New Year’s Resolution #2: Define the Agenda
A consistent theme at "A Dash" has been the application of knowledge that is well known in social science, but not understood by most market participants. This is something you will not read anywhere else.
In political debate, one of these themes is definition of the agenda. Those who define the terms of the debate will win.
The challenge for investors is to understand and to apply this concept. Most market pundits define the question in a way where they have an obvious answer.
But what if they are asking the wrong question?
A Typical Example
The current market comment from John Hussman (excerpts on Seeking Alpha) argues that central banks are doing "liquidity absorbing" transactions so the "liquidity injections" are misleading to investors. We cannot find a good quotation to summarize this, so read the article to check yourself.
Regular readers of "A Dash" will readily see the problem. So will anyone who is following blogs by economists. The Hussman evaluation does not accurately describe the policy goals of central banks.
Central banks are doing two quite different things. They have reduced interest rates and added liquidity. They have also adopted innovative methods to get liquidity where it is needed. This includes the ECB injections, the Fed’s TAF plan, and the swap agreements between the Fed and European Central Banks.
We attempt to avoid ascribing motives to market pundits, but we are mystified by the Hussman commentary. He is an informed observer, albeit one who has been on the wrong side of the market in recent years. It would be more useful if he were to comment on how the various liquidity moves were working in terms of the stated goals of the central banks.
Instead he is setting up a straw man and knocking it down. This is a classic debater’s tactic. Astute investors should beware of pundits who ask the wrong questions. Discovering the real issues, and the right questions to ask, is one of the most important challenges to an investor seeking to understand the global economy.
New Year’s Resolution: Think for yourself in determining the right questions. Read critically. The first step to good investing is defining the issues and the agenda.