A Dash of Insight

Who gets the jobs story wrong? Everyone!

Tomorrow morning we will have the monthly ritual:  The Employment Situation Report.

Here are the main steps (rinse, lather, repeat).

1. A stellar cast will be assembled to pontificate for a couple of hours on CNBC and Bloomberg.
2. Leading economists and bloggers will quickly give reactions that will be instantly posted in MSM summaries.
3. Alan Abelson (with help from assorted perma-bear sources) will explain in Barron's on Saturday why the world is about to end -- second only to Harold Camping.

What you should know, but will not hear

Why do we care about employment data?  Two reasons.

1. Understanding the current economy.
2. Figuring out how to fix it.

Understanding the past is crucial for good policy decisions.  The President and Congressional leaders should be paying attention, but there is no evidence that they are.

Failures of Understanding

There is a list of topics that are repeated monthly mistakes by the assembled jobs punditry:

• Focus on net job creation.  This is the most important.  The big story is the teeming stew of job gains and losses.  It is never mentioned on employment Friday.  The US economy creates over 7 million jobs every quarter.
• Failure to recognize sampling error.  The payroll number has a confidence interval of +/- 105K jobs.  The household survey is +/- 450K jobs.  We take small deviations from expectations too seriously -- far too seriously.
• False emphasis on "the internals."  Pundits pontificate on various sub-categories of the report, assuming laser-like accuracy.  In fact, the sampling error (not to mention revisions and non-sampling error) in these categories is huge.
• Negative spin on the BLS methods.  There is a routine monthly question about how many payroll jobs were added by the BLS birth/death adjustment.  This is a propaganda war that seems to have ended years ago with a huge bearish spin.  For anyone who really wants to know, the BLS methods have been under-estimating new job creation.   Who could have known?

As one who has lived in both the academic and trader worlds, I understand the tension.  One good thing about the academic process is openness and peer review.  Most of the Wall Street commentary skates by without any criticism.

With this in mind, check tomorrow's employment summary.  I'll bet that none of the sources mention the crucial points I highlighted above.

Failures of Prescription

If the only issue was mistakes by all of the leading media sources, the indvidual investor could celebrate.  It would provide yet another opportunity for us to gain an edge.  The problem is that investors are also citizens, and we demand and need effective leadership.

If leaders do not understand what is happening, how can they get policy proposals right?  A key question is whether policymakers should go for a macro solution or do targeted programs.  I plan to take this up in more detail, so today's analysis is really only a preview.

Regular readers know that I have enjoyed the intellectual stimulation from the Kauffman Conference of Leading Economic Bloggers.  Kauffman does a quarterly survey of these bloggers and the results are quite helpful.

General topics that have been covered repeatedly include support for immigration and free trade.  Nearly all economists are on board with these ideas, despite the popular objections.  Readers who think the economists are dead wrong should compare their own current views about Greece and a possible referendum.

Turning to specific ideas, the most recent Kauffman poll raised a number of questions, summarized in this table.

 

I am particularly interested in the XL pipeline question.  This raises a classic issue of absolute regulation versus marginal economic calculations.  I have participated in these debates for decades -- scientists versus economists -- and I freely confess my  bias.  I do not like absolute rules.  A typical question happened when an economist thought of an area as a "basin" where there was a reasonable tolerance limit at low cost.  The scientists idea of reasonable cost was "zero."

I emphasize that "A Dash" is not a political blog.  I endorse an agnostic approach, where we can make profits no matter which party is in power.  Having said this, I am astounded by the current Obama policy.  Promoting job creation should include reducing excessive regulation.

I am disappointed that The Kudlow Report once again missed the main stories on job creation, but they did a good job tonight on the pipeline.  Take a look.

 

If any of the  big-time sources cover the missing elements I have described, feel free to prove me wrong in the comments!

Past References

Inside the Obama Plan

Errors on job creation

Perhaps my best prior article on this theme

And a little fun....

The Kauffman bloggers were invited to write their thoughts in the form of a haiku.  I failed to organize readers of "A Dash" in support of my effort, but it would not have mattered.  Maybe I'll be more imaginative next time.  Here was my entry:

Jobs are needed now

Austerity is ill-timed

Action is required

Here are the top four choices.  I'll bet you can all pick the winner!

 

A Consumer Guide to Investment Forecasting

If you are an investor, you cannot escape forecasting.

Those who criticize predictions are guilty of an obvious blunder.  If you are making investment decisions, your conclusions -- and the hidden assumptions and reasoning -- depend on forecasts.

So don't kid yourself.  You are a consumer of forecasts made by others.  These predictions influence your investment decisions in dramatic ways.  Suppose, for example, you have decided to sell all of your stocks.  Josh Brown explains why this is a mistake:

When you go to 100% cash, something changes in your mind.  You get to this place where mentally you won't be satisfied unless you pick the perfect entry point.  It's harder to do some buying at 100% cash than it is at 75% cash or 50% cash - at least then you're "adding to positions" rather than taking a stand from scratch.  Price will drive you crazy without an existing position or average cost to anchor you, whether it's higher or lower than the current quote.

Do not depend on this single quote from a fine article.  I urge you to read the entire piece.  The concept of avoiding extremes may be the single best way to improve your investment performance.

The first step in this process is realizing the most important fact:  Like it or not, you are a consumer of investment forecasts.

Putting a finer point on this, you are probably terrible at evaluating these predictions.   When you go to buy a car or a refrigerator, you do some real work.  How much effort do you make when evaluating investment forecasters?

Avoiding Bad Pundits and Gurus

In a very fine article on the general topic of pundit reviews (once again, well worth reading in full), Scott Anthony's Harvard Business Review Article recommends Four Strategy Gurus to Avoid.  There is a lot of worthwhile nuance, but here is the quote that you will find to be most useful:

 The opiner. Michael Mauboussin, the Chief Investment Strategist at Legg Mason Capital, eloquently describes how the key thing to evaluate when looking at equity investors isn't what they buy but how they choose what to buy. In other words, ask "What models do they use to make decisions? What process do they follow to gather data?" The same holds true for pundits. Offering opinions without explaining underlying assumptions or mental models isn't helpful. The real world is complicated and any prediction ought to at least spell out the assumptions that would have to be true for a prediction to hold. Wrong predictions based on well-reasoned (at the time) assumptions are useful because they help strategists develop their own instincts for assessing future technologies.

 

What to Evaluate

With all of this in mind, here is my summary of how to evaluate forecasters:

1. Is the forecaster an expert in the subject at hand?
2. Does the forecaster have a track record?
3. What model is being used?
4. What assumptions have been made?

 If major media outlets actually applied these tests, there would be a crisis!  They would have no content!

Major Arenas of Forecasting

Here are the most important issues.  If you knew the answers to these questions, you could make big profits from your predictions.

1. Will there be a recession in the next year?  This means a specific definition with a time frame.  No BS.
2. What is the forecast for corporate earnings in the next year?  Be specific.
3. Will the European governments successfully contain their debt problems?
4. Will the Supercommittee reach a conclusion that will be enacted into law?

Investment Conclusion

Regular readers of "A Dash" know that I am working on all of these fronts.  The average investor has been bombarded with negative news on economic headwinds, the economy, Europe, recession odds, and plenty of politically-charged commentary.

My own take is that the ill-informed punditry is too negative.  Most of the popular pundits fail all of the tests we recommend. This is good news -- very good news -- since it suggests an extreme in market valuation.  It helps to explain why stocks like Microsoft can trade at six times next year's cash flow.

I have written past pieces on all of these specific topics, but today it is important to pull it all together.  I plan more specific analyses of each of the major arenas.

Acknowledgment

While I read many sources, I have a special reliance on Abnormal Returns.  When I am on the road for a few days (as I was last week) I know how to make sure that I am completely in touch with the market.  This story was inspired by links from AR.  People should realize the synergy in the blogosphere.  Excellent curation of financial stories stimulates new stories.

[long MSFT]

Finding the Best Information about Europe

Every day US equity investors awaken and check futures trading and the latest news from Europe.  What might seem like small tidbits of information have major effects on the total market cap for US stocks.  It may not make sense, but it is the reality.

In this environment, it is important to ask:  Whom do you trust?

The answer is more elusive than we might think.

The chief candidates are the following:

• The market
• Political leaders
• Bank executives
• Leading analysts, pundits, and bloggers
• Rumors

Maybe I missed something, but that should get us started.

This morning's market action showed the problem.  Mark Gongloff's prolific blogging at the WSJ kept you on top of the twists and turns.  The market rallied on early comments from Treasury Secretary Geithner offering a guarantee against a Lehman-like event in Europe.  There was then selling because of a report that Austria had rejected expansion of the EFSF.  Then we had a rebound when it was only a delay.

Get ready for months of this, as the 17 different legislatures consider the EFSF, the ECB deliberates, the IMF ponders, the G7 and G20 consider..... well, you get the idea.

If you are a long-term investor, the volatility represents Mr. Market offering you a chance for good prices -- assuming that you are not in the end of the world camp.

If you have a shorter time horizon, or have genuine worries about the financial system, you need to know whom to trust.

My Handicapping

Here are a few thoughts on each of the sources you might consider.

• Markets.  Should we accept the verdict of the market on Europe --- the high credit default swap rates, etc?  Is Greece definitely going to default?  Here is the dilemma.  Everyone pointing to the market as the ultimate source on this is a liar!  If you asked them if they believed markets were efficient, they would say "no."  Otherwise they would have no job.  All of us get edge by finding market mistakes.  So pointing to the markets on this one occasion is hypocritical, self-serving and inaccurate.  It is confirmation bias in action.  Furthermore, I believe (but cannot prove) that the CDS market on European sovereigns and banks is relatively thin in relationship to what some can make by shorting the banks.  This is not like 2008.  We do not have an AIG selling CDS instruments with no collateral, so the price can be driven up more readily.  Then you email David Faber to make sure that he reports the bad news.
• Political Leaders.  Should we accept the statements of political leaders? We all know that they are trying to maintain confidence.  We also know that there are no guarantees.  When the Geithner news came out this morning, CNBC reported from both Rick Santelli and Bob Pisani -- veteran floor observers.  No one on either floor believed Geithner!  Here is the dilemma.  We all know that it pays to be contrarian.  Maybe everyone is too skeptical.  The collective memory of the Street is sketchy and simple.  For proof, do you really know what Bernanke said when he talked about subprime being "contained?"  If you do, you are one in a thousand.  Most people just accept the Wall Street Truthiness.  When it comes to this subject, no one is a contrarian. It is "smart" to dis the politicians.
• Bank Executives.  In 2008 we saw a number of statements from executives that proved to be inaccurate.  They could have been lying, mistaken, or inaccurate in their expectations about upcoming behavior.  Most of them did not see the collapse of short-term lending and the aggressive impact of FASB 157.  Is there a lesson?  What I do is to listen carefully -- very carefully -- for specifics.  I consider the overall exposure to dubious lending, the acknowledged level of markdowns, and the reliance on short-term fund sources.  Most traders reject corporate executives because they have "learned the lesson of 2008."  This is a gross oversimplification.  There is a legitimate concern that this is a crisis of confidence, so we need to evaluate each statement on the merits.
• Pundits.  Hooray!  Here is our chance to shine.  Anyone who can parse the information and avoid a knee-jerk reaction adds value.
• Rumors.  Forget them!  Enough said.

Conclusion

Most traders and pundits are wrong about Europe because they are over-weighting markets and under-weighting information from political leaders.  This is not black and white, but it is a dark shade of gray.

I expect that there will be some European solution that will drag out, displease many, and consist of a patchwork of plans.  My trader friends think in simple heuristics and binary solutions, so they will not see this coming.  It is a classic wall of worry, playing out over months.

Since I mostly focus on US equities, I have a second line of defense.  There is really no evidence of a US risk, other than the fact that stocks have declined.

Investment Implications

The most aggressive play would be European banks, but this does not fit my risk/reward criteria.  You can get plenty of leverage on this situation with US stocks, especially financials and those perceived to have European exposure.

I hold JPM and MSFT, as two good examples.

Wall Street Myths and Truthiness

Our newest addition to the list of  pages on the side panel deals with the myths and "truthiness" commonly propagated on financial TV and in the blogosphere. The page is posted in full below:

In an effort to promote more empirical thinking in the blogosphere, one of the main themes here at A Dash is to expose Wall Street myths and “truthiness.” I laid out my major objectives when I began a series on this subject in December 2, 2008.

1. Identify a widely-held belief or conclusion where supporting evidence is sketchy;
2. Raise this topic for further discussion and analysis;
3. Consider what facts, if any, might prove the conclusion to be incorrect.

In A Search for Catalysts (December 3, 2008), I considered a number of widely held beliefs that had the potential to set the market in motion.

• The SEC report on mark-to-market accounting, due on January 2nd.  This might recommend reporting transparency, but some relief on the official asset calculation.  Or it might not.
• Housing initiatives.  The Treasury is hinting at a new plan to reduce mortgage rates.  The Fed has already acted.  We expect the market to be skeptical of both, so it may take some real evidence to change opinions.
• Corporate earnings.  No one will believe anything from Q4, so if there is positive news, we are waiting until April -- at least.
  

I have been fighting these myths on Wall Street – especially those related to the BLS and the Birth-Death Adjustment (August 6, 2009) – literally for years. This is just another illustration of how “truthiness” has its way of permeating conventional wisdom.

“As always, our motives are to make the best use of available data.  The multi-year criticism of the BLS and the methodology used has been shown to be incorrect.  Despite this, the myth prevails.  This is due partly to the lack of any mainstream media coverage of the BLS viewpoint.”

Back in April of 2009 I took issue with pundits who felt that the Financial Accounting Standards Board was caving to political pressure on its mark-to-market decision. It was a common case of bureaucracy being drastically oversimplified. As I wrote then:

“Various opponents of change claim that FASB caved in to political pressure.  This is an easy story for journalists to write and for pundits to criticize.  None of them exhibit any understanding of how the American political system works.  They are writing to a receptive audience, which shares their pre-conceptions about how government should work.”

Much of the time mainstream media is largely responsible for spreading these rumors and myths in a misleading fashion. In Popular and Critical Acclaim (June 8, 2009) I quoted an article by Barry Ritholtz in which he suggested a number of ways to improve financial television. He writes:

“Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.”

At the end of the day, the independent investor simply cannot expect to be successful by following the conventional ‘wisdom.’ Turning a profit means careful analysis from empirical data.

Political Power: Who Makes the Call?

Last week saw the FASB proposals for some modest adjustments in the mark-to-market rules.  We were on the road for a campus guest lecture, trying to do a little giving back.

The coverage of this was amazing.  Seeking Alpha had a block of stories, all Editors' Choices. They all were very opinionated and critical about the decision.  Apparently Seeking Alpha could not find anyone who thought it was a good decision, since there were no Editors' Choices in support.  Bloomberg and other MSM sources bemoaned the "political pressure" on FASB.

These commentators all need to go back to school.  We have so many blogging economists now.  Why can't we get some help from some blogging political scientists or public policy types?

There is no subject where the gap between the self-perception of knowledge and the actual understanding is so great.

Let us try some examples.

How Experience and Education Colors Advice

Let us take a problem like environmental policy.  Let us further suppose that you had our job, teaching young people about these issues.  Your team included an economist, a scientist, and you.

Would it surprise you to learn that the economist favored a free-market solution with minimal regulation?

Would it surprise you to learn that the scientist thought that all pollution was bad?

The public policy problem is one of reconciling competing viewpoints and finding outcomes that generate something good for society.  (Defining this is difficult, so books are written about it.  Defining the public interest is beyond our scope.  For the moment, let us just accept that there is a  broad public interest, and it would be good to find it.)

On the environment, the solution might be a recognition that driving pollution to zero is too costly.  We might recognize that some firms can improve more readily than others.  The trading of "pollution rights" was an idea from the 70's and we are still debating it now.

Please note well that there is no criticism of either the economist or the scientist.  They are very intelligent and have great knowledge.  They are smarter and know more than most of those pundits evaluating their comments.  They are good!  The problem is that they see the world through their own experience.

We need a broader viewpoint.

Let's try another example, one that is familiar in the decision-making literature - the Cuban Missile Crisis.  Briefly put, the US discovered that the Russians were building missile bases 90 miles from our shore.  It was a challenge that could not be ignored.

A team of advisors presented information and options to President John F. Kennedy.  For those of us who are old enough to remember, this event was the closest we came to nuclear war.  It was important.

(An aside -- Art Cashin uses this as a training story, since he was then a rookie trader.  The question was how to trade the crisis.  The answer was to buy, since if it was not solved, trading longs would not matter!)

The Air Force advisors recommended a "surgical air strike."  Further evaluation showed that the strike might not be as precise as hoped.

The Army thought that an invasion of Cuba was called for.

The Navy recommended a blockade, preventing further delivery of missiles and material.

The State Department sought a political solution.  They thought that the Russians were bargaining about Berlin.  They suggested that we might give up our Turkish missile bases, something that was no longer really relevant for US strategy.

Political advisors thought that a quid-pro-quo in Turkey would be a sign of weakness.  If we did this, it should be through a back channel.

Please note that all of these advisors were very intelligent and had great knowledge.  They were all good -- very good!

The public policy problem was to reconcile the differing advice.  The actual decision -- a "moving blockade" giving Khrushchev time to respond and to allow the back channel to work --is hailed as an example of excellent Presidential decision making.  We did not go to war, and the missile bases were removed.

Implications for FASB

So what does this have to do with the Financial Accounting Standards Board (FASB) and the mark-to-market decision?

The first thing to understand is that the SEC, which has the decision about where to vest accounting rules and oversees FASB, is not a branch of government, like the Supreme Court.  It is an Independent Regulatory Commission.  There is insulation from normal politics, since it is not wise for routine politics to govern accounting rules.  The SEC must have at least two members from each party in a five-member commission.  The President has the power to appoint, but not to fire members.  There is significant insulation from routine politics, but it is not like the Supreme Court.

The Problem

The mission of FASB is accounting.  The intelligent and expert members of this group make very good decisions, but they look at the world from the perspective of accountants.  They want to force companies to reveal information to investors.  It is their mission, and they do it well.

The current problem is that FASB instituted FAS 157 at the worst possible time.  It was a new rule and probably a good one.  The implementation of this rule led many accountants to take the most conservative view of assets held by financial institutions.  While the rule provided some flexibility in implementation, most accounting firms in the post-Enron era chose a conservative course.  Many had the government-dictated death of Arthur Andersen and the loss of accumulated partnership interests at the forefront of their thinking.  Why take such a risk?

Meanwhile, the problem was much broader than the accounting question.  The new rules might have been implemented quite safely a few years ago.  Accountants could learn the rule and also the exceptions.

Instead, the implementation came at the worse possible time.  The forced write downs of assets contributed (did not cause, but contributed) to a death spiral.  Capital was subtracted from firms faster than the government could add TARP money.  Private capital was frightened away by the threat of further write downs.

Some misguided pundits and bank analysts have seized upon the continuing losses as evidence that they were right.  In fact, the rules were designed to make them right.  Had the rules been addressed in a timely fashion, the death spiral might have been stopped.

Enter Congress

Many in Congress noted that there was a wider public interest, something extending beyond the strict notion of accounting rules.

Congress, as part of the original TARP legislation, mandated a study of these rules within 90 days.  Former SEC Chair Christopher Cox and company conducted the study.  There was plenty of evidence, including some from us.  The Cox group made a finding, just before the door hit them on the way out.  Their conclusion was that the FAS 157 rules were not that important for bank failures.  This conclusion, an official finding by the SEC, is rightly viewed as biased by many of us.  It is nevertheless cited by many in supporting the current rules.

Unhappy with this outcome, a sub-committee of the House Financial Services Committee held hearings and expressed some displeasure.  There was some tough questioning of SEC and FASB leaders.

Is this political pressure?  Of course.  It is a completely appropriate exercise of Congressional oversight, warning FASB that their viewpoint was too narrow for the circumstances.

There is absolutely nothing wrong with this Congressional action.  There was not even any legislation -- just some nudging in a public hearing.  This is precisely what Congress should do -- focusing attention on the broad public interest.

The Outcome

The result of this political "pressure" was a very modest tweak to the FAS 157 interpretation, much less than many thought was needed.

The pundit reaction to this has not been accurate.  Various opponents of change claim that FASB caved in to political pressure.  This is an easy story for journalists to write and for pundits to criticize.  None of them exhibit any understanding of how the American political system works.  They are writing to a receptive audience, which shares their pre-conceptions about how government should work.

We are still awaiting the actual new guidance from FASB, but it seems to be pretty tame.

The delay in addressing this issue has been a failure of the political system, which moves slowly and must deal with those in power.  Had the issue been raised eariler, or if the crisis had come later, the outcome might have been quite different.

Takeaways

We have had many emails from accountants.  Please note what we are not saying. Accountants are  intelligent and serving their mission.  Like the Air Force in the Cuban Missile Crisis they are good -- very good!

The problem is that their perspective is too narrow.  We need rules that provide information to investors without crippling the US economy.  Since concern about declines in regulatory capital is not their defined mission, they do not make it part of their decision.

FASB is not elected by anyone.  FASB should not run the economy.  That is what we mistakenly allowed to happen.

Market Curiosities

So many issues -- so little time.  Let us try a few quick takes on some current issues.

Selling the GE News.  We watched with some wonder as selling ensued on the basis of a the announcement by S&P of a negative outlook for GE's triple A bond rating, perhaps in two years.  Surely the issue was widely known, as is Jeff Immelt's determination to avoid this outcome.  If investors doubt his plan, why wait until the S&P announcement?

Additionally, when did everyone suddenly decide that the ratings agencies "got game."  At one moment they are the villains of the CDO fiasco, but now they know better.  Were we alone in this reaction?  No, we see that the astute team at Bespoke Investment Group is on the story.

Bush Delay on Auto Companies.  When the Senate failed to pass legislation to help the auto companies last week, there was some interesting bargaining and speculation.  The measure had majority support, but a procedural vote brought to the floor by Majority Leader Reid showed that the votes were not there to block a filibuster.  In the aftermath, there was widespread speculation that conservative Republicans held firm because they "knew" that President Bush would come to the rescue.  Others speculated that the UAW held the line because they had the same tip.

In short, the parties did not want to negotiate a solution in haste, preferring to sit around a table with a few months to reach a solution.  Now that everyone sees the effect on car sales (see Calculated Risk on Chrysler) and the Bush delay, we wonder if there are any second thoughts.  We still expect action, but it not have the form expected by the parties last week.

Gaius Marius is on this case, discussing the problems with the bankruptcy alternative.

Our take.  The government role should be to create the right incentives for the needed bargaining and let the parties work it out.  This means a firm deadline and some guidelines, but not a dictated solution.  Sen. Corker seemed to be making some headway on this.  The goal should be to achieve the restructuring without the stigma.

Warren Buffett.  In our introduction of the concept of Wall Street Truthiness we noted recent criticism of The Oracle of Omaha, including suggestions that he has "lost it."  Regular readers know our preference for the long term and real data versus an incident or two.  Mebane Faber has a great analysis of the Buffett record, including data and simulation tools.  The results had some surprises, even for those of us who are Buffett fans.

Fed Policy Moves.  It took less than twenty-four hours before the punditry decided that the Fed moves were going to be inflationary -- or ineffective --- or both.  This pattern of market reaction has been typical for months.  Policies that take many months to implement and get traction are declared worthless in the absence of instant results.  Many of those leading the critics, including the CNBC "devil's advocates" do not have much background or expertise on the subject.

Why not look to someone who has both the knowledge and experience?  Readers should consider Bob McTeer's viewpoint.  He has been a practical voice of reason for many months.  Since he is a courteous man, and not a loud and fast talker, he seems to get shouted down on these programs where they put up six or eight talking heads at a time.

Our Take.  There will be time to move from fighting deflation to fighting inflation.  Readers who are not familiar with the importance of the velocity of money should bone up.  You are going to be hearing a lot about the concept.

Wall Street Truthiness: A New Series

Here at "A Dash" we are always interested in things that become part of the conventional wisdom with little supporting evidence.

To find the right terminology for this concept, we turned to a leading source, Stephen Colbert on "truthiness."  Here is the Wikipedia definition:

Truthiness is a term first used in its current satirical sense by American television comedian Stephen Colbert in 2005, to describe things that a person claims to know intuitively or "from the gut" without regard to evidence, logic, intellectual examination, or facts.

It is important at the outset to be very, very clear about our intention.  We are not saying that the CW is wrong, just that the evidence does not support the conclusion.  Also, the CW is not totally bereft of facts; it is more the lack of a true scientific method.

As always, evidence might not matter.  The CW drives the market, and the market often becomes the reality.

Eventually, of course, truth will out.  But in the long run, we are all dead.

Having exhausted our set of pithy quotes, we are confident that you have the drift.  Our objective will be to do the following:

1. Identify a widely-held belief or conclusion where supporting evidence is sketchy;
2. Raise this topic for further discussion and analysis;
3. Consider what facts, if any, might prove the conclusion to be incorrect.

Reader Participation

This is a game that is open to all.  We do not necessarily disagree with the propositions advanced, but obviously we lean that way.  Anyone can join in with evidence, but it must be real evidence, not just an opinion.

Starting Agenda

We have a few topics in mind.  Here are things that we hear almost every day.  The "truthiness indicator" hits the red zone when some TV pundit sounds off on the following:

• The recession is already a year old, so it is nearly over.  Look at the last five recessions.  (Our short take - -not enough cases in the universe.  This recession could last much longer.)
• We have many years of economic distress in front of us.  It will not be a "V" recovery.  (Who can know this?  Some programs will kick in and attitudes will change.  How long?)
• Hank Paulson dumped the original TARP idea because he learned that all of the financial assets held by major institutions were worthless.  (He does not know, you do not know, and neither do we.)
• The economists at the NBER, the official recession-dating group, are clueless bozos.  They are way behind all of us smart folks in knowing that there was a recession.  (Their mission is different.  Traders do not understand research purposes.)
• Warren Buffett has lost it.  (Get real.  When something very unusual -- a black swan -- intervenes, normal metrics are thrown off.  It does not mean they will not be proven right.  Think about long-term records).
• The Baltic Dry Freight index is in a multi-year funk, with little hope of recovery.  (Who knows?)
• None of the government "bailout" initiatives have worked, and none will.  (This is complicated.  Bernanke tried to explain it, but no one was believing).
• President Obama will hike taxes and kill the economy.  (There is some good evidence of moderation for those trying to be objective).

Conclusion

For each item, we want to identify the conventional wisdom and the evidence.  The list is open for nominations.  Please join in!

We will take up each in turn with more detail, and revisit as indicated.

It is important for everyone to realize that this is a time of extreme stress, and therefore a time of opportunity.  The point is to look forward.  This is difficult to do when no investment seems to work.

A strong approach would be to examine the propositions with a view toward what information might provide a refutational catalyst.  Our preliminary assessment is that the catalysts are still many weeks or months in the future, but more study is needed.