Powerful Negative Symbols and a New Concept: The Glide Path
A deep understanding of one subject can help you with another. In the study of public policy analysis, it was important to understand what influenced individual behavior. We asked questions about what information voters had, what they thought was important, and how they formed opinions.
Little did I know that thirty years later I would be remembering these studies as I analyzed market dynamics in the "post-bubble" era. I have highlighted the book of my old colleague, Murray Edelman, in the suggested reading. Few modern hedge fund managers will take the time for something that does not explicitly discuss the stock market, but they should.
The term "stagflation," for example, meant something pretty dramatic in the late 70’s. In the aftermath of Watergate, Vietnam, wage and price controls, WIN buttons (Whip Inflation Now) the country managed to screw up the economy pretty well. One young writer on TheStreet.com (who should know better from his degree in history from an Ivy League school) insists on finding parallels between 1974 and now. I remember doing my dissertation research during the Watergate hearings. The country was directionless. Those who didn’t miss their history classes on that era or (who lived through it) might remember that Nixon also lost his Vice-President, Spiro Agnew. It took us some years of healing through a good man, Gerald Ford, to regain some confidence and spirit. But the GOP was crippled and Jimmy Carter followed. I do not know if Carter was the right man, but it was certainly the wrong time. It is astounding that something thinks the 70’s era — fifteen percent interest rates and recession — is in some way similar to modern times.
With all respect to our troops (and that is a major difference from Vietnam, when the country did not respect returning soldiers) the Iraq conflict is not similar to Vietnam. Bernie Ebbers and Ken Lay in the dock is not the same as a President forced to resign and losing his grip on the nation.
Those following the market would be well-advised to learn from Murray Edelman. Is the description of what is happening a neutral term, or one laden with symbolic or exaggerated meaning? Let’s try a few examples.
To do so, we must keep in mind our objective. Everyone hoping for the success of the U.S. economy and our country would like to see the President and the Fed accomplish their objectives. Since everyone agrees that the economy has a limit to how fast it can grow without inflation, the Fed is trying to slow the pace of growth from the scorching rate of the first quarter.
Let’s look at economic growth and find a term to describe it. Here is the series, adjusted for inflation.
Q2 05 3.3% (just about the long-term trend — what we might hope for w/o inflation)
Q3 05 4.2% (probably a bit too hot to be sustained)
Q4 05 1.8% (weak — influenced by hurricanes)
Q1 06 5.6% (very hot — influenced by rebound from hurricanes)
Q2 06 2.5% (slowing, as exepcted and hoped for — maybe a little too light?)
There is a lot of volatility in this series. How would you describe it?
- Stagflation, chosen by Irwin Kellner, is really over the top. He also mis-defines the term. Read his article. He is alarmed by the reduction from the first quarter growth rate. Is he looking at the same data series I have above?
- A Slowdown.
- Moving South.
These commentators are not objective. A slowing in the rate of economic growth is not the same as a recession, although they make it seem so. 2.5% growth is only slightly below trend. It is not bad, and something that we might have to accept as we try to hit The Glide Path.
Oh — The Glide Path is my suggestion for the symbolic substitute for the "Soft Landing." Murray would say that "soft landing" has the wrong connotation. We are not coming down. We are trying to reach a sustainable level of growth.
Also look for "plummeting profits." Does this mean that earnings are actually moving lower, or that the double-digit rate of growth, sustained for a record period of time, is moving to more normal levels.
Astute investors may want to read the news and the news headlines with an eye for these loaded terms.
At "A Dash" we look for mainstream and consensus forecasts and descriptive terminology. An investor is poorly served by those who exaggerate evidence in any way.