What the Past 3 Years Have Taught Me

Was sitting here watching my tweets, looking at data, and reading the news flow this morning when I started thinking about what the last three years have shown me. So I thought I’d pen them and share them with the 2 (maybe 3? hoping for 3?) readers of this bog. I don’t think these are profound or earth-shattering, but since folks seem to be commemorating things today (We’ve sunk to commemorating over-liquefied 50%+ retracements? Really?), figured I might as well chime in before the real Professor Pinch posts something unrelated and mucks up my abysmal SEO.

A String of Events That “Couldn’t Happen,” “Shouldn’t Happen”, or “Can’t Happen” Can Indeed, Happen

Call it my paraphrasing of Taleb. But the truth is, we started seeing tremors in mortgage origination back around this time, three years ago. Which is where I start the clock on the crisis, not the NBER’s definition. And the truth be told, I don’t even think it’s true. I think our methods for estimating likelihoods and severities of events are flawed. They’re far from perfect. Gaussian distributions matter little to me, unless I’m reading something that has been stylized to show me, the dear reader, how it should work. Yet our literature in finance and economics is filled with Gaussian assumptions. I don’t offer this up in a “destroy the models and lynch the quants” sort of manner, far from it. I think we need that thinking and the benefits of data visibility/transparency (we can’t analyze it until we record it/store it), but the mold needs to be broken in terms of what we do with it and how we do it. I tend to think we’re a lot more infantile in this realm than we believe we are. We need to focus on building mousetraps and metrics more.

Also, there were tell-tale clues all along the way to this point, but they were collectively ignored, forgotten, or disputed. I have a lot more to say about this, but away from this post. The “hindsight is always 20/20” rebuttal usually comes out of this, but frankly, I don’t buy that. I think you could’ve seen a bunch of this if you chose to look.

Never Underestimate a Political Hack’s Desire to Clean Things Up Over a Weekend

Just read “Too Big to Fail” to see what I mean. That desire has had a lot of manifestations over the past few years. From mortgage mods to unorthodox Fed policy to stimulus largesse, the desire to just make pain stop is one I frankly underestimated. And the lengths they’ve went to are simply fantastic. This acts as a lead-in of sorts for my next learning.

The Things Political Hacks Do Are Great at Creating Cross Currents and Choppiness

What do I mean by that? Simple. Throughout ’06 in the run-up to the mortgage meltdown that started in ’07, 2s/10s on the yield curve was inverted, which meant 10yr funding was cheaper than 2yr – not typical. But as the Fed aggressively cut rates, sparking a rally in short-term money, the curve started to normalize. And with the Fed purchasing MBS and starting up its alphabet soup of liquidity facilities, the effects were amplified.

All of which was supposed to spark a run to risky assets, which it did. Frankly I was shocked at how well it worked, because I just assumed people would’ve learned to exhibit a little more restraint, and been a little less willing to play along with the Fed. But, mea culpa, I can admit that. While it has made a great run-up thus far, it’s not something that looks like it can be sustained. Well, at least to me, it doesn’t.

So I look around and question what’s real and what isn’t, kind of like Neo spending night after night trying to figure out what The Matrix is. Because I want to find relatively clean data and observations to help me price risk/return. Not data points that feel like they’ve been dampened, scrubbed, massaged, and filtered to give the appearance of normalcy, which is what I feel like has been done. But if you start with that premise, you arrive at some conclusions you would never arrive at otherwise.

It kind of reminds me of the first day I tried to surf. Nasty on-shore wind, beach break thrown out of whack by a tropical storm somewhere near Bermuda, in short, a mess. But I went out, managed to catch a few good ones and had a good time, mostly for the friends I went out there with – not the waves. In hindsight, I was probably better off staying out of the water. All the starts and false starts in spotting waves made it tough. So as a result, I’ve become a bigger fan of keeping dry powder and working on stripping away noise. I feel like I spend a lot more time on this now than I used to.

Cross Currents, Seasonal/Cyclical/Secular Trends

This is where things have been tricky, if not treacherous. I’ve become a lot less enamored with government statistics on the economy, because frankly, I don’t think last year’s seasonal effects can capture seasonality one year forward. Maybe it’s climate change and the cyclical nature of weather that does it. I don’t know, but I find myself yawning a lot more when retail sales, NFP, housing starts data come out during the winter months. It just seems like putting a lot of weight on observations skewed by cold temperatures, Eastern Standard Time, snowfall, and holiday shortened months just doesn’t make sense. It’s just noise to me. That means I’m essentially using the months March through October as my barometer of economic health, and I’m OK with that.

So when I think of the jobs data, as easy as it is to be bearish/cynical about it, there are legitimate reasons we can see some things turn around. A lot of work that has to be done simply doesn’t halt because we’re in the Great Recession. Sure, construction and real estate related work isn’t going to be what it once was, financial services work won’t be either. But time still marches on and there will still be some work that has to get done. Governments still need people, hospitals, hotels, and other places need to hire too. My wife and I are still going to have to do/provide plenty of things for our son, so we need goods and services for that and somebody to provide them to us. And we’re not the only ones who need them, there are plenty of others in the same boat. We can argue about how much and at what wage, but the market should be able to sort that out. Trees don’t grow to the sky and they don’t crash straight to hell, either. Call it Zen and the Art of Bearishness if you want, but it’s a struggle to find balance.

I guess I’m trying to say there’s a certain rhythm that all of these things keep, regardless of what any one person or group(s) of people may think or do. What got me thinking about that the most was the weather. You go out, you talk to people, and you’re bound to run across some who act like winter is never going to end and we’re destined to a cursed life of nothing but cold and snow. Next thing you know it’s almost 70 degrees, sunny, and we’re in the second full week of March. The days are getting longer, you actually see and hear birds, and you realize some things are the same as they ever were. Psychology is one of those things that’s so powerful, yet its influence is often misjudged and misunderstood. Folks seem to get way too high and way too low these days.

At any rate, Happy Anniversary…

Advertisements

Leave a comment

Filed under About me, government, macro, Markets, Way Forward

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s