BREXIT will unnecessarily hurt shoppers in the UK and EU unless governments recognize that prices of different products don’t necessarily move together and that inflation doesn’t necessarily cause growth. The nature of inflation changed years ago. For example, shoppers know that some prices they pay are increasing and some are decreasing. Today’s consumers don’t buy more now in anticipation of higher prices in the future. This new reality will complicate international trade negotiations, particularly the transition to BREXIT. In the Euro area, consumers have enjoyed low average price increases over the past few years; often buying more as prices…
Author: Brian Barnier
Central bankers fear slowing productivity growth. This fear comes from overlooking the details of productivity data. Like connecting dots, insufficient understanding leads to policy mistakes, distortions in markets, uncertainty for businesses, weakness in tangible markets and – through global financial flows – threatens financial stability. Productivity is stronger than central bankers realize, both labor and multifactor productivity, as we’ve illustrated with multiple data pictures. For labor productivity, measured slower growth is primarily because: Hours worked rebounded strongly from lows of 2009 due to both rehiring and industry specifics such as oil & gas field built-outs Improvement in output quality…
Japan’s GDP has grown in each of the past four quarters – good news. Next, Japan needs to learn from baseball to consistently grow each GDP component. “Headline” Gross Domestic Product (GDP) is like the final score of a baseball game – it says nothing about each player at bat or on the field. When a favorite team wins, loyal fans want to know, “How did they win?” and, “Can they keep winning?” When the good news of four quarters of real (price level-adjusted) GDP was announced, the same baseball questions were asked. Answering the “how” question starts by…
Job loss warnings are scary — jobs being killed-off by technology without better jobs being created. Skeptics flag soft assumptions in job loss estimates. What people on both sides of the debate miss is the impact that already occurred. Risk to a job is generally estimated based on the aspects of that job and technology available to replace humans doing the job. Job aspects include: Changes in products made, such as digital camera sales falling once cameras were embedded in other electronics. Or, losses for repair services as products become more “throw-away.” Changes in job location, whether distant manufacturing…
“Hindsight is 20/20” is often an excuse for why a meltdown wasn’t seen. Yet, some people do see. People with foresight are better at asking “how does it work?” and “what if?” In your last buy-sell decision, what did you discuss? Price trends? Analyst ratings? P/E? Fundamentals beyond earnings? Any forward-looking risks? If so, which types? In reviewing investor decisions that didn’t have good results, frequent findings are that few risks were considered, they were usually generic and not diverse – setting up failure. Consider a few examples where too many people assumed… The Trump Administration fiscal and regulatory…
Again, Japanese shoppers bought more when prices fell — and cut purchases when prices rose. To grow more, babies per household matter more than purchases per household. The latest estimate of 4Q2016 household consumption reports shoppers bought more durable goods as prices fell and fewer semi-durables and non-durables as those prices rose – the opposite of what the Bank of Japan (BoJ) expected. The “textbook” price-quantity chart with each axis the same makes it easy to see the dramatic fall in consumer durable prices. The dramatic price drop in consumer durables is especially notable as the global price drop…
To find the most promising companies, look beyond earnings per share and price-to-earnings ratios. These are superficial and give you no advantage simply because everyone else is using them – especially frequent traders. In 1907 Leo Baekeland heated a piece of wood to bake on a varnish. He failed. But he noticed ooze from the wood. His exploration of the ooze led to his invention of Bakelite – the first workable thermoplastic. Another chemist had discarded similar ooze because it didn’t crystallize. But crystallizing wasn’t the right measure of value. For company value, as illustrated in “To find better…
Individual investors often think, “Volatility I can weather, big falls I fear.” Estimating potential falls starts by looking to the past. Then, it considers macro or company factors for the future. Previously, in “Here are 2 ways to avoid being misled about volatility,” the problem was that volatility measures have significant limitations and usually aren’t applicable to the needs of individual investors. More, they are only designed to measure certain types of risk experienced over a recent period. These complications cause structural errors in portfolio design. When an investor seeks published estimates of potential price drops, different names and…
Caution is needed when using risk measures that “hide dynamics in a dot” or are inappropriate for an investor’s situation. Steps toward clearer insight include separating downside from upside volatility and separating trend from volatility. Previously, in “Biggest mistake managing risk,” the problem described was that investors don’t use risk measures matched to their situation. Risk includes recently experienced risk and “meltdown” risk. Recently experienced risk includes trading volatility. Meltdown risk includes large losses that either happened prior to an evaluation period (e.g., more than three years) or never happened (e.g., how the Federal Reserve’s “wealth effect” turned bubble…
Not measuring risk in a way that matters to you is the most basic mistake. To avoid losses, first understand how popular risk measures work and can mislead; second, select measures that best answer the questions that confront you. “One force drove each stock market boom – do you know which?” illustrated how since the early 1970s, over 90% of equity market gains have been due to growth in debt – first credit cards, then broader consumer, housing and commercial & industrial debt, and the FOMC buying Treasuries and Mortgage-backed Securities as part of “Quantitative Easing” (QE). “Fed’s bubble…
Economic “slack” refers to unused resources. Slack matters because estimates of slack then shape economic policy that affect interest rates and markets – and your returns. The problem is that typical measures hide its size. Digging into the data reveals a more dramatic story. Excess labor capacity (“slack”) is bad for the: Smart young man with high trade skill aptitude caught in the trap of “no hires without two years of experience” Former corporate accountant now cashier at a big box store to get benefits Single mom who just wants to work more hours at a single job Slack of…
Economists assume that lower interest rates increase business investment – all else equal. This assumption matters because it shapes interest rate policy and your returns. The problem is that all else isn’t equal; the interest rate-investment assumption hasn’t consistently held over time. Investors can bypass this problem by selecting companies based on business model. “Low rates and higher asset prices should support household and business spending and investment through various channels.” – Federal Reserve Governor Jerome Powell, January 7, 2017. Governor Powell stated standard economics – if interest rates are lowered, then investment will increase. A web search reveals…
The Fed bubble reminds people of huge gains and raises fears of a fall. Central bank decisions are just one example of bigger “decision risk” – a few people making errors in high-impact decisions. These risks are increasing. Increasing danger requires a better way of managing risk — that starts with a clearer view of threats. Like driving in a fog, today’s threats are confusing. Too many individual investors have gone defensive. Some blame “the markets.” This year will be another of struggle for investors who don’t take the time to understand threats and design portfolios to manage that…
U.S. REITs are often seen as a safe haven by domestic and international investors. Are they still safe when fundamentals are strained? Trends in REIT price and real estate markets have investors reevaluating risk. How high can Real Estate Investment Trust (REIT) prices go and/or how soft can real estate fundamentals become before REITs get risky? Because REITs were good investments at times in the past, are they still today? In return for their money, investors receive price appreciation and dividends. As we discussed in “Dividends in danger? Avoid 3 mistakes.,” dividend health in asset-based investment vehicles needs to…
Fed-driven equity bubble, market exuberance, and political uncertainty led many investors to high-dividend stocks. Yet, macro fears from oil & gas to political still generate headlines about danger in dividends. Finding safer dividends isn’t about running from headlines, or chasing tips or even ratios, it’s about screening for dividends that fit your objectives and checking drivers of dividend health. For the person who views dividends as security, fears are stoked by headlines that name companies with recent dividend cuts. But, that’s not widespread and macro troubles don’t uniquely target high-dividend stocks. Those headlines are a distraction from the daily…
The debate about the GDP measure gets muddled when people confuse three questions: What do we really want to know? What do we need to measure? And, how well does that measure work? Answers point to the top priority – adjusting for improved product quality. Debates about what Gross Domestic Product (GDP) is intended to measure go back to the 1930s when the question was whether government sector should be included. The World War II need to count military production gave a firm “yes” answer. Since then, debates have continued, but are often confused simply because debaters talk past…