Forgive me for being a little late to this, I don’t follow Twitter much. There’s just not enough minutes in the day! Anyway, a recent series of tweets has come to my attention that is worth repeating for the broader lesson it offers.
Readers will recall that last week I registered a ‘China sell signal” on the counter-contrarian signal generator known as The Pascometer. At the time I thought nothing more of it, but The Pascometer apparently burned red a second time that day:
Time to go long MB! So, I’m an accused “permabear scaremonger” guilty of forecasting a “housing depression” that never happened!
Have Leith or I ever forecast a housing depression? No. Do we argue that the housing market is inflated and therefore by definition at risk of a correction more or less permanently? Yes, we do! Even within that framework, MB has at times called the housing market higher, despite its obvious overvaluation. This is the difference between focusing on the cycle and structure. Cyclically, housing is going strong. But structurally, it is inflated beyond all reason.
And it is this last point that this post is about. Understanding risk, as opposed to whitewashing it away, is an opportunity not a threat. You can’t do that without having a strong structural view of markets and the economy which is where the main stream media (MSM) fails.
But that’s not the end of it. Back to the Twitter exchange and an enterprising reader appears to have taken The Pascometer meme and run with it:
Here are a few choice quotes from when The Pasometer burned red on US subprime mortgages in March 2007:
“Never let facts get in the way of a good story” is the accepted wisdom of tabloid journalism, but it looks like it’s also become the guiding light of finance reporting when it comes to the US subprime mortgage market.
When the animal spirits are as edgy as they have been over the past couple of weeks, it doesn’t take much in the way of a screaming headline to spook them. That was the case on Wall Street on Tuesday night with the fall there knocking on to our Wednesday market.
…The lesson here is that rising mortgage delinquencies can be a big problem at times. At other times, it makes little difference.
And with continuing strong employment and a soft landing in prospect, this looks like one of the times that it should make little difference. Just don’t tell the headline writers that.
It’s not hard to see why a counter-contrarian signal generator of that quality was promoted subsequently to a much larger audience at Fairfax!.
But, you will tell me, it didn’t matter did it! Australia sailed through it just fine!
Eventually, yes, but what about the missed opportunity on the way down? I know lots of people that played the downturn successfully because they were focused on structure and the insights into risk that it furnishes. Indeed, much of the nation was going to cash and ramping up its savings rate in 2007. I sold my last business, The Diplomat, that year and made money instead of losing it.
The moral of the story is that the MSM’s focus on cycle makes it a dill. Either that or it’s pernicious. Or it’s a pernicious dill. It’s hard to tell exactly. I suspect it’s designed that way to persuade more intelligent people to also behave like dills. It’s got something to do with a near outright dependence on real estate advertising and a belief in a bastardised Keynesian notion of animal spirits without which, it is argued, no economic growth is possible. Ironically, over a long period of time this belief has become self-fulfilling as productive investment has been crowded out by a stampede of leveraged dills.
If you want to leverage yourself without pause be my guest, but I don’t see why you should miss out on profits at every point in the business cycle.
