Searching for good news

Given my bearish sentiment in contrast to the “green shoots” crowd, it is not surprising that I have been exhibiting my own confirmatory bias (see my previous posting). For those not familiar with it, confirmatory bias is the human tendency to look for and favor information that confirms our personal beliefs and to minimize or ignore information that contradicts our own views. With that in mind, let’s outline the criteria a priori that we will use to determine what constitutes good news. (By the way, financial stocks beating faulty estimates is not a good criterion).

Good news would be stabilization of employment. By employment, I mean real employment, not temporary and seasonal. I think the real unemployment figure is significantly higher than the reported numbers due to the undercounting of temporary workers, the undercounting of those who’ve given up the search, and the undercounting of those who have lost their jobs but are receiving severance and can’t claim unemployment benefits. The employment figures have not stabilized yet, but I’ll be looking at Shadow Stats (http://www.shadowstats.com/) for more accurate figures than those in the headlines.

Good news would be stabilization in real estate. While this stabilization is frequently discussed in the popular press, I think most people are looking in the wrong places. The current crop of real estate speculators who are bolstering the sales figures are not stable hands. Real estate should not be valued on a turnover basis or a comp basis; one must examine the rental yields, which are still falling in many markets, and certainly falling in the commercial space. I am looking for stabilization of rents, which I expect will only come in 2010 or 2011. One way to speed this up would be to encourage immigration, which would lead to higher demand. Sadly, this does not seem politically viable, at least for now.


Good news would be tough words and actions on the international political front. What kinds of actions? Tough talk on Iran, and if necessary, military actions to ensure that Iran does not achieve nuclear capabilities. A concerted international alliance to assist Pakistan, Afghanistan, and Tajikistan (their northern neighbor) in their police and military efforts to deal with Al Qaeda. Pressure on Putin and Russia to halt their anti-democratic trend. All of these actions and countless other measures—including a formalized policy towards Chavez and a strategic working relationship with the Chinese—would require carrots of financial assistance as well as the occasional stick. The common thread here is that the U.S. should be leading international efforts, not just reacting. While the market is always vulnerable to geopolitical risks, with the aforementioned efforts, it will bounce back; without those efforts, we face considerably more uncertainty.


Finally, good news would be a policy of dealing with transfer payments (Medicare and Social Security) based on sound economic and financial principles. This will be the single largest driver of our tax rates (actual or implied through the devaluation of our purchasing power) in the future. I’ll write more about it this week, but suffice it to say that the direction right now seems contrary to sound economic principles and will lead to sub-optimal long-term flexibility, productivity, and growth.

Based on these four areas, I see no reason to be long the market as a whole, for now. There are attractive individual positions out there, but the market has not demonstrated the signs that would encourage an optimistic long-term view. Plus, valuations for the aggregate are not cheap enough. That said, there is no reason to be short the market either: short squeezes, gaps, constantly changing policy, deleveraging (which can cause movements in all directions), etc., all make this a treacherous environment for shorts. In this market environment, getting the direction right is not enough; maintaining purchasing power is key. Later this week, we’ll discuss Chinese dollar holdings and the resultant (surprising) power play. We’ll also continue discussing the cognitive dissonance associated with deflation (deleveraging, liquidations, price pressures, etc.) and inflation (dollar weakness, gold strength, etc.).

Last 5 posts by Yaron Sadan

categories Company News, Politics, Real Estate, Strategy/Allocation | Yaron Sadan | datetime May 18, 2009 12:04 pm

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