The Aleph Blog – Page 51 – Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control

One Dozen Reasons Why the Average Person Underperforms In Investing, Part 1

Posted on 13 February 2015 by David Merkel

Brian Lund recently put up a post called 5 Reasons You Deserve to Lose Every Penny in the Stock Market. ?Though I don’t endorse everything in his article, I think it is worth a read. ?I’m going to tackle the same question from a broader perspective, and write a different article. ?As we often say, “It takes two to make a market,” so feel free to compare our views.

I have one?dozen reasons, many of which are related. ?I do them separately, because I think it reveals more than grouping them into fewer categories. ?Here we go:

1) Arrive at the wrong time

When does the average person show up to invest? ?Is it when assets are cheap or expensive?

The average person shows up when there has been a lot of news about how well an asset class has been doing. ?It could be stocks, housing, or any well-known asset. ?Typically the media trumpets the wisdom of those that previously invested, and suggests that there is more money to be made.

It can get as ridiculous as articles that suggest that everyone could be rich if they just bought the favored asset. ?Think for a moment. ?If holding the favored asset conferred wealth, why should anyone sell it to you? ?Homebuilders would hang onto their inventories. Companies would not go public — they would hang onto their own stock and not sell it to you.

I am reminded of some of my cousins who decided to plow money into dot-com stocks in late 1999. ?Did they get to the party early? ?No, late. ?Very late. ?And so it is with most people who think there is easy money to be made in markets — they get to the party after stock prices have been bid up. ?They put in the top.

2)?Leave at the wrong time

This is the flip side of point 1. ?If I had a dollar for every time someone said to me in 1987, 2002 or 2009 “I am never touching stocks ever again,” I could buy a very nice dinner for my wife and me. ?Average people sell in disappointment thinking that they are?protecting the value of their assets. ?In reality, they lock in a large loss.

There’s a saying that the right trade is the one that hurts the most. ?Giving into greed or fear is emotionally satisfying. ?Resisting trends and losing some?money in the short run is more difficult to do, even if the trade ultimately ends up being profitable. ?Maintaining exposure to stocks at all times means you ride a roller coaster, but it also means that you earn the long-term returns that accrue to stocks, which market timers rarely do.

You can read some of my older pieces on how investors earn less on average than buy-and-hold investors do. ?Here’s one on how investors in the S&P 500 ETF [SPY], trail buy-and-hold returns by 7%/year. ?Ouch! ?That comes from buying and selling at the wrong times. ?ETFs may lower expenses, but they also make it easy for people to trade at the wrong times.

3) Chase the hot sector/industry

The lure of easy money brings out the worst in people. ?Whether it is tech stocks in 1987, dot-coms in 1999, or housing-related assets in 2007, there will always be people who think that the current industry fad will be a one-way ticket to riches. ?There is psychological satisfaction to be had by buying what is popular. ?Everyone wants to be one of the “cool kids.” ?It’s a pity that that is not a good way to make money. ?That brings up point 4:

4)?Ignore Valuations

The returns you get are a product of the difference in the entry and exit valuations, and the change in the value of the factor used to measure valuation, whether that is earnings, cash flow from operations, EBITDA, free cash flow, sales, book, etc. ?Buying cheap aids overall returns if you have the?correct estimate of future value.

This is more than a stock market idea — it applies to private equity, and the?purchase of capital assets in a business. ?The cheaper you can source an asset, the better the ultimate return.

Ignoring valuations is most common with hot sectors or industries, and with growth stocks. ?The more you pay for the future, the harder it is to earn a strong return as the stock hopefully grows into the valuation.

5) Not think like a businessman, or treat it like a business

Investing should involve asking questions about whether the economic decisions are being made largely right by those that manage the company or debts in question. ?This is not knowledge?that everyone has immediately, but it develops with experience. ?Thus you start by analyzing business situations that you do understand, while expanding your knowledge of new areas near your existing knowledge.

There is always more to learn, and a good investor is typically a lifelong learner. ?You’d be surprised how concepts in one industry or market get mirrored in other industries, but with different names. ?One from my experience:?Asset managers, actuaries and bankers often do the same things, or close to the same things, but the terminology differs. ?Or, there are different ways of enhancing credit quality in different industries. ?Understanding different perspectives enriches your understanding of business. ?The end goal is to be able to think like an intelligent business manager who understands investing, so that you can say along with Buffett:

I am a better investor because I am a businessman, and a better businessman because I am an?investor.

(Note: this often gets misquoted because Forbes got mixed up at some point, where they think it is:?I am a better investor because I am a businessman, and a better businessman because I am no investor.) ?Good investment knowledge feeds on itself. ?Little of it is difficult, but learn and learn until you can ask competent questions about investing.

After all, you are investing money. ?Should that be easy and require no learning? ?If so, any fool could do it, but my experience is that those who don’t learn in advance of investing tend to get fleeced.

6)?Not diversify enough

The main objective here is that you need to only invest what you can afford to lose. ?The main reason for this is that you have to be calm and rational in all the decisions you make. ?If you need the money for another purpose aside from investing, you won’t be capable of making those decisions well if in a bear market you find yourself forced to sell in order to protect what you have.

But this applies to risky assets as well. ?Diversification is inverse to knowledge. ?The more you genuinely know about an investment, the larger your positions can be. ?That said I make mistakes, as other people do. ?How much of a loss can you take on an individual investment before you feel crippled, and lose confidence in your abilities.

In the 25+ years I have been investing, I have taken significant losses about ten times. ?I felt really stupid after each one. ?But if you take my ten best investments over that same period, they pay for all of the losses I have ever had, leaving the smaller gains as my total gains. ?As a result, my losses never inhibited me from continuing in investing; they were just a part of the price of getting the gains.

Temporary Conclusion

I have six more to go, and since this article is already too long, they will have to go in part 2. ?For now, remember the main points are to structure your investing affairs so that you can think rationally and analyze business opportunities without panic or greed interfering.

On Bitcoin

Posted on 12 February 2015 by David Merkel

I’ve generally been quiet about Bitcoin. ?Most of that is because it is a “cult” item. ?It tends to have defenders and detractors, and not a lot of people with a strong opinion who are in-between. ?There’s no reward for taking on something that has significance bordering on religious for some… even if it proves to be a bit of a “false god.”

I view Bitcoin as a method of payment, a collectible item, a commodity that is not fully fungible, and not a store of value. ?It is not a currency, and never will be, unless a government takes it over and adopts it.

In order for a tradable item to be a store of value, the amount of variation in value in the short- to intermediate-term versus other items that has to be limited. ?If there are other tradable items with greater stability toward the other items, those tradable items would be better stores of value. ?Thus Bitcoin is inferior as a store of value versus the US Dollar, the Euro, the Yen, etc. ?It is far more volatile versus goods and assets that one might want to buy, and goods and liabilities that one might want to fund.

Now as an aside, the same thing happens in hyperinflationary economies. ?Merchants have to change their prices frequently, because the currency is weak. ?Often another currency will begin to replace the weak local currency, like the US Dollar or the Euro, even if that is not legal.

Fungibility implies that any Bitcoin is as good as any other Bitcoin. ?But with failures like Mt. Gox, a Bitcoin exchange that had Bitcoins under its care stolen from it, a Bitcoin under the care of Mt. Gox was not as valuable as one elsewhere. ?(Another aside: that happened in a minor way with the Euro when Euros in Cypriot banks were forced to have a “haircut,” while Euros elsewhere were unaffected.)

Bitcoin is a means of payment, a way of transferring value from one place/person to another. ?It seems Bitcoins move well, but they are less good at being safely stored.

The theft of Bitcoins points out the need for there to be a legal system to protect property rights. ?Licit participants in Bitcoins as a group have not been adequate to assure that the rightful owners might not lose them as the result of computer hacking. ?Contrast that with the protections that credit card holders have when false transactions are applied against credit card accounts. ?The credit card companies eat the losses, funded by profits from interest charged an interchange fees.

The libertarian vision of a currency that does not require a court, a government to protect it is misguided. ?Where there are thieves, there is a need for courts to try cases of theft, and deal with questions of equity if theft leads to an insolvency.

Now, governments can be less than fair with their own judicial systems. ?I think of Dennis Kozlowski, formerly CEO of Tyco, who was barred from using his own money in self-defense when the US Government brought him to trial. ?Much as you might like to have value protected from the clutches of the government, that is easier said than done, and there are thieves that will pick away at those who?get value away from governments, because ultimately in an interconnected world, you have to trust other people at some points, and trust can be violated as much as the rights of a citizen can be violated. ?Repeat after me: THERE IS NO PERFECTLY SAFE PLACE ON EARTH TO STORE VALUE! ?That said, though, there are safer places than others, and so you have to live with the risks that you understand, and are prepared to take.

If you think that Bitcoin fits that bill, well, knock your socks off. ?Have at it. ?I will stick with US Dollars in banks, money market funds, bonds, and public and private stocks. ?Maybe I will even buy some gold that does nothing, just for the sake of diversification. ?But ultimately my store of value is in the bank of Heaven, as it says in Matthew 6:19-21:

“Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal; but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal. For where your treasure is, there your heart will be also.”

There is no perfect security on Earth, try as hard as you like. ?Bitcoins may keep value away from the government under some conditions, but who will protect your property rights in Bitcoins in the event of theft? ?You can’t have it both ways, so Bitcoins as property would?either be taxed and regulated by governments, or be totally underground, which would diminish utility considerably.

One final note: Bitcoins can’t be used of themselves to produce something else. ?They are a fiat currency, and only has value to the degree that users place on it. ?I liken it to penny stocks, where traders can bounce the price around, because there is nothing to tether the price to. ?At least with gold, you have jewelers demanding it to turn it into jewelry, and a broader pool of people who are somewhat less jumpy about what the proper exchange rate between gold and dollars should be.

But, gold can be stolen… again, no Earthly store of value is perfect. ?All for now.

Fade High Price-Sensitivity Assets in Crude Oil

Posted on 4 February 2015 by David Merkel

This will be a short post. If we get a significant updraft in the price of oil, and Saudi production policy has not changed, you might want to sell crude oil price-sensitive assets. The marginal cost of production for a lot of crude oil that is shale related is around $50/barrel, and that is where I think the market “equilibrium” will bounce around for a few years, until global growth picks up.

I hold my positions for longer periods of time, so I may not do much off of this, but I would expect crude oil prices to be range-bound for a few years, with all of the volatility which a global commodity can have.

That’s all folks.

An Idea Whose Time Should Not Come

Posted on 4 February 20154 February 2015 by David Merkel

I get fascinated at how we never learn. Well, “never” is a little too strong because the following article from Bloomberg, Meet the 80-Year-Old Whiz Kid Reinventing the Corporate Bond had its share of skeptics, each of which had it right.

The basic idea is this: issue a corporate bond and then package it with a credit default swap [CDS] for the same?corporate bond, with the swap cleared through a clearinghouse, which should have a AAA claims-paying ability. ?Voila! You have created a AAA corporate bond.

Or have you? ?Remember that bond X?guaranteed by?Y has many similarities to bond Y guaranteed by X, because both have to fail for there to be a default. ?I used to help manage portfolios that had many different types of AAA bonds in them. ?Some were natively AAA as governments, quasi-governments (really, Government Sponsored Enterprises) like Fannie and Freddie, or corporations. ?Some were created by insurance guarantees from MBIA, Ambac, FGIC, or FSA. ?Others were created via?subordination, where the AAA portion took the losses only if they were greater than a highly stressed level. ?Lesser lenders absorbed lesser losses in exchange for the ability to get a much greater yield if there was no default.

There is a lot of demand for AAA bonds if they have a high enough yield spread over Treasuries. ?The amount of spread varies based on the structure, but greater complexity and greater credit risk tend to raise the spread needed. ?Here are some simple examples: At one time, you could buy GE parent corporate bonds rated AAA, or GE Capital corporate bonds with an identical rating, but no guarantee from GE parent. ?The GE Capital bonds always traded with more yield, even though the rating was identical. ?AIG had a AAA credit rating, but its bonds frequently traded cheap to other AAA bonds because of the opacity of the financials of the firm (and among some bond managers, a growing sense that AIG had too much debt).

So?how would one get a decent yield spread?under this setup? ?The CDS will have to require less spread to insure than the spread over Treasuries priced into the corporate bond.

How will that happen? Where does the willingness to accept the credit risk at a lower spread come from? ?Note that the article doesn’t answer that question. ?I will take a stab at an?answer. ?You could get a number of hedge funds trying to make money off of leveraging CDS for income, the excess demand?forcing the CDS spread below that implied by the corporate bond. ?Or, you could get a bid from synthetic Collateralized Debt Obligations [CDOs] demanding a lot of CDS for income. ?I can’t think of too many other ways this could happen.

In either case, the CDS clearinghouse is dealing with weak counterparties in an event of default. ?Portfolio margining should be capable of dealing with small negative scenarios like isolated defaults. ?Where problems arise is when a lot of default and near defaults happen at once. ?The article tells us what happens then:

ICE requires sellers of swaps to backstop their contracts with various margin accounts. If the seller fails to pay off, then ICE can tap a ?waterfall? of margin funds to make the investor whole. In the event of a market crash, it can call on clearing members such as Citigroup and Goldman Sachs to pool their resources and fulfill swap contracts.

There?s still a danger that the banks themselves may be unable to muster cash in a crisis. But this shared responsibility marks a sea change from the bad old days when investors gambled their counterparties would make good on their contracts.

That shared responsibility is cold comfort. ?Investment banks tend to be thinly capitalized, and even more so past the peak of a credit boom, when events like this happen. ?Hello again, too big to fail. ?Clearinghouses are not magic — they can fail also, and when they do, the negative effects will be huge.

Two more quotes from the article by those that “get it,” to reinforce my points:

The bond is a simple instrument with a debtor and creditor that?s proven its utility for centuries. The eBond inserts a third party into the transaction — the seller of the swap embedded in the security who now bears its credit risk.

Such machinations may be designed with good intentions, but they just further convolute the marketplace, says Turbeville, a former investment banker at Goldman Sachs.

?Why are we doing this? Is our society better off as a result of this innovation?? he asks. ?You can?t destroy risk; you just move it around. I would argue that we have to reduce complexity and face the fact that it?s actually good for institutions to experience risks.?

and

?The way we make money for our clients is by assessing risk and generating risk-adjusted returns, and if you have a security that hedges that risk premium away, then why is it compelling? I would just buy Treasuries,? says Bonnie Baha, the head of global developed credit at DoubleLine Capital, a Los Angeles firm that manages about $56 billion in fixed-income assets. ?This product sounds like a great idea in theory, but in practice it may be a solution in search of a problem.?

And, of course, fusing a security as straightforward as a bond with the notorious credit-default swap does ring a lot of alarms, says Phil Angelides, former chairman of the Financial Crisis Inquiry Commission, a blue-ribbon panel appointed by President Barack Obama in 2009 to conduct a postmortem on the causes of the subprime mortgage disaster. In September 2008, American International Group Inc. didn?t have the money to back the swaps it had sold guaranteeing billions of dollars? worth of mortgage-backed securities. To prevent AIG?s failure from cascading through the global financial system, the U.S. Federal Reserve and the U.S. Treasury Department executed a $182 billion bailout of the insurer.

?When you look at this corporate eBond, it?s strikingly similar to what was done with mortgages,? says Angelides, a Democrat who was California state treasurer from 1999 to 2007. ?Credit-default swaps were embedded in mortgage-backed securities with the idea that they?d be made safe. But the risk wasn?t insured; it was just shifted somewhere else.?

The article rambles at times, touching on unrelated issues like index funds,?capital structure arbitrage, and alternative liquidity structures for bonds. ?On its main point the article leave behind more questions than answers, and the two big ones are:

Should a sufficient number of these bonds get issued, what will happen in a very large credit crisis?
How will these bonds get issued? ?When spreads are tight, no one will want to do these because of the cost of complexity. ?When spreads are wide,?who will have the capital to offer protection on CDS in exchange for income?

I’m not a fan of financial complexity. ?Usually something goes wrong that the originators never imagined. ?I may not have thought of what will?go wrong here, but I’ve given you several avenues where this idea may go, so that you can avoid losing.

Learning from the Past, Part 3

Posted on 31 January 20151 February 2015 by David Merkel

Photo Credit: Thibaut Ch?ron Photographies

I wish I could tell you that it was easy for me to stop making macroeconomic forecasts, once I set out to become a value investor. ?It’s difficult to get rid of convictions, especially if they are simple ones, such as which way will interest rates go?

In the early-to-mid ’90s, many were convinced that interest rates had no way to go but up. ?A few mortgage REITs designed themselves around that idea. ?Fortunately, I arrived at the party late, after their investments that implicitly required interest rates to rise soon, fell dramatically in price. ?I bought a basket of them for less than book value, excluding the value of taxes that could be sheltered in a reverse merger.

For some time, the stocks continued to fall, though not rapidly. ?I became familiar with what it was like to go through coercive rights offerings from cash-hungry companies in trouble. ?Bankruptcy was not impossible… and I burned a lot of mental bandwidth on these. ?The rights offerings weren’t really good things in themselves, but they led me to buy in at a good time. ?Fortunately I had slack capital to deploy. ?That may have taught me the wrong lesson on averaging down, as we will see later. ?As it was, I ended up making money on these, though less than the market, and with a lot of Sturm und Drang.

That leads me to my main topic of the era: Caldor. ?Caldor was a discount retailer that was active in the Northeast, but nationally was a poor third to Walmart and KMart. ?It came up with the bright idea of?expanding the number of stores it had in the mid-90s without raising capital. ?It even turned down an opportunity to float junk bonds. ?I remember noting that the leverage seemed high.

What I didn’t recognize that the cost of avoiding issuing equity or longer-term debt was greater reliance on short-term debt from factors — short-term lenders that had a priority claim on inventory. ?It would eventually prove to be a fatal error, and one that an asset-liability manager should have known well — never finance a long term asset with short-term debt. ?It seems like a cost savings, but it raises the likelihood of insolvency significantly.

Still, it seemed very cheap, and one of my favorite value investors, Michael Price, owned a little less than 10% of the common stock. ?So I bought some, and averaged down three times before the bankruptcy, and one time afterwards, until I learned Michael Price was selling his stake, and when he did so, he did it without any thought of what it would do to the stock price.

Now for two counterfactuals: Caldor could have perhaps merged with Bradlee’s, closed their worst stores, refinanced their debt, issued equity, and tried to be a northeast regional retail player. ?It didn’t do that.

The investor relations guy could have given a more understanding answer when he was asked whether Caldor was having any difficulties with credit lines from their factors. ?Instead, he was rude and dismissive to the questioning analyst. ?What was the result? ?The factors blinked and pulled their lines, and Caldor went into bankruptcy.

What were my lessons from this episode?

Don’t average down more than once, and only do so limitedly, without a significant analysis. ?This is where my portfolio rule?seven came from.
Don’t engage in hero worship, and have initial distrust for single large investors until they prove to be fair to all outside passive minority investors.
Avoid overly indebted companies. ?Avoid asset liability mismatches. ?Portfolio rule three would have helped me here.
Analyze whether management has a decent strategy, particularly when they are up against stronger competition. ?The broader understanding of portfolio rule six would have steered me clear.
Impose a diversification limit. ?Even though I concentrate positions and industries in my investing, I still have limits. ?That’s another part of rule seven, which limits me from getting too certain.

The result was my largest loss, and I would not lose more on any single investment again until 2008 — I’ll get to that one later. ?It was my largest loss as a fraction of my net worth ever — after taxes, it was about 4%. ?As a fraction of my liquid net worth at the time, more like 10%. ?Ouch.

So, what did I do to memorialize this? ?Big losses should always be memorialized. ?I taught my (then small) kids to say “Caldor” to me when I talked too much about investing. ?They thought it was kind of fun, and I would thank them for it, while grimacing.

But that helped. ?Remember, value investing is first about safety, and second about cheapness. ?Cheapness rarely makes something safe enough on its own, so analyze balance sheets, strategy, use of cash flow, etc. ?This is not to say that I did not make any more errors, but this one reduced the size and frequency.

That said, there will be more “fun” chapters to share in this series, because we always learn more from errors than successes.

Talking About Value Investing and Fed Policy

Posted on 30 January 2015 by David Merkel

https://www.youtube.com/watch?v=kxonfx1hRUw&feature=youtu.be&t=13m58s

Here is the second part of my interview on RT Boom/Bust. It was recorded while the FOMC was releasing its statement, so I had no idea at that time as to what the announcement had been.

The interview covers my view of Apple (not one of my strong points), Fed Policy, and what should value investors do in this low interest rate environment. Note that not all of my opinions are strong ones, and that in my opinion is a good thing. Often the best opinions are not controversial.

If you are interested in these topics, or listening to me, then please enjoy the above video. My segment is about seven minutes long.

Talking Mostly About Earnings

Posted on 29 January 2015 by David Merkel

https://www.youtube.com/watch?v=_ErbHlr_gtM#t=207

I was on RT Boom/Bust yesterday. ?The segment that I taped here was mostly on corporate earnings. ?There’s only seven minutes of me here — so enjoy it if you will.

Redacted Version of the January 2015 FOMC Statement

Posted on 29 January 2015 by David Merkel

Comments

Pretty much a nothing-burger. Few significant changes.? The FOMC has a stronger view of GDP and Labor, and deems the weak global economy to be a reason to wait.
Despite lower unemployment levels, labor market conditions are still pretty punk. Much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.? Wage growth is weak also.
Forward inflation expectations have flattened out.
Has the FOMC seen how low the 30-year T-bond yield is?
Equities fall and long bonds rise. Commodity prices are flat.? The FOMC says that any future change to policy is contingent on almost everything.
Don?t know they keep an optimistic view of GDP growth, especially amid falling monetary velocity.
The FOMC need to chop out more ?dead wood? from its statement. Brief communication is clear communication.? If a sentence doesn?t change often, remove it.
In the past I have said, ?When [holding down longer-term rates on the highest-quality debt] doesn?t work, what will they do? I have to imagine that they are wondering whether QE works at all, given the recent rise and fall in long rates.? The Fed is playing with forces bigger than themselves, and it isn?t dawning on them yet.
The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain?t moving rates up, absent improvement in labor market indicators, much higher inflation, or a US Dollar crisis.\
We have a congress of doves for 2015 on the FOMC. Things will be boring as far as dissents go.? We need some people in the Fed and in the government who realize that balance sheets matter ? for households, corporations, governments, and central banks.? Remove anyone who is a neoclassical economist ? they missed the last crisis; they will miss the next one.

Choose Your Weatherman With Care

Posted on 28 January 2015 by David Merkel

This should be a short post. Weather forecasters deserve to be double-checked, as there has been a tendency among weather broadcasters to sacrifice accuracy for ratings, which can be goosed in the short run by offering a good scare.

I offer the most recent snowstorm as a partial exhibit. There is a real cost to misforecasting, as this article from USA Today points out:

The lost wages and tax revenue from stores and others businesses that shut down early Monday and kept employees home Tuesday, in anticipation of something far more … dramatic.

The vacations, business trips and job interviews disrupted by the pre-emptive cancellation of thousands of airline flights across the Northeast. The extra aggravation caused Monday by those two words that every working parent of school-age children dreads: early dismissal.

All the overkill adds up, in ways that may be impossible to tease out precisely.

Now, many actions are due to a need for caution, but caution needs to be kept in bounds, lest the costs of?businesses and government grow without any value gained. ?Maybe my bias comes from growing up in Wisconsin, because we were always ready for bad weather, and at least in that era, rarely canceled anything in the winter.

My second observation stems from hurricane forecasting. ?Both the overall estimates of the number and severity of storms for the season and the individual estimates of likely severity seem to be biased high. ?Again, I blame the need for high ratings.

Yes, we get occasional monster years with hurricanes, like 2004 and 2005. ?We also get freak storms like Katrina and Sandy that cause a lot of damage from the degree of flooding that accompanies some severe storms.

As an analyst of insurance companies that insure against many of the losses that come from these storms, it has taken an iron constitution to keep from trading out of loss-exposed insurers when I think the forecast is overly pessimistic.

On a personal level, it is good to be prepared for the kinds of catastrophes common to the area in which you live, regardless of the current predictions. ?But where weather affects your business or your investing, I would encourage you to double-check?severe weather forecasts to see if they make sense before taking actions as a result. ?There are costs to being wrong on each side, so be careful.

What do we ‘know’ about investing — but can’t prove with stats?

Posted on 26 January 201520 June 2017 by David Merkel

What do we ?know? about investing ? but can?t prove with stats?

msantoli:

The statistical revolutions that have overtaken sports, business and markets have bred suspicion of any observation or assertion not backed up by hard numbers.

This is a good thing in most respects. Yet experts who study these complex realms surely have ideas about how they work based on?

What do we ?know? about investing ? but can?t prove with stats? was originally published on The Aleph Blog

December 2014	January 2015	Comments
Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace.	Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace.	Shades GDP up. This is another overestimate by the FOMC.
Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.	Labor market conditions have improved further, with strong job gains and a lower unemployment rate.? On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.	Shades their view of labor use up a little.? More people working some amount of time, but many discouraged workers, part-time workers, lower paid positions, etc.
Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.	Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power.? Business fixed investment is advancing, while the recovery in the housing sector remains slow.	Interesting how falls in energy prices are treated as permanent by the FOMC, while rises are regarded as transient.
Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.	Inflation has declined further below the Committee?s longer-run objective, largely reflecting declines in energy prices.? Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.	Shades their forward view of inflation down.? TIPS are showing slightly lower inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.03%, only down 0.04% from December.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate.	The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.	No change. They are no longer certain that inflation will rise to the levels that they want.
The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.	The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced.? Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.? The Committee continues to monitor inflation developments closely.	CPI is at 0.7% now, yoy.? They shade up their view down on inflation?s amount and persistence. Okay, so here they regard the energy price declines as transitory.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.	To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.? In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.? This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.	No change. Highly accommodative monetary policy is gone ? but a super-low Fed funds rate remains.? Policy normalizes, sort of, but no real change.
Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.	Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.	No change.? In other words, we?re on hold until something goes ?Boo!?
The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.		Sentence removed, but I doubt that it means much.
However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.	However, if incoming information indicates faster progress toward the Committee?s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.? Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.	Tells us what we already knew.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.	The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.? This policy, by keeping the Committee?s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.	No change.? Changing that would be a cheap way to effect a tightening.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	No change.
The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.	The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.	No change.
	When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.? The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.	?Balanced? means they don?t know what they will do, and want flexibility.? They are not moving anytime soon.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee’s decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.	Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.	A congress of doves for 2015. Things will be boring as far as dissents go. We need some people in the Fed and in the government who realize that balance sheets matter ? for households, corporations, governments, and central banks.? Remove anyone who is a neoclassical economist ? they missed the last crisis; they will miss the next one.