Archive for April, 2010

Central Planning – The Chinese Way

April 21, 2010 Comments off

China is, as are much of the emerging markets, an investing land of opportunity today, no doubt.  All I ask is a bit of skepticism here and there.  After all, these guys are still commies.

This week, Chinese officials directed banks to stop making loans for the purchase of 3rd homes in cities with “excessive property price inflation”.  China’s state council also said that local officials will be “held responsible” for determining which cities qualify as “excessive property price inflation” and for any failure to appropriately enforce these mechanisms.

(How’d you like to have your mayor suddenly say you can’t have a loan because your city is experiencing “excessive property price inflation”?)

Right now, China has an excess of commercial property and luxury homes, but  a shortage of housing in general.  Therefore, the state is attempting to significantly increase the supply of low-income housing this year to help facilitate the urbanization of its population.  However, it is also increasingly cracking down on housing demand.  Wealthy Chinese citizens have often parked significant levels of cash in the property market given their limited investment options (tied to strict capital controls) and low carrying costs due to no property taxes.

I shudder to think of US politicians tinkering with housing supply and demand.  (Though, sadly, a lot of this goes on already in the US). Ultimately any asset in China (stocks, real estate, etc) is beholden to the whims of Chinese officials.  And, ultimately, that kind of thing causes a lot of trouble at some point or another for society and capital markets.  Capitalism has its booms and busts, but give me those over a bureaucratic figurehead at the helm any day.

Sensational Economics

April 19, 2010 Comments off

Whenever folks contemplate recent events, the coloring of emotion tends to cloud much clear thinking (this tends to hold true for policy-markers, critics, and historians alike).

Here are some colorful words and phrases from a recent Paul Krugman article via the New York Times, which nicely encompass one prominent current view of Wall Street. Call this what you will, but don’t call it objective economics. At least we know where the gentleman stands.

  • Looting
  • Fraud
  • Predatory
  • Complex
  • Lured
  • Didn’t understand
  • Failed
  • Abusive
  • Surely knowing
  • Designed to fail
  • Magnified
  • Deepening
  • Toxic waste
  • Bubble burst
  • Catastrophe
  • Moral
  • Urgent
  • Change
  • Financial industry racket
  • Game
  • Handful of people
  • Lavishly paid
  • Mislead
  • Exploit

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.


April 13, 2010 Comments off

LA’s fiscal woes sort of reminds me of Chinatown, that classic Jack Nicholson flick about LA water Utilities, except this time with “Green” subsidies. From the article:

“Utility officials say they need those higher rates to help cover the costs of investing in renewable energy, such as wind and solar, that are mandated by state and municipal laws.”

You have to wonder if politicians can put on such airs forever—on the one hand they have to mandate green-sourced energy for the “good of the people”, and on the other they must ransack taxpayer checkbooks (via what amounts to a mostly regressive tax on energy, mind you) in order to do it…for, you know, the good of the people.

Flukes Are Usually Head Fakes

April 12, 2010 Comments off

This is exactly wrong: Retail Recovery Hangs on April Sales Proving March Was No Fluke. With economics numbers—be they retail or employment or whatever—it’s the trend that matters. A single data point over virtually any time period tells you little. Recoveries, recessions, or general expansions are never a perfect straight line up or down. There will be hiccups and anomalies and head fakes. To hinge the validity of any trend on a week or month, or even quarter, is ludicrous.

Paradoxes of Demand Side Mythologies

April 8, 2010 Comments off

I hear two things regularly from the general media and many economists: Consumers are vastly overleveraged and need to reduce debt, but also (and this is from the same folks, mind you) that we need to get people spending again in order for an economic recovery to solidify. But it’s impossible to do both because the years of profligate leveraging is what fueled the spending binges. Thus, a continued malaise is more likely than anything else. No way out! And yet…

1. Retailers Report 4th Consecutive Month of Gains

2. Consumer Credit fell more than expected in February

GDP For Three

April 7, 2010 Comments off

A client recently asked about the Institute for Supply Management’s (ISM) index of non-manufacturing businesses, which makes up almost 90% of the US economy. How can that be the case when economists commonly say ~70% of the US economy is consumer spending?

The discrepancy comes from different methods of calculating GDP. There are three main methods. Each looks at a country’s output from different angles:

Expenditure: This is the most widely cited approach. It sums the total value of all final goods and services purchased in the US (or any country). Many will recognize the equation used for this one:

GDP=C (consumption) + I (investment) + G (government spending) + (X-M) (net exports).

Using this method, consumers (C) account for about 70% of GDP. In other words, consumers purchase about 70% of the final goods and services sold in the US , thus the common refrain consumers make up 70% of the economy. (Demand-side Keynesians love this one best.)

Value-Added (or Product or Output): This approach looks at GDP from the prospective of who’s producing the goods and services, not who’s buying them. It sums the value added at each stage production to come up with GDP. So consumers buy 70% of everything produced here, but non-manufacturing businesses make 90% of everything produced. (Supply-siders tend to love this one best, but it’s much less oft used in the mainstream.)

Income: The income approach sums the incomes of everyone involved in the production of goods and services. This one isn’t used as often either, but has its uses.

In theory, all three methods should produce about the same number. But statistical quirks alone create a lot of variability in practice. Ultimately, this is another case of making sure you understand what the data are saying—statistical methodology is one of the most common sources of economic bias.


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