Open your eyes to see that the world is booming — we just can’t measure it properly
The US economy has been roaring for years – the Fed is just not measuring it properly
I remember going to visit a company in which we had an investment interest. It boasted a grand headquarters with a path, indeed a bridge, that bisected two lakes that led to the main door. In one lake there were black swans and in another white swans. We didn’t invest.
It did not seem right for a company to be so needlessly profligate with investor’s money, even if it were successful. It indicated that the managers were more interested in the managers, than the shareholders. Another investment mantra was never to buy the stock of a company who gave you a free logo pen that immediately stopped working. Attention to detail means buying a good pen – especially if it is going to bear your company’s name.
That may seem an idiosyncratic way of choosing one’s investments but it is still a better way of running money than never leaving the office. These days we drown in data, which is an opiate, dulling the senses of the digital-age investors. If you have the numbers you can manage any asset from anywhere.
At no other time in human existence have we been able to analyse big data so bigly. Hard-crunching machines work out relationships between two, three, four, five financial, economic, performance or industrial indicators – and then scientifically invest. It nearly always relies on the assumption that there is an inherent stability in the world; that things will move back to their long-term norms. So he who has the biggest machine, wins.
The collapse of the big quantitative hedge fund LTCM in 1988 was one of the more high-profile cases of data-led value destruction if only because they had two Nobel Prize winners in economics on their board – showing that even the smartest people in the world can get it wrong. Simplistically, their strategy was to bet on the distance between two flies crawling up a wall. When one of the flies, call it a Russian domestic currency bond, fell off the wall, they went bust.
Good data is helpful but to be a good investor you still need a pair of Mark 1 eyeballs and a healthy dose of cynicism. Eyeballs enable you to see and cynicism to interpret what is really happening.
The best way to use your eyeballs for investment purposes is to travel. In recent years I have marvelled at how London – a dull, developed economy, with dreadful infrastructure – can so quickly develop into an exciting glass and steel city. Much of London is very modern (the Tube and the phones excepted) and sits in a booming economy – not just now, but for years; and not only in London, but also in the provinces.
Two weeks ago I was in Vancouver, the city formerly known as Hongcouver or more recently as Shangcouver, reflecting its investment base. The forest of tower cranes building commercial and residential developments all over the city is indicative of the activity. Hong Kong’s dramatically regular facelifts are looking complete and pedestrian by comparison.
The city that never sleeps surprised the most. Last week and frankly for the last eight years or so, New York has been wide-awake. The pretty but shabby, pre-Great Recession buildings are now holes in the ground or already developed into something more dramatic than before. Like London, Big Apple infrastructure sucks, but the energy and dynamism of a booming economy is plain to see.
Yet the US Federal Reserve maintains that the economy is running below par and maintains interest rates far too low for too long. The US economy has been roaring for years – the Fed is just not measuring it properly. Many of the shiny buildings are of course a reflection of massive cheap credit that will still be an asset to the economy in 15 years time, but are likely to be paid for with a recession in the Twenties.
The problem is that the Fed, and most other economists, are still fighting the last battles of the Great Recession and Seventies stagflation. Their economic indicators are those of the 1900s; they need to be using new digital indicators that reflect the mind-blowing changes of the 2000s.
If we can’t measure properly, we can’t manage – and that’s what has happened to the Fed holding onto old indicators. At the moment, most people with eyeballs know that we are not accurately measuring inflation, or unemployment, or labour force participation, or productivity, or economic growth, or direct investment, or money supply.
Smart investors are left to keeping their eyes open to the opportunities and the threats – and to manage their investments with a healthy dose of cynicism.
Richard Harris is a veteran investment manager, banker, writer and broadcaster – and financial expert witness. www.portshelter.com