The Sunday book section of the New York Times used to have a feature called “Notes with Pleasure” which excerpted short passages from books.
Here’s one that appeared in 1992, taken from Neil Postman’s Technopoly: The Surrender of Culture to Technology.
“The fact is, there are very few political, social and especially personal problems that arise because of insufficient information. Nonetheless, as incomprehensible problems mount, as the concept of progress fades, as meaning itself becomes suspect, the Technopolist stands firm in believing that what the world needs is yet more information… . To the question ‘What problem does the information solve?’ the answer is usually ‘How to generate, store and distribute more information, more conveniently, at greater speeds than ever before.’ This is the elevation of information to metaphysical status: information as both the means and end of human creativity. In Technopoly, we are driven to fill our lives with the quest to ‘access’ information. For what purpose and with what limitations, it is not for us to ask; and we are not accustomed to asking, since the problem is unprecedented.”
We have seen many advancements in technology since then (that was, in fact, before the Internet became mainstream), but the same tendencies haunt us. For example, see the MIT Technology Review article, “The Dictatorship of Data.” It uses the story of Robert McNamara — who “fetishized” numbers, winding up in a “quagmire of quantification” — to challenge the culture of Google, quoting Douglas Bowman, who said, “When a company is filled with engineers, it turns to engineering to solve problems.”
With data scientists in ascendance at organizations these days, you can bet that many will overshoot in promoting the promise of their analysis, just as every specialty overshoots when given the opportunity. That is how promise turns into peril.
Accompanying a recent Floyd Norris piece in the New York Times was a graphic that included eight charts on the financial situation of U.S. households. These two panels show the percentage of assets as a share of gross domestic product:
Given the increases in stock and bond prices over the last few years — and the big asset flows to fixed income — I was interested in seeing how the exposure to the bond market had changed. (Even though a simple number wouldn’t give a complete sense of the degree of interest rate and credit risk being taken, it would be a good indication.)
Unfortunately, we don’t get that information from these charts, because the grouping of “stocks and mutual funds” apparently contains all manner of mutual funds, including those that have nothing to do with stocks whatsoever.
This is a common problem. Even big investment outfits sometimes conflate categories in ways that cloud the information rather than shine a light on it. For example, some clients get statements that show fixed income and alternative ETFs mixed in with stocks, because they happen to trade in a way that we associate with stocks rather than fixed income or alternatives.
In all types of analysis, make sure that you are using classifications that make sense for today’s world. That goes for firms, data providers, industry organizations, and governmental entities. The world changes, and investors need to see the true underlying economic exposures in ways that make sense for decision making.
It is amazing how often the manner in which information is delivered gets in the way of that.
Somewhere along the way, in our rush to have everyone do their own presentation materials, we forgot to instruct people in the basics. Consequently, I see reports from big investment firms that violate some basic principles of presentation: Sell-side analyst reports, mutual fund marketing materials, you name it.
The goal is to enable the reader to comprehend as quickly and easily as possible. Here’s the most straightforward trick in the book. If you have a column of numbers of like kind, they should all:
a) have the same number of decimal places, appropriate to the specificity necessary, and
b) be right-justified in the column.
Doing so allows the reader to instantaneously make comparisons of value. If you don’t believe me, give someone a comprehension test with things all jumbled up (which is more often than not how they appear these days) — and then as I suggest.
Here’s a fresh example from Whitney Tilson, found on ValueWalk. Please, Whitney, justify this mess:
It has become popular to use 1994 as the “comp” of the moment for what is going on in the bond market. Felix Salmon of Reuters did just that in a posting titled “Investing in bonds while rates are rising.” His bottom line: Look for a bond manager whose experience extends back to a time when rates were rising.
I posted this comment to the story:
Regarding: “1994, the last time that we had a bear market in bonds.” Part of the problem is that there are so many different kinds of bonds, with different maturities and structures and credit profiles. “The bond market” is a series of markets, at times moving in unison and at times not.
Even in Treasuries, there have been moves since 1994 that have been more dramatic in price than that one.
But all of that is parsing. In broad brush, it has been a bull market in bonds of all types for more than thirty years, so if the test is who has managed through something other than a supportive environment for an extended period, you’re going to have to get some folks out of retirement.
From the archives: I ran into a Wall Street Journal “Abreast of the Market” column from October 13, 1997. It began: “The once-lowly stock market ‘technicians’ are finally getting a day in the sun.”
The article explained how the “confusing bull market” was leading some fundamental investors to explore technical analysis — with the typical arguments for each branch of securities analysis presented much as they would be today.
What caught my eye were the last two paragraphs:
“But even as it attracts new fans, technical analysis retains many detractors.
“‘It shouldn’t be allowed,’ fumes Kurt Feuerman, who manages $4 billion of stocks at Morgan Stanley Asset Management. ‘It’s just self-perpetuating: People buy something because it looks strong and lo and behold, it is strong. It bastardizes the investment process because people don’t have the courage of their convictions to buy and hold stocks when they say they’d rather trust the charts.’”
Feuerman (who is now at AllianceBernstein) probably took some ribbing about his choice of words, since I’m not sure how you would monitor the decision making processes of others. As noted before, we are all in the pattern recognition business, and one meta-pattern is that styles of analysis get overdone along with everything else. As long as they are not illegal (such as insider trading) or manipulative (as some of us think certain machine trading is), we should strive to understand their impact on pricing in the markets and to take advantage of the distortions that are created.
A fundamentalist who thinks that the herd has moved prices off the mark has some tough choices to make, but is afforded a time arbitrage. Unfortunately, many professional investors can’t escape the quarterly performance derby long enough to go with their own processes (and thereby increase career risk). It’s much easier to play along — and perhaps to fume.
Below is the lead item in a recent email from Investment News:
The article opens in this way: “Advisers on the hunt for income should be keeping a close eye on the closed-end-fund space, where yields are double and triple those of traditional mutual funds and exchange-traded funds.”
As with all other manner of “dividend machines” extant, closed-end funds have been running non-stop for quite a while. The question is whether a new rate regime is upon us that will cause them to leak start leaking oil.
The article references the $5.5 billion raised in two closed-end offerings this year by the bond giants Pimco (PCI) and DoubleLine (DSL). Despite the complexity and lack of understanding of closed-end funds mentioned in the piece, they are not undiscovered.
When you have machines that pump out yield — real or not (many “yields” are return of capital), or sustainable or not — there are buyers. The question is when the buyers become sellers. The extraordinary deals in closed-end funds come when the crowd has gone away.
One of the first pieces I wrote when I showed up in the blogosphere five years ago was about warming up the models. That is, thinking about models and probabilities in light of the range of economic outcomes that could occur if climate change were to continue or accelerate.
On May 15, the New York Times featured a story entitled, “For Insurers, No Doubts On Climate Change.” A sidebar said the industry was “straying from the conservative line on global warming.” The president of the Reinsurance Association of America explained why: “Insurance is heavily dependent on scientific thought. It is not as amenable to politicized scientific thought.”
To wit, the industry wants to objectively assess the odds of various scenarios and to price its products and build its business accordingly. Many insurance industry leaders are turning away from the rhetoric of the climate debate and focusing on the real potential effects on their businesses.
Will CEOs in other industries follow their lead?
Which brings me back to the point of my original piece, that if present trends continue much longer, analysts will need to consider the long-term effects in their models (good and bad), and that the pricing of securities could change (up or down) as a result.
Of course, we tend to wait until calamity arrives rather than focusing on the long-term and assessing scenarios. Look no further than the financial crisis which hit shortly after that 2008 blog post. The storms had been building for years, but we ignored them until their fury was unleashed.
Here’s a BlackRock ad that appeared on the front page of the Journal today:
Firms are getting more aggressive in warning about bonds. Sort of. If you go to the BlackRock URL, you’ll see that “rethinking your bonds” means looking at one of the firm’s offerings:
“Backed by BlackRock’s 500 bond experts, the BlackRock Strategic Income Opportunities Fund (BASIX) moves freely in search of the best income opportunities — from a broad range of investments — and adapts as markets change.”
Back on November 1, I commented on a chart that looked at some of the vehicles that were storming ahead in the chase for yield. (They have kept storming since.) It’s great to diversify your income opportunities as BlackRock suggests, but it’s not like it hasn’t been happening for a good long while. When “bonds” come under pressure, you can expect that all of the rest of the yield plays will too. Plus, the big question referenced in that November commentary may be answered, perhaps to our dismay.
I must say that the man of a certain age in the ad, resolutely looking forward, was a direct hit on my demographic. But the “once thought safe, now risky” tagline should be reversed, with “once thought risky, now safe” describing many alternative yield vehicles out there.