Getting beyond the Rhetoric

Readers of "A Dash" constitute a sophisticated investing audience.  We know this both from comments and from email.  Perhaps readers will take some time to help in our key mission — the blog about a book.

Imagine that you are an individual investor who got  your January statement and discovered that your broker’s advice cost you money.  Swayed by the frequent TV commercials from online brokerages, you now think that you can do better than your advisor (or an index fund) taking only a few minutes of your spare time.  If you are really ambitious, you can spend an hour or so and develop a complete trading system — according to a leading firm.

Since there are so many Internet resources, that is one of the first places you look.  Perhaps you follow someone’s list of the blogs getting the greatest traffic.  It is like finding a restaurant with a full parking lot.  Perhaps you look to the resources of well-known brand names like Forbes or the Wall Street Journal.  Perhaps you discover some "gatekeepers" and read the suggested sources.  Most likely you read plenty of online news articles.

Where does this search lead?

Your search gets a lot of information — most of it using some loaded language about recession or stagflation.

Recession Prospects.  There is a vast disparity between the projections of economists (perhaps flawed, but data-based and professional) and the perceptions of non-economists.  The latter group includes CFO’s, CEO’s, and your average citizen.  An interesting question is why there is such a large gap?

One answer could be that economists are hopelessly out of touch.  (This idea is favored by bearish pundits who lack any economic credentials!)  It proves to be wrong, since poll respondents are consistently more optimistic about their own situation than they are about the general economy.

There is an excellent, wide-ranging survey piece by Nathan Burchfiel, that covers most of the key perspectives.  He shows the lack of balance in many high-profile media pieces.  He then provides insight from two very well-placed sources:

 CNBC’s
Maria Bartiromo said recession “is all psychological. Because when
people have fear and expectations that things are going to worsen, they
pull their spending. They slow down and become cautious and then they
actually push into one anyway.”

 

 Media
outlets largely fail to recognize their role in paving the way toward
recession. With incessant negative reporting, dotted only sporadically
with positive reports, the media are contributing to consumers’ fears.
But analysts recognize the correlation.

 

 “We
have to hope that the consumer doesn’t decide there’s a real recession
coming because then they’ll close their pocketbook and we’ll really
have one,” Bill Seidman, an NBC financial analyst, said on the January
10 “Nightly News.”

Journalism?  At "A Dash" we have the highest hopes for journalists.  Anyone wishing to learn about markets, as we did twenty years ago, could benefit from reading daily the best journalistic work.  Is this still true?  Rich Karlgaard argues that the pay is not enough to attract the best talent.  We hope that he is wrong, since most of us depend upon leading journalists to discriminate wisely among sources of information.

Behavioral Finance.

Readers of "A Dash" probably think they are impervious to the barrage of misleading and symbolic language from the media.  We would love to conduct a survey, but the result is already known.

We are all subject to the effects of behavioral finance — even if we know the literature.

Take this example — one of so many psychological studies.  We have read all of the books, but the Wikipedia summary serves our purpose here:

The anchoring and adjustment heuristic was first theorized by Amos Tversky and Daniel Kahneman.
In one of their first studies, the two showed that when asked to guess
the percentage of African nations which are members of the United
Nations, people who were first asked "Was it more or less than 45%?"
guessed lower values than those who had been asked if it was more or
less than 65%. The pattern has held in other experiments for a wide
variety of different subjects of estimation. Others have suggested that
anchoring and adjustment affects other kinds of estimates, like
perceptions of fair prices and good deals.

Is any of us resistant to the media blitz on recession chances, the housing market, and financial write-downs?  Is it any wonder that those not looking at actual data see things much worse than those who do?

Articles that show a minority of economists predicting recession routinely feature the headline, Economists see Recession.

Today’s Story: Stagflation

There are so many examples that we suggest a reader test instead of picking on a single source.  Type "stagflation" into Google.  Then read the article.  Try comparing current conditions — relatively low interest rates and low unemployment with the actual stagflation of the  70’s.  We modestly suggest that an individual investor is not likely to see the difference, providing an advantage for those who can.

Symbols are powerful.  Media sources — mainstream and bloggers alike — get plenty of traffic by emphasizing the negative.  The popular theme today is the familiar one:  The Fed is in a box.

How to Predict Government Policy

The astute trader or investor should not ask the question of what he or she thinks the Fed will do.  The superior approach is to look at the actual reasoning process and actions of key policymakers.  Is it not better to predict what government will do?  (Readers should check out this article and also the thoughtful commentary at Abnormal Returns.)

A leading source for understanding the Fed is Bob McTeer, whose blog is featured on our site and should be getting more attention.  McTeer explains in detail how he views the issues–a good clue for current FOMC members.  His key conclusion is as follows:

To summarize, in 2008 we have greater wage- and price-flexibility
than in the 1970s, fewer cost- and wage-push forces, more deregulation,
a wizened Fed, more energy efficiency, and, not mentioned earlier, more
globalization imposing price and wage discipline.

While inflation has crept up to uncomfortable levels and the real
economy slowed in the 4th quarter, I doubt that stagflation in any
serious way is in the cards.  Given the differences I’ve cited above,
that’s more than just a hope and a hunch.  But it’s that too.

This is an honest answer, and one likely shared by the current FOMC.  Check  out his complete article to learn about how the Fed views inflation potential and which money supply indicators are important to them.

Conclusion

At "A Dash" we are better at analyzing fundamentals of earnings and interest rates and predicting government actions than we are at predicting the behavior of the investing and trading public.  The situation reminds us of the 1999-2000 bubble era, now in reverse.  We are also reassured by the system signals from our trading models, including The Gong, which provided a good risk/reward signal a few weeks ago, and our TCA-ETF system, which is fully invested.  A free report on both methods is available on request.