Recessions, BIG NUMBERS, and Reading the Room
Recessions, BIG NUMBERS, and Reading the Room
A grab bag of thoughts on how financial data is presented to investors.
Note: I have been doing something I promised I wouldn’t do.
When I started writing this newsletter. I said to myself that I wouldn’t post to a set schedule and would focus instead on publishing when I had something worth saying. There is value in sitting down and writing every day to codify one’s thoughts, but ideation and reflection often happen in bursts. I found recently that I have been writing to meet some self-imposed schedule rather than letting the good ideas come to me. I’m trying to get back to writing when I have something worth sharing.
This is a long-winded explanation to say non-business profile posts will likely be more sporadic. You can still expect a regular cadence of Misfit business profiles on Saturdays and knee-jerk IPO assessments when something worthwhile goes public.
An interesting economic factoid has been making its rounds lately.
It’s hard to state how great this economic expansion has been. Since 1929 (as far back as the St. Louis Federal Reserve’s data goes), this 15-year period has had the least amount of time in a recession.
I’ve been delighted that social media has provided an outlet for thoughtful, nuanced discussion…Wait, I’m hearing that it was an outlet for people to dunk on permabears and take victory laps.
That’s unfortunate because it does make for a great jumping off point for several conversations. None of these ideas are large enough for a standalone post, so I’ll lump them together here.
Anything that uses “history says” is nonsense
The term “we have 100 years of economic data” sounds authoritative. This is a period that spans several generations and has witnessed monumental leaps in technology and quality of life. If someone wants to make their argument sound like it has added heft behind it, something like “never in 100 years” to make it sound unprecedented.
Many market soothsayers point to the frequency and duration of recessions and use this 100-year period with robust economic reporting as a reason to believe them.
But we don’t have 100 years of data to prove this. We have 15 recessions to “prove” this.
I know not everyone remembers everything from their high school statistics class, but I think we all intuitively understand the concept of statistical significance. Basically, for a statistic to be proven or disproven, there have to be enough data points in a set to guess the next data point reasonably.
While my statistics and experimental design skills have diminished, I’m pretty confident that 15 data points aren’t nearly enough to produce a statistically significant result.
Any statement about how frequently the economy goes into recession has no scientific backing; it is just a heuristic someone came up with after looking at the chart above. Even worse, anyone who follows it has suffered as a result.
The “common knowledge” about recessions is that they happen every seven years. However, with so few data points, that seven-year estimate is no more accurate than throwing darts at the wall.
Using big numbers to make something sound profound
One of the tried and true ways to attract eyeballs to whatever you are doing is to use really large numbers. Big numbers sound scary and hard to quantify. Big numbers are often thrown about in the political area, but It want to avoid that third rail as much as possible. So, let’s stick to ones that market bulls and bears have used lately to make their point.
Let’s skewer the bad news bears first. What makes for a better headline than “consumer credit card debt at all-time highs”? (forgive my bad MS paint skills)
The big news outlets aren’t the only ones using credit card debt as a touch point. A fair share of doom profits looking to sell their newsletters have pointed this out.
As you may have noticed, a lot of these posts came out after total credit card debt outstanding crossed the $1 trillion mark in November in 2023. Something about $1 trillion hits harder than $967 billion. It sounds scarier because it has that extra digit on it.
Step back for a minute and consider this. If the population and household income increase, shouldn’t higher total credit card balances increase without raising too many alarm bells?
Let’s put the number in context. Of the people that have credit cards in their wallets. 53% of them never carried a balance. For those that did, the national average credit card debt outstanding with credit card holders at the end of 2023 was $6,864. 2022 and 2023 were the lowest mean outstanding balances since the mid 1990s.
So overall, not the harbinger of doom that many might claim it to be.
Don’t get too excited, permabulls, you’re just as guilty. Remember all that chatter about trillions of dollars “sitting on the sidelines” ready to fuel the next leg up on market rally?
Again, big numbers sound great until you hold them up to the light. That record balance of cash also happened to coincide with record equity market values. At the time of this Tweet (Xeet?), the U.S. equity market was valued at $50.8 trillion. We’re talking about cash on the sidelines representing about 10% of the total equity market. If we scale this down to our portfolios, having 10% in cash sounds standard. It has more or less been the norm since the early 1980s.
Simply stating a big number doesn’t make it significant. As society grows over time, we should consistently post record numbers, whether it be stock market values, total debt outstanding, or any other number. What matters is whether those numbers are outside the historical norms.
If you need a reminder about how large numbers lose their luster over time, consider this. Old Wall Street heads talk about the “Black Monday” crash in 1987 as one of the scariest days in market history. The Dow Jones Index dropped a jaw dropping 500 points.
As of this writing, The Dow Jones has moved 500 points over the past three trading days, and no one has even batted an eye.
Live optimistically, underwrite conservatively
Returning to the “2 months of recession in 15 years” theme and the gloating happening in the world of financial media.
As great as these past 15 years have been for investors and as awful as they have been for those calling for an “imminent” recession, there is never time for gloating.
Eventually, the market humbles us all in one way or another.
One of an investor’s greatest tests is to solve the paradox of having an optimistic outlook on the future while also consistently looking out for the bad outcomes in their investments.
Philip Fisher, the investor, was one of the standard bearers of growth investing and is often held up as an example of what buying and holding great companies for long periods can do for your wealth. Philip Fisher, the man, was a constant worrier who would scrutinize the finest details when trying to find those great businesses to buy and hold.
When the going is good, we shouldn’t relax our due diligence. Instead, Fisher, Lynch, Graham, and Buffett would probably tap you on the shoulder and tell you it’s time to scrutinize your allocations even more.
Warren Buffett’s “be greedy when others are fearful” is the most overused Buffet quote, but it’s only half of the quote.
Don’t forget the other half.