Weather, market, economic, political forecasts have similar records – Weekly blog # 744

Caution: “Bears are the worst people to listen to at the lows, and bulls are the worst to listen to at the highs.” – Bank of America Merrill.

Are you Optimistic?

For a number-crunching experienced analyst, it is much easier to be excessively skeptical than believing things will work out well. Please suggest ways I can be more optimistic in the future, as it has been too easy to be pessimistic for more than a year.

Two Big Stories of the Week

Far too much has been said or written about the Federal Reserve raising interest rates by 75 basis points and the Senate’s compromise tax bill. Analytically, all I wish to add are thoughts not discussed elsewhere.

In all the discussion of interest rates related to both inflation and recessions, two long-term critically important areas are not explored.

Most of the discussion has been focused on the size of the increase and its timing. More important is the historical need for recessions (some of which were turned into depressions due to policy mistakes).

Throughout recorded economic history, there have been severe economic/market disruptions caused by known and unidentified imbalances not properly addressed in normal circumstances.

The present imbalances I perceive as not being addressed can be characterized by the lack of sufficient efficiency to produce satisfactory results, some of which are briefly shown below:

• In the US, there are roughly twice as many openings as there are unemployed, with 5% fewer participants in the workforce. Among other factors, this is the combined result of poor schooling and home training, plus unaffordable child care.
• Prospective employers can’t find workers. This is not just the result of insufficient formal “education”, but also work attitudes.
• One example is healthcare, due to regulation resulting from tort lawyers and insurance payers. Unions also don’t help. We all pay for this.
• Another example is the lack of an adequate military force to defend our interests.
• The final topic not discussed in the rate discussion, particularly when mentioning Paul Volcker’s name, is that he needed two recessions to break the back of inflation.

Turning to the new tax bill, which in theory “balances” expenditures with tax collections. There is a classic problem of government-paid workers versus some of the best highly paid tax accountants and lawyers in the world.

Dynamic forecasting is one reason weather, stock, economic, and political forecasters have difficulty on being correct in their judgements twice in a row. (Track bettors know how difficult it is to follow a winning bet with another winning bet in the next race.)

Luckily, it did happen in World War II, when General Dwight Eisenhauer was given command of the largest amphibious landing in the history of the world. At the scheduled time of the main European landing, the weather was poor. The German general’s staff of highly trained logisticians believed Ike would postpone the landing to later in the month of June. However, they did not take into consideration that Ike grew up on a farm in Kansas and spent many years as General Mac Arthur’s speechwriter in the Philippines, both of which experience sudden storms. Ike made the judgment to go ahead with the June 6^th landing. Although there were some difficulties, it established the Americans, British, and other Allies on the beaches before the Germans could reinforce their defenses. This proves that making a bet against the odds can win sometimes.

What Else Happened?

This week, the New York Stock Exchange (NYSE) volume of up price transactions was approximately the same as those on the NASDAQ market, at 13 million shares. The big difference was the number of shares changing hands at lower prices, with the NYSE having 7.1 million and the NASDAQ 9.4 million. (As mentioned in these blogs, the NASDAQ players tend to be wiser traders, due to the absence of index players and, to some extent, wealth managers.) This could be viewed as a cautionary note.

Also, 95% of the stocks in the Dow Jones Transportation Index rose, while only 80% of the stocks in the DJIA rose this week. Typically, more professionals invest in transportation securities than the more popular industrials in the DJIA. This is perhaps a contrary positive indicator.

Remember, I want to learn why you are optimistic.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.