Economics

Consensus v Reality

“Davidson” submits:

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Writing Skills stock investing works
StartupStockPhotos / Pixabay

Every day, I scan the news to understand how the consensus/policy makers think. I always find differences of one degree or another. I also get a sense of the trend of thinking, i.e. market psychology, and compare this against what I see occurring economically. The correct connections between economics and market prices are dictated by how investors think. When there is a large difference, there is an investment opportunity. I am in effect judging the momentum between market psychology and prices vs. economic/business fundamental momentum to locate the widest disparity/greatest advantage. This is what makes me a contrarian to consensus opinion.

The market prices reflects consensus, at all times.

It requires daily reading of the financial news to do this. One cannot take a 2wk vacation and  jump back in the first day back and feel one knows where market thinking stands vs. economics. It takes about 2wks to get back into sync with my overall process. One never knows when a real gem which defines market psychology will present itself. One must simply watch continuously and capture those items which jump out at you and save them for review periodically through a continuous look-back process. These 2 items stood out yesterday. Yellen revealed much of what she does not know and the market action on the US$ reveals the short-termism misperception of long-term US$ trends.

Yellen Brushes Aside Inflation ‘Mystery’ While Fed Eyes Rate HikeBy Rich Miller

September 20, 2017, 6:22 PM EDT https://www.bloomberg.com/news/articles/2017-09-20/yellen-brushes-aside-inflation-mystery-as-fed-eyes-rate-hike

“Davidson” comments:

Yellen said does not understand inflation. Agreed!! The Fed is ‘the consensus’ in thinking they control rates or inflation.

Rates are controlled by markets chasing return perceptions. Higher rates reflects optimism that investors see higher returns outside of Fixed Income. Inflation is simply expansion or contraction of direct Govt Spending using debt. Govt spending is non-productive long term. Using debt to fund govt spending simply dilutes currency without adding productive output. Any GDP rise from govt spending does not add to society’s standard of living as it is not creative/value-added as creating an iPhone certainly is creative and value-added.

The value added by an iPhone is similar to curing HepC, A strong positive for standards of living. Govt spending steals from Paul to pay Peter and leaves us paying for government and no net return for society and expanded currency base which causes the intrinsic value of the existing currency to fall, i.e. Inflation.

Managers of $3 Trillion Buy Dollars After Six-Month SlideBy Lananh Nguyen

September 20, 2017, 6:00 PM EDT September 21, 2017, 1:39 AM EDT https://www.bloomberg.com/news/articles/2017-09-20/managers-of-3-trillion-buy-dollars-after-worst-slide-in-decade