just delving into today’s headlines and data, but also knowing what has come before and why. Traversing the territory of thought on just about any topic is adventurous—there’s a great deal of fluff, wrongheadedness, misdirection, brilliance, insight, and all in between. Plenty to agree and disagree with. Ultimately, a good investor shouldn’t ever be indoctrinated, but should know the context before forging one’s own path forward.

So let’s start with a read that’s a synthesis of my favorite kinds of books: Short, timeless, insightful, clear, and often witty—GC Selden’s Psychology of the Stock Market.

Originally published in 1912, this little 125-page book appeared just a handful of years after the Panic of 1907, and some parts are clearly a reaction to it. Yet, despite its old age, this work is still around. Why? When studying market history, often the starkest and most obvious truth is how much doesn’t change. Selden’s opening chapter, “The Speculative Cycle,” could appear in Forbes today and few would doubt it was penned expressly for the most recent bear. Of particular note is Selden’s often ignored observation (to this day) that markets in the short term can become both over- and under-valued—one of the prime lessons of 2009. Overshooting can (and almost always does) happen in both directions.

“The broad movements of the market, covering periods of months or even years, are always the result of general financial conditions; but the smaller intermediate fluctuations represent changes in the state of the public mind, which may or may not coincide with alterations in basic factors.”

Selden’s heart is that of a trader’s (he’s often concerned with liquidity, another important feature of the most recent bear), but his insight rings true for longer-term investors too.

The beginning of the 20th century was a heady time: The US was on the cusp of superpower might, modernism was entering the culture, the Industrial Revolution (and thus capital markets) were thriving. Selden seems acutely aware of the prevailing intellectual movements of his time. Just to use the word “psychology” in the title is interesting—William James, Sigmund Freud, and others were just then giving birth to modern psychology. We can’t know if Selden studied those folks, but we can safely say he favored pragmatism over theory—he saw occasional anomaly where classical economics modeled most everything on rationality and “invisible hand” notions.

Indeed, Selden’s chapter, “Confusing the Present with the Future-Discounting,” is cutting-edge thinking for its time—ostensibly an affirmation of Louis Bachelier’s 1900 dissertation and generally accepted founding doctrine of the efficient market hypothesis, “The Theory of Speculation.” Those debates—on the role of behavioral psychology and market efficiency still rage to this day and aren’t as new as we often believe.

“The psychological aspects of speculation may be considered from two points of view, equally important. One question is, What effect do varying mental attitudes of the public have upon the course of prices? How is the character of the market influenced by psychological conditions? A second consideration is, How does the mental attitude of the individual trader affect his chances of success? To what extent, and how, can he overcome the obstacles placed in his pathway by his own hopes and fears, his timidities and his obstinacies?”

Selden was acutely self-aware, and this is where the majority of his wisdom emerges. He doesn’t claim to know what’s in the hearts of men—he just claims emotion is more than capable of overruling the rational. Ultimately, humans are at the core of markets—no matter the epoch or level of technological sophistication.

He preaches the notion of knowing oneself first and foremost—to gain mastery of one’s emotion and perspective. In a word, it’s discipline—the least sexy but possibly most important part of investing over the long term. Simply, Selden recognized his own limitations, what he could and could not know, and therefore how he could move within the market system. He’s nothing if not a pragmatist (a virtue, as the true vice of psychology is often to delve into the fanciful and theoretical). Over and again he recognizes implicitly that to forecast the stock market is brutally difficult, and that even the best at it will often be wrong.

It would be easy to call Selden a contrarian, but that isn’t nearly right. Not purely technical, not purely intuitive, Selden’s work is an amalgam of insight over years of experience in a time long before we had the mechanics of Ben Graham or even the “animal spirits” of Keynes. He offers a rare glimpse into a view less obscured by today’s hyper-defined investing categories and schools—and that makes his often still-valid wisdom all the more ingenuous today.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Fisher Investments Analyst’s Book Review: How to Lie With Statistics

April 6, 2010 Comments off

Darrel Huff was a very concise writer, so I will be too. His classic How to Lie With Statistics, first published in 1954, is still the best way for novices to enter the world of number interpretation, and their often latent distortions. Bowling shoes.

One of my all-time favorite comedic devices is the non sequitur—a deliberately illogical response or interjection for comedic effect. No one did this better than Monty Python or, for that matter, Samuel Beckett. Pancakes. Here’s a tremendous example. Strangely, How to Lie With Statistics is full of them (non sequiturs, not pancakes). As nearly as I can tell, the cartoonist who did the illustrations may have had no prior knowledge of the text—he/she just drew “stuff” with tangential relation to the text to fill pages. It’s amusing and more than a little bizarre.

I read this book once every couple years, but this time around it felt a bit stale—the examples are starting to feel old. Nevertheless, the wisdom doesn’t change: The real lesson of this book is not to learn the specific foibles of statistics so much as the spirit of skepticism one must bring to any statistic encountered. Huff takes a dim view of newspapers and reporting generally, which often borders on the cynical. But after years of watching the media and many, many thousands of articles read later, to my view, he’s right to fall closer to the cynical side than the credulous.

Another important lesson: Never fall in love with exactitude. Exactitude is often a sickness in the business of economics. Numbers are messy, economics are messy, the world is messy. When it comes to looking at huge economies, statistics are great to get a sense of things, and not much more.

If you want an adventure, take any economic indicator you like—from GDP to employment surveys—and see how it’s calculated. The number of assumptions, plugs, and other bizarre mathematic miscellany will boggle your mind. This isn’t to disparage those statistics—they are what they are and have their use. Eddie Van Halen in ballet shoes. But it will teach you very quickly not to quibble over 3.1% GDP growth versus 3.2%, for instance.

Before we go, a quick example on how statistics can fool us: Thomas Sowell’s most recent book, Society and Intellectuals, tackles the widely accepted notion “the rich are getting richer and the poor are getting poorer.” According to Sowell, the stats often used to bolster this idea don’t actually prove that particular point, instead they prove an entirely different one. What’s happening is that the categories of income are becoming more disparate. But Sowell’s insight is that people don’t stay in the same category through their careers—most move up the ladder over time! Manatee. Looking at categories of income is a much different thing than knowing whether folks in the real world are actually getting richer or poorer over time in a relative way. So at a minimum, the stats don’t say what most think they say. After all, I’m willing to bet you started your career at a low income bracket, and moved up over time too.

Ultimately, How to Lie with Statistics might be too facile for some—this is for the absolute square-one beginner. Today’s world is full of bell curves, T-tests, and multiple regressions. If you want to go a step further and introduce yourself to the kinds of statistical tools heavily used today,Statistics for Dummies, believe it or not, is a good place to look. Ben Bernanke wearing a scuba mask.

Signs the Apocalypse Has Been Cancelled

March 29, 2010 Comments off
  • Useful factoid: as of Friday, the S&P 500 was up 5.1% for the quarter. If it doesn’t lose any ground from now to the end of the month (today was a nice up day as well), it’ll be the best Q1 return for the S&P 500 since 1996 (+5.4%). (Source: Global Financial Data, Inc.)
  • Consumers in the US keep spending: Consumption rose in February for a fifth consecutive month. This is without a big rebound in employment so far—which is almost totally contrary to the intelligencia’s normal view of how a recovery ought to work. Personal income was virtually flat m/m but rose +2% from a year ago. All this in the context of a very low inflation environment.
  • 2009 was so “too big to fail”. We’re over it. 2010 is all about…too big to succeed! If this isn’t a shining example investors have capital and are looking to put it back to work, I’m not sure what is…
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