I love statistics. My favorite book is “Money Ball” by Michael Lewis about how Billy Beane turned around the Oakland A’s baseball team with the help of Paul DePodesta. The two combined to rethink how to evaluate talent – removing the “gut feel” of a scout and replacing it with a new look at the performance statistics that really mattered. Since their system came up with different attributes than most other talent evaluators, they were able to acquire good players “on the cheap”. His team did make it to the American League Championship game, but not to the World Series. But it was still quite a turn around.
But to the point, one thing that Money Ball highlighted is that statistics, by themselves don’t suggest a course of action. Statistics need to be interpreted. What is important or relevant is most times open to debate and still subject to human bias. Thus the interpretation that statistics (and I will qualify with misused statics) are nothing more than damned lies!
For the past several years, and especially last year the financial media and talking heads insist on talking down the economy and raising the specter of the imminent recession/market crash. Had an investor listened, they would have missed out on one of the best years ever in terms of the S&P 500’s return. Despite my more paranoid nature, we stayed pretty much invested throughout the year. I attribute this decision to focusing on the statistics that matter to the market and ignoring those that don’t.
One example is debt. And in this case, I am only talking about consumer debt. Analysts spend a lot of time talking about the volume of debt. With debt levels at record highs, a recession is most certainly around the corner. Instead they should be talking about the number of dollars consumers spend on servicing the debt. And only then, in relation to the dollars available to make those payments. Debt does not become an economy wide problem unless increasing numbers of people can’t make their payments. Below is a graph from the St. Louis Federal Reserve that shows the historic amount of household debt payments as a percentage of disposable income (after tax income).
While the percentage is rising, it is currently near an average level of the last 40 years or so and well below pre financial crisis and tech wreck levels.
What this tells me is that the consumer is pretty healthy. The economy is still nearly 70% consumer driven, and the consumer relies on debt. Debt servicing payments have room to grow, especially if incomes continue to rise.
What Does Matter?
The corollary to the debt is too high argument is that, if interest rates increase rapidly debt service costs will rise and the graph above could start looking ugly soon. Yes, and if monkeys start falling from the skies. I grew up in the 1970’s, the years of double-digit inflation, (inflation is what drives interest rates higher). 90% of economic thought at the time revolved around inflation. Inflation was talked about more than debt is today. I was schooled on inflation. I too am paranoid about the prospects for inflation. But guess what? It is just not on the horizon. Remember one phrase – global capacity utilization. There is just no price pressure on anything that can be manufactured overseas. Country of origin doesn’t matter. And the world is full of unemployed people that will work for a lot less than Americans. The Steve Jobs of the business world will continue to pay sustenance level wages to women and children around the world as long as a sustenance level wage is the only alternative to no wage.
Where we do see inflation is in services. Tradesmen are in high demand and so far, you can’t fly in a plumber from China to remodel the bathroom and then fly them home for less than the cost of the local plumber! But such services are still a small enough part of the overall economy that they haven’t had a major impact on the overall national numbers.
What are we Watching?
In addition to the graph above we have a systematic approach to looking at the economy. A non-emotional statistics driven flowchart of steps taken to interpret data. We look at things that history and economics say really matter. Things like money supply – the biggie! Not the yield curve that everyone else is obsessed with, but the forward yield curve and for the market it’s always all about future earnings.
As we have transitioned into a new calendar year remember too that 2020 is all but in the books for the stock market. While the election process is likely to cause more than normal volatility, the market’s focus has turned to 2021 and that crystal ball is still pretty hazy.
The best advice we offer, is the same advice: Make a plan and stick to it, that way you are not emotionally reacting to the story, and the bad statistics, of the day.
For a plan for your portfolio we are always here to help.
Bill DeShurko, President and Portfolio Manager
James Kilgore, CFP
Ofc: 937.434.1790 Bill@401Advisor.com or Jim@401Advisor.com
