Sunday, May 20, 2018

This Week's Message: Don't Be A Bull Or A Bear: Be What Conditions Dictate!

Seems like I'm getting more emails lately with folks forwarding often pithy analyses of why some data point spells imminent doom for the economy and, by default, for the equity market. Problem being, the last few have featured, as I just hinted, merely one data point.

To begin with -- and quite simply -- companies like Macy's absolutely killing it on earnings (as reported last week) generally never happens when a consumer driven economy is on the cusp of collapse. And, per the first chart below, you generally wouldn't expect to see the lowest share of American workers in history on the unemployment rolls:

Not to mention weekly jobless claims posting a record run of below 300k. The old record being set over 40 years ago, when there were 100 million+ fewer folks living in America versus today:

The following is my response to a friend's comment last week, which was inspired by an article he read that expressed skepticism over the current state of the labor market and inflation.

Note: This particular friend of mine is exceedingly sharp, and experienced (and thus a valuable resource to me). And he wasn't suggesting that the data point in question was spelling doom for the economy or the markets; he just found it interesting and worth sharing. My response, though, is pertinent to the doom and gloom discussion.

Hmm..... Cant' say that I remotely agree that we're at 10% unemployment... and looks like wage growth to me (albeit not breathtaking)...

There's lots of legitimate data to consider... Look at JOLTS, weekly jobless claims, ISMs, PMIs, NFIBs, NAHBs, (virtually all surveys of employers say the labor market is as tight as they've ever seen it -- they would know).
Yes, inflation -- as well as the recovery (in terms of acceleration of pace) -- has been slow to come (to be expected following a financial industry recession), but it's definitely on the rise... It's in the data for sure (the bond market, gold, the dollar are confirming it as well [in terms of gold, it's signaling that inflation's rising enough to inspire the fed, but not rising at a problematic pace) ...  And, by the way, input prices have been rising virtually across the board -- they (along with tight labor market) have been a top concern mentioned in every survey... no exceptions!  
Be careful with those who argue yesterday's trends... And beware these "analysts" who cherry pick data (ie., there's no smoking gun, or grand conspiracy to skew the data)...
I keep seeing these one-off data points, and these deep creative explanations that do nothing more than satisfy certain folks' biases, and data mining activities, and make the author look smart... It risks distracting folks away from on-the-ground reality... I generally see the data point they're referencing in my weekly analysis... it's just that when it's been problematic, other stuff has confirmed the signal... which has not been the case (i.e., other data don't confirm) with the stories (told within certain articles and "research" analyses) I've reviewed lately... 
The bears and the naysayers always sound smarter than the Pollyannas... Better to be neither... Better to be humble, and simply be what conditions dictate...
In closing, and to drive these points home, here's James Picerno in his outstanding 2014 book Nowcasting the Business Cycle:
".....history isn't a perfect guide to the future. The intuition for using several economic series arises from the likelihood, if not the inevitability, that one or more predictors will mislead us at times in the task of evaluating recession risk. No one knows which indicator (or indicators) will fail in providing an early clue of trouble the next time macro trouble arises. It's only prudent to assume that perfection will forever be elusive, no matter how carefully we select a portfolio of indicators. History certainly advises us to assume no less. Developing expectations based on a diversified set of numbers is therefore essential."
And here, from his fascinating and enlightening 2010 best seller The Black Swan, is Nassim Taleb asking us to look beyond our egos and keep our minds forever open:
 "The problem is that our ideas are sticky: once we produce a theory, we are not likely to change our minds—so those who delay developing their theories are better off. When you develop your opinions on the basis of weak evidence, you will have difficulty interpreting subsequent information that contradicts these opinions, even if this new information is obviously more accurate. Two mechanisms are at play here: the confirmation bias that we saw in Chapter 5, and belief perseverance, the tendency not to reverse opinions you already have. Remember that we treat ideas like possessions, and it will be hard for us to part with them."
Have a nice week!

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