First there is no inflation, and then there is
Tuesday, May 16, 2006 at 12pmBy John Friedman
Today brings another report of an inflation number that appears to be high, but which, we are then told, is not high.
So today we hear that April’s Producer Price Index (the PPI ) came in at 0.9% overall, but only 0.1% at the core. The difference, the standard lingo says, is that the core excludes food and energy prices, which are highly volatile and which tend to be more noise than information.
and journos to always label growth rates accurately
and completely. Is that 0.9% a year-over-year growth
figure or a month-to-month growth figure? I think in
this case it is month-to-month, but . . . we should not
have to decipher and guess, should we?]
I, for one, though, cannot remember the last time I heard about the overall rate being much lower than the core rate, which is a situation that should arise fairly often (about half the time, say) if we are correctly ignoring the overall rate and focusing instead on the core rate.
The CW here, then (that’s conventional wisdom to most folks), might just be delusional.
It is, though, straight from the horse’s mouth (or, in this case, from the mouth of one of the horse’s in the corral).
Most people I know, and most clients with whom I work, are not experiencing a low inflation world.
Yes, garments and electronics and things that can be manufactured overseas and brought over and then bought here are incredibly low-priced — thank you (kinda) China, you manufactured-good pusher-man to the world you, addicting a globe-full of people (or at least major chunks of the globe) to manufactured goods that have embedded within them labor wages that would not, and could not, cut it in the places where the bulk of those manufactured goods are destined to be consumed/enjoyed.
Just like banks make their money on the spread between their cost of capital and the interest they charge on loans, so, too, are we making our material world on the spread, but this time it’s the spread between our wages (with which we buy the goods) and the wages of the folks who manufacture the goods that constitute our material world (low enough relative to our wages to generate a sweet sweet spread).
In the Jared Diamond parlance, then, now quite well known (did you get all the way through that book?) (not many did . . . ), we’re doing great with cargo. We’ve always been good at cargo, as we are, as Harrison told us, Living in the Material World.
But how about non-cargo? How about something that cannot be manufactured overseas — something that we have to put together right here, using labor wages that can and do cut it right here right now via wages that can float someone’s boat in the good ol’ you ess uv A?
Yea, how about that — the situation where low wages elsewhere can’t save our high-wage-butts right smack dab here?
Well, by golly, that’s the key, isn’t it? Our cargo-excellence can’t save us here, can it?
For instance, how about education and health care and housing? Not one of them can be manufactured by relatively low-wage workers overseas and brought here to be consumed/enjoyed by all us high-wage workers, can they?
And what of inflation for these three immobilities?
Most people have seen their health care costs rise about 25% to 40% per year over the past several years — a doubling in a handful of years. The price of housing has seen similar increases and, here in Northern California, over the past forty or so years has increased at a rate of about 8% per year.
And what of tuition inflation? Well, during the years 1979 through 2001, tuition inflation ran at about double the overall rate of inflation in the U.S. (about 8% for tuition vs. 4.4% for the CPI) (yes, I have done tuition and Northern California real estate inflation numbs; please contact me if you’d like to see them).
And that’s what we are all facing and fearing and fretting: the most top-of-mind/top-of-pocketbook/scary-as-all-get-out financial health issues for most Americans right now are all in-our-backyard-only sorts of services that no number of people elsewhere willing to provide cheap labor can support. These are issues about housing our families, and about guiding our children, to the extent we can, towards a well-educated, healthy entrance into the world we leave to them.
And, my oh my, isn’t inflation vis a vis those three crucials just terribly frightening to all of us!
How fast can you run? Faster than the Red Queen (the RQ in JFRQ)? Can you earn your way past these issues? Can you grow your money-in faster than inflation takes it away?
That is where the real fear lies. That’s where inflation, as measured by the PPI and the CPI and the CPE and the inflation deflator, don’t really tell us very much about what it is to be living in 2006 in this lovely ol’ world of ours.
So what of the future?
Well, health care and education can be, after all, imported, can’t they? Here, though, importing involves the customer moving to the services, rather than the goods coming to the customer. Both are, if my macroeconomic teachings/failings serve me well here, imports (just as travel abroad is an import in terms of money flows).
So look for more than just plastic surgery pulling patients into Mexico and Southeast Asia. And look for lots of students going abroad for education.
And what of housing? Hmmm . . . let’s see. I don’t have much to offer up there, other than this: if you are living in the general area in which you want to be living over the long run, and if you are renting, you are on an unhealthy trajectory. You are apt to end up needing to export yourself to a place you find less desirable.
Here that means people getting Ellis Acted out of their SF apartments and finding that they have to move out of the city, due to affordability considerations. Or it means having to buy a first home somewhere other than where you’d like to be — way Way WAY other, not just a bit off, a bit away.
And, typically (though not always), in the real estate context things get worse with time, so it’s a matter of: do it now, take your medicine, bite the bullet, because, the more time goes on, the worse the medicine is going to taste, and the harder to swallow the bullet is going to be.
Why?
Because of the spread between two different types of inflation, but of course, and because few will see our incomes inflating commensurate with core inflation (the one that includes our China bonuses and the Walmart deep discounts — the one that is low . . . ), let alone keeping up with the Made-Only-in-the-USA type of inflation that hits all of us in our health care, housing and education pocketbooks.
Look, also, for China to give way to other places, for, just like bigger boats, someone somewhere can just about always be found to provide inexpensive labor (as Bush gets the country into a politically-driven immigration-fear-mongering tizzy, all the while with all the powers that be having their lawns cut by, as they say, illegal aliens, this last sentence has a certain irony to it right now).
Look for the last great bastion of cheap labor to be Africa (Antarctica and the Arctic are out of the question, yes?). So maybe 25 years from now (50?) Africa will take China’s place as the inexpensive manufacturer of choice, just as China took that mantle from Korea and just as Korea took that mantle from Japan.
Perhaps the cheapest labor of all time is the labor that built a good chunk of this nation. I refer, of course, to slaves.
The Wall Street Journal just reviewed a book called Inhuman Bondage by a fellow named David Brion Davis. You can read reviews of this book all over the place, but the WSJ, in its review (subscription required), as only it can, made the whole thing sound like a Harvard Business School business case.
Ever the financial wonk me, I found it fascinating
Here are two paragraphs:
Slavery was once the cornerstone of America’s future. In 1860, as investment capital, the value of the nation’s slaves far exceeded the cash value of all the farms in the South and represented three times the cost of constructing all the railroads that then existed in the U.S. At the time, the South grew more than 60% of the world’s cotton, supplying mills and markets from Manchester to Moscow and making not only Southern planters but also Yankee bankers, insurers, commission agents and shipowners very rich. Meanwhile, since 1800 the number of enslaved African-Americans had quadrupled, from one million to four million. As late as 1863, a North Carolina railroad executive could optimistically assure his stockholders that the price of slaves would double by the end of the Civil War, which he confidently expected the South to win.
In 1860, the total value of slaves in the U.S. was $3.5 billion — the equivalent of $68.4 billion today. Mr. Davis observes stunningly: “A more revealing figure is the fact that the nation’s gross national product in 1860 was only about 20 percent above the value of slaves, which means that as a share of today’s gross national product, the slaves’ value would come to an estimated $9.75 trillion.” About 360,000 Union soldiers died, in part, to set slaves free. In the process, they also overthrew the traditional — and morally repellent — underpinning of the nation’s economy.
So today, just as has been true in one way or another always for humans, there are those who are purchasing the efforts of others at prices that, to the purchasers, look extremely low. Some things (health care, housing, education), though, can’t benefit from that spread, and in those realms inflation runs just like it did when Juhmmy Cotter was running the show.
Currently, then, we are getting a great deal in terms of dollars and maximization of our consumption of goods (if not services). But is that a long-term good?
Was cheap gas during the 80s and 90s and the first five years of the new millennium a good thing?
Time will tell, but my hunch tells me no . . .
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Louis Passes
Wednesday, May 3, 2006 at 11amBy John Friedman
Louis Rukeyser passed away yesterday.
More than anyone, I owe my financial wonkiness to Louis. As a kid, I used to watch him every Friday night — probably for the better part of three decades. Wall Street Week was, then, where I learned a good chunk of what I know about the stock market. Yes, it sounded like a different language at first (doesn’t most every area of endeavor have its jargon barrier that one has to break through in order to start the endeavoring?), but after a while I spoke the lingo and kept learning more and more.
Thank you Louis.
Louis had bad hair (knowingly, it seemed) and bad puns (knowingly, it seemed), but he also had a very healthy approach to investing compared to the mania that is CNBC et alia today. He was a buy-and-hold type.
About five years ago, PBS canned Louis, a move that ranks right up there with CBS canning Walter Cronkite.
If memory serves, PBS canned Louis right around the same time that PBS in SF (KQED) decided it would no longer follow through on the joke that was its non-commercial commercials approach to corporate sponsorship, and decided to just run car commercials for real.
It was also about then that PBS at the national level started making a handful of self-help gurus and guruinis rich by televising purely-commercial infomercials featuring this handful of folks (e.g., Perricone).
Any of those things by itself would have turned me away from PBS, but firing Louis and replacing him with a not-all-that-interesting fellow from Fortune magazine (and changing the name of Louis’s show to Wall Street Week with Fortune — eegads!) was sufficient all by itself to turn me away.
What were they thinking?
Louis went on to cable, but stories of failing health soon circulated, and yesterday the circle closed.
I worry now that young people will not have a Louis in their life to teach them about long-term investing, as Louis did for me.
Now maybe I sound like an old fart when I say that, and I truly hope that there is someone out there filling Louis’s shoes (to the extent they can be filled) so that people just coming to investing are able to sit at the knee of a person with some wisdom and learn the difference between investing and gambling — the difference between using investing as a tool to help fortify one’s financial health and using it as a quick-fix attraction that more often than not will hurt those who approach it blithely.
But my fear is that the fast-ticker-crawl along the bottom of the screen, the ever-changing information box up on the right, and the buy/sell hot stock/cold stock talking-heads-that-can-move-markets / therefore-you-must-watch-the-talking heads approach of today is triumphant (CNBC is on, all the time, in every trading space, period the end) and that the much slower East Coast Brahmin drawl of one Louis Rukeyser, presented sans any video/Avid cleverness (so that, eegads again, there’s just a person there saying stuff) and his ilk has left the media stage forever.
Time marches on. It will be what it will be. The fact is, though, that yesterday we all lost a strong voice of investing reason.
.
Is it Time to Rescind the Biggest No-Go Zone of All?
Tuesday, May 2, 2006 at 12pmBy John Friedman
Warning: this essay is all questions, no answers.
There are lots of no-go zones in our lives, are there not? Our lives are filled with things that we simply don’t do when we’re among people, n’est pas? Call them rules or social niceties or manners or what you will; in here we’ll call them no-go zones, as in you must not go there. Going there would be bad manners. You’d be breaking the rules and it would be most improper. It would be in bad taste.
The easiest example of a no-go zone (forgive the crudeness here — it’s an unavoidable consequence of talking about behavior that most people believe to be impolite) is that of public defecation. Having just been olfactorily assaulted by an infant on a smallish airplane, I can’t help but think (at least as I write this, but otherwise not at all . . . ) about how seldom it is that this particular no-go zone — the public fecal release no-go zone — is breached, even though with 6 billion people on the planet the chances are that, at any given time, about 4.2 million of them are confronting the atmosphere (which we all share) in precisely the way the offending infant on the smallish plane did.
(Scatological aside for the arithmetic-head in you [the first ever in the FHB, and probably the last]: assuming that the deed takes, on average for everyone on the globe, one minute, and assuming that the act happens once per day per person, then each day the population of the globe requires 6 billion minutes to do the deed. One day contains 1,440 minutes [60 minutes per hour times 24 hours per day equals 1,440 minutes per day]. Dividing the 6 billion minutes per day required for everyone on the planet to move their bowel into the 1,440 available minutes per day, and assuming that it all happens uniformly, then, 4.2 million people are doing their doody every second of every day — and doing it, mostly, with no one observing them do it, via any sense or faculty [6 billion people-doing-the-deed-minutes per day divided by the 1,440 of available minutes per day equals 4,166,666.6666666666667 people doing the deed during each available minute].)
Now I am not here to question the wisdom of that particular no-go zone (though, upon quick analysis, I say “yay” to that no-go zone. I’m for it by golly.) Hopefully, though, this example really solidifies for you what I mean when I refer to a “no-go zone.”
(And, I kid you not, it was only after about an hour of writing that I heard any pun in the juncture between the no-go zone phrase and the public fecal release example at all. Funny what the subconscious can conjure, eh?)
But I *am* here to question some other no-go zones.
In fact, every time I think that a no-go zone is justly a no-go zone — one that serves a good purpose, and one that therefore does good things by blocking certain things from happening — sooner or later I come to realize that the no-go zone is harmful, and shouldn’t be there at all.
For example (one far closer to the overall FHB theme than the example above) at one time in my financial health advising I used to tell clients that I didn’t work on the revenue side of their financial lives, i.e., that I only worked on the expense and balance sheet (a/k/a Asset Grid in JFRQ-land speak) sides. So, I would tell them, I can help you with your money-out, and I can help you with how you store your saved-up money, but when it comes to money-in, you’re on your own.
But after saying that to clients a couple of times I came to realize, first, that having a no-go zone like that was a mind-set vestige from the world of conventional financial planning (which knows no revenue model by which a financial planner can be paid directly for helping clients increase their labor-generated revenues) (what would the broker-dealer compliance department say?) (by contrast, it’s not hard to mock up a money manager, pulling in a percent a year on a retiree’s assets, arguing that the retiree should spend less, is it?), and, second, that the no-go zone impeded the client’s overall objective of improving his or her financial health (because for most people the revenue side of their financial life is the key determinant of their overall financial health, with planning for the come-what-may a distant second and things such as investing prowess as a “not even in the same ballpark” distant seventy-second place or so on the list).
So, just like that, kerplooey, the no-go zone fell by the wayside, and these days I am happy to help clients with the revenue side of their financial health, and do a lot of it (though by no means do I hone to a strict partyline rule that “more is better” when it comes to money-in) (though, all things being equal, particularly in terms of lifestyle and values [the place where the happiness deficit usually arises alongside the quest for more money-in], it’s far easier to be financially healthy with more money-in than with less).
So lately I’ve been thinking about another no-go zone that I and most everyone takes as a given. This no-go zone, common in our culture and I believe many others, treats the numbers in a person’s financial life as a no-go zone. This no-go zone forbids talking about the numbers in one’s financial life with people outside one’s family (and indeed, many people think it’s just not right talking about it inside a family either) (a topic for another day, but I’ll just add quickly: moms and dads, you should talk about this stuff with your kids, and that’s whether you’re 40 with young kids or 80 with adult children).
So the saying that people in polite circles never discuss sex and politics is incomplete and/or outdated, isn’t it? Those topics come up fairly often nowadays don’t they, certainly among friends, yes? So those no-goes are often fair game these days.
But how often do you hear people actually talking to other people about the numbers in their lives?
For instance, do you know how much your very best friend makes? Do you know how much is in his or her 401k or IRA or other retirement plan?
Do you know anyone who inherited money recently? If so, do you know how much it was?
Hmmm . . .
I just had dinner with a bunch of folks from New York. People who live in New York are different from people who live in San Francisco. They’re great (just as New York is great), but anyone who lives most of their life on the piece of concrete and other human-made objects known as Manhattan are different from those who live most of their lives on the piece of concrete and other human-made objects known as San Francisco. They are very different places, each with their strengths and weaknesses, and each with the people who are drawn to the particular mix of strengths and weaknesses their city of domicile presents.
I bring this up here because a quintessential New Yorker made popular a song that might have the answer to the question we’re raising here, as perhaps the no-go zone that precludes all of us from talking about the numbers in our financial lives with even our best friends is a result of this thought:
Money changes everything.
I’m reminded of intra-family issues that arise when a person with parents and sibs hits the Silicon Valley big-time, with sudden wealth in the tens of millions of dollars generated by owning founders or near-founders shares, or pre-public offering options — the sort of securities that can, quite literally, make deci-millionaires out of young people with the ringing of a bell (or, more accurately, the first pricing on the first day of public trading of the now-publicly traded shares).
So ask yourself this: if your child was suddenly worth $10 million (or 50 or 20 or whatever), what would you do? How would you feel? What would you expect from yore child? Would you expect yore child to make you (feel) rich as well? Would you expect a new house? A new car? And what if your child refused? It happens.
And can you imagine a scenario where either or both you and your child came to wish that you had never known about the sudden wealth?
Would money change everything? And if you said “no” to that last question, are you really so sure of that?
I’m also reminded of the very odd, very non-mainstream Operations teacher I had in school. Instead of talking about The Goal and widget manufacturing, this guy talked about information flow and continuous improvement and the number of M&Ms in each of dozens of bags bought at different drug stores.
And he was extreme. Extremely extreme.
The relevance here is that this teacher consulted to a company in Silicon Valley in which, following the teacher’s advice, every employee of the company knew how much every other employee of the company made. The teacher insisted that this was a great and smart way to do things; most of the students, however, wondered if this approach might not go just a little bit too far. Yes, information flow is important, and the more the better, they all said, but isn’t there something different about the numbers in people’s financial lives?
The popular crapola media give us one counter-example. Most Sunday morning paper readers are familiar with the annual issue of Parade (is that the right name of that insert with the gossipy letters page at the front?) called something along the lines of, “How Much People Make,” where they show how much given folks make, from the celebrities of the day to salespeople hawking dthis, dthat and dthe other dthing (I just got back from Chicago), from coal minors subject to grave dangers to CEOs showered with huge fortunes (even if they retired long ago), and from doctors once universally admired but now viewed skeptically by many, to dock workers (Marlon and Lee and the birth of unions).
Next to other gossip, as this article always is, one has to wonder: Is there something gossipy about sharing one’s numbers with others? Or can it be done in a productive, caring way?
But, aside from Parade, can you think of another counter-example in the media? The PBS money shows (Ormond, Kawasaki, Ponds, etc.) never really put scale onto their advice do they? Maybe Ormond does (aside: I think she has gotten much better over the years) (though I still have some issues with what she says/how she says it) but I can’t remember any time when I heard any of these heads answer a question that had a dollar amount in it.
It’s just not done.
Not in polite circles, anyway.
Now, I don’t have time to decently spin this tale out, and haven’t had time to fully think this thing through. But let this serve as a marker and as a reminder that I am going to be questioning whether the no-numbers-please no-go zone is helpful or harmful to people’s financial health in general.
Might it be that the no-numbers-please no-go zone comes from the desire of Da Man to keep everyone down, by telling them not to talk to each other about something which, if they did talk about it, would help them tussle their way out from underneath the oppression of Da Man? Is it, then, an age-old form of self-censorship with ulterior motives behind it? Is this the same thing as Google in China, the same thing as Bush/Cheney in the Whitehouse, only a whole lot older?
Is this:
Or is Cyndi right, so that, by merely mentioning some numbers to your best friend you are apt to upset the applecart? Is it true that, by simply saying, Hey, Terry, I just got rich to the tune of $14,587,214.58, that then, as if by magic, with the snap of that finger of a sentence passing through your lips and the molecules vibrated thereby instantly fluffing up the hairs inside of Terry’s ears, nothing can ever be the same?
What sort of cause and effect is that?
My hunch is that, somewhere down the line (years from now?), I am going to declare that the no-numbers-please no-go zone is harmful to people’s overall financial health, and make it go kerplooey for those in my charge, at least to some degree (perhaps via financial health groupwork).
And my further hunch is that initially the fallout from breaching that no-go zone will be substantial and difficult, but that over the long run much good will come from having people — in some context and with some people — openly talking about the numbers in their lives with other people.
It might do people a world of good.
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Death comes, and how — the human story everywhere
Wednesday, February 1, 2006 at 3pmBy John Friedman
With great and troubled sadness, today brings news of the murder of a lunch buddy of mine, Paul, and his wife Julie.
[Caution: if you are the type of person who prefers to not pull into your consciousness stories of deranged behavior, do not click through that link. But if you are the type of person who prefers to stare into the belly of the beast from time to time, because the beast is and should not be ignored, then do click way.]
Paul was a very sweet man, with a big grin captured well in the picture the press is carrying of him today. I didn’t know him well, as over the past ten or fifteen years we would get together for lunch once or twice a year — always a real treat — but what I did know of him I found to be quite admirable: he was smart and gentle and knowledgeable and fun to be around.
Paul, you will be missed! By me, for sure, and lots of others, of this there can be no doubt. You made a difference in people’s lives while you were here. You used your lifetime well.
Life is exploration. Life is learning. Life is especially learning about ourselves, because everything we see and feel and do we see and feel and do through ourselves.
Yet, in a sweet-misery sort of irony seemingly woven into the fabric of the universe itself, most of us will never know the ultimate set of facts about ourselves — most of us will never know the facts surrounding our demise. Everyone else we leave behind will know, but we will not.
The facts surrounding Paul’s demise were of the sort that just about no one ever contemplates, and no one should ever have to contemplate.
Presumably, Paul and Julie went to sleep two evenings ago, Monday, January 30th, 2006, just as they always had. But then somewhere between that moment in time and the moment in time that they presumably contemplated awaking to, i.e., a new day on Tuesday, January 31st, 2006, much like any other, an event intervened at 4 a.m. — an event with a human face and a human behavior — that changed everything, for many people, forever and in all ways, irreversibly and irretrievably.
Life goes on and death cuts it off, as the human story high up in the hills of El Cerrito (surely shrouded deep in fog at this moment in time, what with the entire Bay Area being enshrouded today, February 1st, 2006, with a slow constant drippy rain, and what with it being more foggy way up there in the hills of El Cerrito than just about any other place around here) — is all too much The Human Story Everywhere.
May all of us have sets of facts surrounding our demise that are very much to our liking. And, Paul, my lunch buddy, may you get something somewhere somehow somewhy somewho along the way to make up for the facts surrounding your demise, because you were rooked.
So, yes, and quite obviously, financial health requires all of us to plan for our demise (if you don’t have your estate planning binder in place, then, please, get it done: it’s easy and it’s not expensive and you’ll feel all the world better when you do) because death comes, though many of us will never know how, and many of us are going to be rooked.
It could even be tomorrow . . .
But, yes also, and far more importantly, remember the simple exhortation a friend offered up to me and my honey during our wedding circle, an exhortation we follow most every day, an exhortation we state out loud to each other while happily complying therewith:
So time’s a wastin’.
The Problem with Trying to Predict the Future: Whooz t’ Know?
Friday, January 27, 2006 at 11amBy John Friedman
Today I awake to a report that growth of the GDP last quarter was anemic, at a 1.1% annual rate (3% to 5% is usually considered Goldilocksian just right, in the sense that too much growth can generate wicked inflation, and too little growth can feed on itself to generate recession and even depression).
Now, as a young lad, I would have thought, Good, that means the market will have gone down. To some folks that seems like an odd thought, because to them the word good should not be combined with the phrase the market will have gone down. But I thought they were fine together, because even back then I appreciated that, so long as I wasn’t in the mode of selling out major chunks of my portfolio (which, after all, is something that awaits us in our later years of life, right?) that down was good because I was a net buyer, rather than a net seller, meaning that I was buying a whole lot more than I was selling, so lower prices were, all things being equal (that dread phrase), good.
I still feel that way about down markets. After all, most of the folks whose financial health I help look after are net buyers.
The difference between when I was a young lad and now, though, is that I no longer expect to be able to predict the direction of the market in response to economic reports. So today, no longer a young lad, I wake to the news of anemic GDP growth and say to myself, I wonder which way the market will move?
And, sure enough, the young lad takes a lesson from the . . . not-young-any-more-lad but not-ready-yet-to-call-it-old lad, to see that the market has gone up smartly (or dumbly, depending on your opinions of these things) from 10815 to 10932, i.e., something just shy of 11000 and more than 1% up.
So, today, the grand aggregator of personal opinion that is the market does not hear of this economic anemia and then think, Gee, we’re going into recession and corporate profits will be low and everything is going to be going to hell in a handbasket at least for a while.
No. Instead the grand aggregator chose, in this particular context — this particular set of circumstances, never to be repeated again and never having occurred before (oh you Red Queen you!) — to hear the news and say, Oh joy, that means that the interest rate increases the Fed has been putting through, taking us from short term rates of 1% or so up to 4.5% or so, will be ending even sooner than we thought, and that means that the cost of money and capital — the engine that drives business — will go down, and that is a good good thing for us, a good thing for the market.
Now, I’m no economist, and I remember well how, in the last economics class I had — the one with a bunch of really smart people — how I would often get the stochastics precisely backwards, as in thinking that a given cause on the market would have exactly the opposite effect that a good economics student would expect. And I remember that I could always see a way that either effect could make some sense, and how neither seemed totally out of whack or preferable to the other.
Now for the purposes of Macro with Rose, I was just plain wrong. I would get a bad grade.
But back then I would also think, Friedman’s Law of the Average is at work here, so if I am thinking that a movement in either direction is conceivable, then probably lots of people would think that was the case as well.
And so, no longer a young lad, I know that the market is a whole lot more like me as a confused Macro Econ student among a bunch of go-getter MBA-types, than it is like the tried-and-true, one-direction-is-right and one-direction-is-wrong Mankiwian wisdom to which one is exposed in Macro. (Greg Mankiw is the guy who wrote the text book for that class; he is also the fellow who got excoriated and then kicked out of the Bush administration for suggesting that out-sourcing was good, nicely timing that suggestion to the time when out-sourcing was a big political and media hot potato — in other words, he stepped right into it, and Karl and Andy were not pleased, so GW agreed that he should go) (please do not ask me how to say his name, or the modification of his name into a label for his school of thought; I do not know).
So, no longer a young lad, I know that I don’t know which way the market is going to go when faced with economic news, even when the economic news is unambiguously not great for putting food on our collective table (and food-on-the-table is, after all, the ultimate economic fact, isn’t it?), such as a GDP figure coming in well more than half below the expected figure (2.8% was the consensus going into the release).
So what does knowing-that-you-don’t-know mean for a person’s financial health? Two things.
First, for many people (me, anyway), coming to grips with one’s inability to predict markets and economies and stock prices and whatnot is one of the biggest knowledge-hurdles to jump over — for here the hurdle is to know that you don’t know and never will know — but, once jumped over, is a feat of enormous power, capable of producing a true freeing. Most of us are not comfortable admitting total abject defeat, and that’s what’s required here: you have to admit that there is no way, no how, you are ever going to be good at predicting price movements in the stock market.
T’ain’t no figgering; t’ain’t no knowing.
But once you jump over that hurdle, seriously wonderful financial health things happen. Most readily, people who’ve surrendered the edifice of able prediction do not expect to, over time, beat the market and are instead happy to match it.
Now if financial health has something to do with happiness (and I think it does, bigtime), then this can be key. Because expectations are one key to a person’s s happiness, aren’t they, in the sense that, when our expectations are met, we feel better and happier, and, when our expectations are left unfulfilled, we feel worse and less happy?
When folks expect to beat the market, then, they tend to make themselves feel crazy because they fail. They are less happy in their financial life — less happy in their financial skin — and are therefore less financially healthy.
Letting go of that expectation, on the other hand, makes a person feel better about his or her investing. Happiness and financial health ratchet up quantum-like, and that is predictable. Give up the expectation and you are quite likely to feel financially happier.
Second, getting to the exalted knowing-that-you-don’t-know plane of financial self-knowledge also makes your investing chore a whole lot easier — not even a chore, really — because matching the market is a piece of cake, and getting more so every day. All you have to do is slap yourself on the wrist every time you are tempted to get too cute about it. Just be simple. Just be tame.
And if you have the urge to set out for that lofty plane of better-than-market returns (alpha is the term the financial wonks use for that plane), wanting to try your hand at predicting that-which- is-mostly-unpredictable, then a good piece of advice is to quarantine that part of your portfolio — the trying-to-beat-the-market part — so that you can really, really, really, honestly and truly, gauge your performance.
Gauging performance is a lot harder than most people think. For instance, do you know how well your 401k has performed? Usually the only people who have any inkling of an answer to that question are those whose 401k is housed on a platform that provides that information (on statements or online) and not all that many platforms do that because it is bad for their business model (and the regulators sure haven’t required performance metrics in that context, unlike in the mutual fund prospectus context, in which they’ve at least made a start).
So when you wake up and here that the economy didn’t grow very much last quarter, and that it’s Chairman Greenspan’s last week at the Fed, what’ch’ya gonna think, what’ch’ya gonna say?
If you’re me in my 20s, you say, market’s gonna tank.
If you’re me in my . . . 40s . . . you say, whooz t’know?
So the truth can set you free — and here setting-you-free means making your investing a no-brainer because, as it turns out, brains ain’t going to do you much good here, no way, no how and, in fact, are more apt to do you harm than to help you along your merry financial health way.