That sinking feeling
I wrote last week about central banks trying to figure out how to remove the "stimulus" they've injected to get economic growth going.
This week, the central banks of Australia and Norway started removing their stimulus by hiking interest rates.
Markets were not impressed.
Monday to Wednesday, the S&P 500 was down 3.4%. On Thursday, the market rallied 2.3% on a better than expected report of Gross Domestic Product (read here for my take on why GDP isn't the best measure of economic health), but then tanked on Friday (currently down 3.8% for the week).
This just goes to show that what the government can giveth, it can taketh away. Now that economic props are being removed, investors seem very worried about how well the economy can stand on its own.
This should not be a surprise.
And it seems like the worst is yet to come. If a Norway (population 5 million) and Australia (22 million) can tank markets, just think of what happens when Europe (500 million), the U.S. (310 million) and China (1.35 billion) raise rates. Ouch!
Don't get me wrong, I think central banks have to stop printing money or we'll have the much bigger problem of hyper-inflation. It's good that world governments are getting around to removing props.
But, you have to wonder about people that get overly excited about markets going up when it's clearly just due to government stimulus.
At some point in time, the props had to be removed. And, just like every other time in history, markets aren't happy when that happens.
Nor do I mean to indicate that markets can't keep going up. Governments can keep trying to prop things up. In fact, their props could lead to high inflation, in which case markets should be expected to go up (though perhaps not in real, inflation-adjusted terms).
This all comes back to the inflation/deflation concerns I've voiced in the past (here and here). If we get high inflation, you don't want to be sitting in cash. If we have deflation, you won't want to own commodities.
As the Chinese curse goes: may you live in interesting times. These are interesting times, and call for a sophisticated investment approach.
This is an amazing opportunity for investors.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, October 30, 2009
Friday, October 23, 2009
Exit strategy
It's no secret, the world economy was propped up last fall and winter by the governments of the United States, Europe and China. If it weren't for those props, we would probably still be on the way down.
The question now becomes, how will the governments of the world remove those props?
In ancient Rome, building an arch required props, too. Once construction was complete, the props were removed and the arch would stand firmly in place. It is rumored that the builder would stand underneath the arch as the props were removed to show how confident he was in his construction.
The reason why such a builder would confidently stand under his arch is that he knew the arch would hold when the props were removed. My question is: how confident is anyone that world economies will stand on their own without props?
I think current builders have demonstrated their confidence by both not removing the props and by only tentatively talking about their exit strategy, which is a euphemism for removing the props.
How can the central bankers of the world and various treasury departments know when to remove their props? This is a tricky question.
If they remove the props too early, the economy will go back into recession. If they wait too long, then high interest rates and high inflation may do the same thing. The governments of the world have a very difficult task ahead of them. I don't envy their position.
But, as an investor, I have to wonder what will happen.
Will the world economy stand on its own even though the fundamental underlying problems really haven't been addressed?
Are government bureaucrats aware that a huge number of mortgage loan resets are coming up and may send the housing and credit markets back into decline?
Have individuals and companies trimmed expenses enough to foster self-sustaining growth?
I don't have any answers to those questions, but I know I'm not going to be standing under this particular arch as the props are removed.
Instead, I'm repositioning my clients and my own money to prepare for the possibility of a wobbly arch. That means buying high quality companies and perhaps a little insurance against the downside. It means being prepared for the possibility of both deflation and inflation.
It will be interesting to see what happens, even more so a good distance away from the arch.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
It's no secret, the world economy was propped up last fall and winter by the governments of the United States, Europe and China. If it weren't for those props, we would probably still be on the way down.
The question now becomes, how will the governments of the world remove those props?
In ancient Rome, building an arch required props, too. Once construction was complete, the props were removed and the arch would stand firmly in place. It is rumored that the builder would stand underneath the arch as the props were removed to show how confident he was in his construction.
The reason why such a builder would confidently stand under his arch is that he knew the arch would hold when the props were removed. My question is: how confident is anyone that world economies will stand on their own without props?
I think current builders have demonstrated their confidence by both not removing the props and by only tentatively talking about their exit strategy, which is a euphemism for removing the props.
How can the central bankers of the world and various treasury departments know when to remove their props? This is a tricky question.
If they remove the props too early, the economy will go back into recession. If they wait too long, then high interest rates and high inflation may do the same thing. The governments of the world have a very difficult task ahead of them. I don't envy their position.
But, as an investor, I have to wonder what will happen.
Will the world economy stand on its own even though the fundamental underlying problems really haven't been addressed?
Are government bureaucrats aware that a huge number of mortgage loan resets are coming up and may send the housing and credit markets back into decline?
Have individuals and companies trimmed expenses enough to foster self-sustaining growth?
I don't have any answers to those questions, but I know I'm not going to be standing under this particular arch as the props are removed.
Instead, I'm repositioning my clients and my own money to prepare for the possibility of a wobbly arch. That means buying high quality companies and perhaps a little insurance against the downside. It means being prepared for the possibility of both deflation and inflation.
It will be interesting to see what happens, even more so a good distance away from the arch.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, October 16, 2009
(Innate) Talent is Overrated
I just finished reading a truly incredible book: Talent is Overrated by Geoff Colvin.
In it, Colvin highlights that world-class performance is not something you're born with, but the result of years of deliberate practice.
Academics have long studied what differentiates world-class performers from everyone else. They've looked at experience, inborn abilities, and intelligence and memory, among many other things. None of these sufficiently explain world-class performance.
What does? Deliberate practice.
After studying Berlin's best violinists in the early 1990's, and how they differ from good and mediocre violinists, researchers found that world-class performers had practiced much more, and much more intensely, than others. This research has since been confirmed in many other fields, including sports, chess, science, investing, business, music, fine art, etc. Deliberate practice is what made Jerry Rice, Mozart, Tiger Woods, Sir Isaac Newton, Yo Yo Ma, Benjamin Franklin, Warren Buffett and too many others to count great.
Let me be specific here. Deliberate practice isn't just practicing, but practicing in a very specific way. It's activity designed to improve performance (often with a teacher's help), it can be repeated a lot, feedback on results is continuously available, it's highly demanding mentally, and it isn't much fun.
Deliberate practice requires that you identify specific elements of performance that need to be improved and then work intently on them. That's not just going through the motions. That's figuring out exactly what's necessary to be good and then working hard on those areas. It's working at the edge of one's ability. Think of a violinist practicing a very complex passage of an exceedingly difficult work over and over again until they get it right. Think of them analyzing the way they play and what they must change to get better.
It must be repeated--a lot. Deliberate practice must be done for 4-5 hours a day for around 10 years, or around 10,000 hours, to reach true excellence. It's not enough to practice every now and again, but to practice at high intensity over many, many years. Imagine a violin player practicing 4-5 hours a day for 10 years, and that such repetition makes them better than someone who practices 2 hours a day for 5 years.
Feedback on results has to be continuously available. It's not enough just to practice, but to get objective feedback on your performance. This can come from a teacher or other expert. Or, it can come from simply analyzing your performance over and over again. Think of a violinist getting feedback from an experienced teacher, or recording their practice and listening to it over and over again to master a passage.
It's highly demanding mentally. The intensity of the practice is such that world-class performers break their 4-5 hours a day into 1 to 1 1/2 hour blocks. It frequently takes years to even work up to the point where 4-5 hours a day can be accomplished. Think of a violinist practicing 3 or more times a day to the point of utter exhaustion, and then doing that 5 days a week for years.
It isn't much fun. If my description so far hasn't convinced you, then perhaps the research will. The best violinists, as a group, consistently reported that deliberate practice "is not inherently enjoyable." It requires a lot of effort and self-discipline to practice at this level for years.
I found this research confirmed my own experience with investing. I started teaching myself investing around 14 years ago. Initially, it was a hobby, but within one year I was spending 20 hours a week analyzing investments, expanding my knowledge, learning from the masters, and analyzing my results.
I quickly learned I needed to know a lot more about accounting, valuing companies, analyzing industries and management, etc. I spend several hours a day analyzing new companies. It's especially easy to get feedback with investing because you can readily calculate your performance relative to the market and other investors. Researching particular companies is very demanding mentally and, although I find the work very rewarding and fulfilling, I don't necessarily find the process of intense investment analysis fun. As I like to tell my wife, it's not like drinking a beer and watching a sunset.
Talent is Overrated is a great read. It's almost a guidebook on how to achieve excellence in a chosen field. I would highly recommend it to anyone interested in achieving world-class performance or helping someone else get there.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I just finished reading a truly incredible book: Talent is Overrated by Geoff Colvin.
In it, Colvin highlights that world-class performance is not something you're born with, but the result of years of deliberate practice.
Academics have long studied what differentiates world-class performers from everyone else. They've looked at experience, inborn abilities, and intelligence and memory, among many other things. None of these sufficiently explain world-class performance.
What does? Deliberate practice.
After studying Berlin's best violinists in the early 1990's, and how they differ from good and mediocre violinists, researchers found that world-class performers had practiced much more, and much more intensely, than others. This research has since been confirmed in many other fields, including sports, chess, science, investing, business, music, fine art, etc. Deliberate practice is what made Jerry Rice, Mozart, Tiger Woods, Sir Isaac Newton, Yo Yo Ma, Benjamin Franklin, Warren Buffett and too many others to count great.
Let me be specific here. Deliberate practice isn't just practicing, but practicing in a very specific way. It's activity designed to improve performance (often with a teacher's help), it can be repeated a lot, feedback on results is continuously available, it's highly demanding mentally, and it isn't much fun.
Deliberate practice requires that you identify specific elements of performance that need to be improved and then work intently on them. That's not just going through the motions. That's figuring out exactly what's necessary to be good and then working hard on those areas. It's working at the edge of one's ability. Think of a violinist practicing a very complex passage of an exceedingly difficult work over and over again until they get it right. Think of them analyzing the way they play and what they must change to get better.
It must be repeated--a lot. Deliberate practice must be done for 4-5 hours a day for around 10 years, or around 10,000 hours, to reach true excellence. It's not enough to practice every now and again, but to practice at high intensity over many, many years. Imagine a violin player practicing 4-5 hours a day for 10 years, and that such repetition makes them better than someone who practices 2 hours a day for 5 years.
Feedback on results has to be continuously available. It's not enough just to practice, but to get objective feedback on your performance. This can come from a teacher or other expert. Or, it can come from simply analyzing your performance over and over again. Think of a violinist getting feedback from an experienced teacher, or recording their practice and listening to it over and over again to master a passage.
It's highly demanding mentally. The intensity of the practice is such that world-class performers break their 4-5 hours a day into 1 to 1 1/2 hour blocks. It frequently takes years to even work up to the point where 4-5 hours a day can be accomplished. Think of a violinist practicing 3 or more times a day to the point of utter exhaustion, and then doing that 5 days a week for years.
It isn't much fun. If my description so far hasn't convinced you, then perhaps the research will. The best violinists, as a group, consistently reported that deliberate practice "is not inherently enjoyable." It requires a lot of effort and self-discipline to practice at this level for years.
I found this research confirmed my own experience with investing. I started teaching myself investing around 14 years ago. Initially, it was a hobby, but within one year I was spending 20 hours a week analyzing investments, expanding my knowledge, learning from the masters, and analyzing my results.
I quickly learned I needed to know a lot more about accounting, valuing companies, analyzing industries and management, etc. I spend several hours a day analyzing new companies. It's especially easy to get feedback with investing because you can readily calculate your performance relative to the market and other investors. Researching particular companies is very demanding mentally and, although I find the work very rewarding and fulfilling, I don't necessarily find the process of intense investment analysis fun. As I like to tell my wife, it's not like drinking a beer and watching a sunset.
Talent is Overrated is a great read. It's almost a guidebook on how to achieve excellence in a chosen field. I would highly recommend it to anyone interested in achieving world-class performance or helping someone else get there.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, October 09, 2009
Interesting indicators
I don't put a lot of faith into watching economic indicators. They seem to tell you more what has happened than what's going to happen.
On the other hand, I do watch a couple specific industry indicators that do, in general, give me a flavor of what may be going on economically.
For instance, the price of copper is an interesting indication of worldwide demand for basic materials. Copper goes into so many things that watching copper prices gives me an interesting view into overall economic growth. Copper prices peaked in late August and have been holding relatively steady below that peak.
I also watch the price of oil and natural gas. Oil and gas are also fundamental inputs to many types of production, so watching their prices is also informative. Oil prices, which reflect global demand, peaked in early August and have been trending down. In contrast, U.S. natural gas prices, which reflect local demand, bottomed in late August and have been trending up.
The Baltic dry index, which reflects worldwide dry bulk shipping rates, bottomed in late September and have since climbed over 20%. This indicator lets me know how much shippers are charging to move large amount of dry bulk materials, like wheat or iron ore. When shippers are charging higher rates, worldwide demand is up.
Each week, the Association of American Railroads reports rail traffic for the U.S. and Canada. This indicator shows how many rail cars of containers, coal, bulk materials, etc. are moving around North America each week. This indicator recently peaked in early September and has been trending down over the last 4 weeks.
Add it all up, and what do you get? A mixed picture.
Copper prices are down only slightly. That could be due to higher copper production, lower demand, or some combination. It's not a very bullish sign.
Oil prices are down, too, and this reflects global demand for a fundamental input to everything. This is also a bearish sign.
Natural gas is climbing again, which seems to be bullish for U.S. demand, but it could also reflect the huge slowdown in natural gas production that has occurred over the last year.
The Baltic dry index is up, which seems bullish for global demand. It could also reflect that global shippers are on the ropes with high debt loads.
Railroad traffic is down in the U.S., which seems a bit bearish, but seasonal factors may be impacting the numbers and traffic isn't down by a large amount.
Do you see why watching economic indicators can be problematic. There are no obvious blinking lights and ringing bells. That's part of the reason why economic forecasters and market strategists have such a lousy record of predicting even the direction, much less the magnitude, of markets.
One of my favorite jokes is that market strategists (who forecast market direction) are like diapers; they need frequent changing and for the same reason.
It looks like global demand may be doing better than U.S. demand. But, then again, maybe not.
That's why the smartest thing to do is buy great companies at good prices or good companies at great prices and just ride the market up and down. It works.
Market and economic forecasting? Not so much.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I don't put a lot of faith into watching economic indicators. They seem to tell you more what has happened than what's going to happen.
On the other hand, I do watch a couple specific industry indicators that do, in general, give me a flavor of what may be going on economically.
For instance, the price of copper is an interesting indication of worldwide demand for basic materials. Copper goes into so many things that watching copper prices gives me an interesting view into overall economic growth. Copper prices peaked in late August and have been holding relatively steady below that peak.
I also watch the price of oil and natural gas. Oil and gas are also fundamental inputs to many types of production, so watching their prices is also informative. Oil prices, which reflect global demand, peaked in early August and have been trending down. In contrast, U.S. natural gas prices, which reflect local demand, bottomed in late August and have been trending up.
The Baltic dry index, which reflects worldwide dry bulk shipping rates, bottomed in late September and have since climbed over 20%. This indicator lets me know how much shippers are charging to move large amount of dry bulk materials, like wheat or iron ore. When shippers are charging higher rates, worldwide demand is up.
Each week, the Association of American Railroads reports rail traffic for the U.S. and Canada. This indicator shows how many rail cars of containers, coal, bulk materials, etc. are moving around North America each week. This indicator recently peaked in early September and has been trending down over the last 4 weeks.
Add it all up, and what do you get? A mixed picture.
Copper prices are down only slightly. That could be due to higher copper production, lower demand, or some combination. It's not a very bullish sign.
Oil prices are down, too, and this reflects global demand for a fundamental input to everything. This is also a bearish sign.
Natural gas is climbing again, which seems to be bullish for U.S. demand, but it could also reflect the huge slowdown in natural gas production that has occurred over the last year.
The Baltic dry index is up, which seems bullish for global demand. It could also reflect that global shippers are on the ropes with high debt loads.
Railroad traffic is down in the U.S., which seems a bit bearish, but seasonal factors may be impacting the numbers and traffic isn't down by a large amount.
Do you see why watching economic indicators can be problematic. There are no obvious blinking lights and ringing bells. That's part of the reason why economic forecasters and market strategists have such a lousy record of predicting even the direction, much less the magnitude, of markets.
One of my favorite jokes is that market strategists (who forecast market direction) are like diapers; they need frequent changing and for the same reason.
It looks like global demand may be doing better than U.S. demand. But, then again, maybe not.
That's why the smartest thing to do is buy great companies at good prices or good companies at great prices and just ride the market up and down. It works.
Market and economic forecasting? Not so much.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
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