Employment Report Disappointment (??) Part 3
My biggest objection to the analysis in today’s Barron’s is the most difficult to prove in a conclusive fashion. I must add it to the score of projects that would make a good Master’s thesis. But anyway, here it is.
One of my propositions is that most of my young friends who are "market strategists" or hedge fund managers are themselves the victims of the many factors that lead astray the individual investor. These findings, reported in the prize-winning Behavioral Finance literature, show evidence that investors have various mis-perceptions that lead to sub-optimal behavior. Readers of "A Dash" should love this, since the only way we can make money is from other people’s sub-optimal behavior.
One of the great examples is discussed in the wonderful book, Why Smart People Make Big Money Mistakes and How to Correct Them. It is a lot of fun and an easy read. A couple of hours on the beach could make (or save you) a lot of money.
Professor Gilovich challenges his stat class to write down a mock series of coin flips. One student actually does the flips and writes them down. Professor Gilovich, to the amazement of his students, can always identify the real answer from the invented ones. You can read the book to find the full explanation, but the idea is that the student answers expected too much perfection. Normal data has streaks, for example.
So what does this have to do with the Employment Report? The problem is that those who have an agenda in mind are always looking for something not to like in any report. That is what they highlight, even if it is a real stretch to do so.
These people fail for the same reason as Gilovich’s students. They do not understand what is normal. Economic expansion does not mean that every company, every state, every subsector grows in lock-step. It is completely normal for there to be an ebb and flow from employment in one category to another. Dunne and Henwood are distressed that there is job growth in government and job loss in construction. They fail to understand that this is normal, not a cause for alarm.
I am confident that any point in history would show this ebb and flow. It is entirely understandable that sectors showing growth over the last two years drew new employees. If the sector strength changes, the employees will change. That is the nature of a free-market economy and it explains frictional unemployment.
If you are out to prove a point, you can always find some sub-group that is losing jobs. So what??
It is similar to those who say that the earnings growth right now is all in energy stocks. So what? That is a good reason to have energy stocks as part of your portfolio.