Weather, market, economic and political forecasts have similar records – Le blog de l’week #744
Warning: “Bears are the worst people to listen to in the lows, and bulls are the worst to listen to in the highs.” – Bank of America Merrill.
Are you an Optimist?
For an experienced computational analyst, it is a lot easier to be overly skeptical than to believe that everything will be fine. Please suggest ways I can be more optimistic in the future, as it has been too easy to be pessimistic for over a year.
Two big stories of the week
Far too much has been said or written about the Federal Reserve’s 75 basis point interest rate hike and the Senate compromise tax bill. Analytically, all I want to add are thoughts that haven’t been covered elsewhere.
In all the discussion of interest rates linked to both inflation and recessions, two areas of critical long-term importance are not explored.
Much of the discussion focused on the size of the increase and when. More important is the historical need for recessions (some of which have turned into depressions due to policy mistakes).
Throughout recorded economic history, there have been severe economic/market disruptions caused by known and unidentified imbalances that have not been properly addressed under normal circumstances.
The current imbalances that I perceive as unresolved can be characterized by the lack of sufficient efficiency to produce satisfactory results, some of which are briefly presented below:
- In the United States, there are about twice as many job openings as unemployed, with 5% fewer labor force participants. Among other factors, this is the combined result of poor home schooling and training, and unaffordable childcare.
- Potential employers cannot find workers. This is not only the result of insufficient formal ‘education’, but also of workplace attitudes.
- An example is health care, due to regulation resulting from tort attorneys and insurance payers. The unions don’t help either. We all pay for this.
- Another example is the lack of an adequate military force to defend our interests.
- The final topic left unaddressed in the rate discussion, particularly when Paul Volcker’s name is mentioned, is that he needed two recessions to break the back of inflation.
Let’s move on to the new tax bill, which in theory “balances” spending with tax revenue. There is a classic problem between workers paid by the government and some of the highest paid tax accountants and lawyers in the world.
Dynamic forecasts are one of the reasons why weather, stock market, economic and political forecasters struggle to be correct in their judgments twice in a row. (Track bettors know how difficult it is to follow up a winning bet with another winning bet on the next race.)
Fortunately, this happened during World War II, when General Dwight Eisenhauer was given command of the largest amphibious landing in world history. At the scheduled time of the main European landing, the weather was bad. The German staff of highly trained logisticians believed that Ike would postpone the landing until later in June. However, they failed to take into account that Ike grew up on a farm in Kansas and spent many years as General MacArthur’s speechwriter in the Philippines, both of which experience sudden storms. Ike decided to go ahead with June 6e landing. Although there were some difficulties, he established the Americans, British and other Allies on the beaches before the Germans could strengthen their defences. This proves that making a bet against the odds can sometimes win.
What else happened?
This week, bullish trading volume on the New York Stock Exchange (NYSE) was about the same as the NASDAQ market at 13 million shares. The big difference was the number of stocks changing hands at lower prices, with the NYSE having 7.1 million and the NASDAQ having 9.4 million. (As mentioned in these blogs, NASDAQ players tend to be savvier traders, due to the absence of index players and, to some extent, wealth managers.) This could be taken as a warning.
Additionally, 95% of stocks in the Dow Jones Transportation Index rose, while only 80% of stocks in the DJIA rose this week. Generally, more professionals invest in transport tickets than the most popular industrialists of the DJIA. This may be an opposite positive indicator.
RememberI want to know why you are optimistic.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.