It's amazing how two people can use entirely different adjectives to describe the same thing. My wife, for example, who grew up in the crowded Bay Area, would unhesitatingly refer to a 1400 square foot house as "spacious." For me, on the other hand—a guy who grew up in a sparsely populated town in Michigan, that kind of square footage would never be paired with the word "spacious," unless maybe in reference to a hunting blind. Other differences abound: She refers to foie gras as "delicious," I term it "inedible;" she would call Michigan football "ho hum," I'd refer to it as "all-important;" she would label my waist "tubby," whereas I'd like to think of it as "insulated."
Because my wife and I have different frames of reference on lots of things, successful communication relies on steering clear of ambiguous adjectives and focusing on terminology we both understand.
Unfortunately, this isn't always possible in how we receive information through the financial media. When an article refers to the economic outlook as "dour," stocks as "overpriced," or the consumer as "tapped out," it's often difficult to determine just how in the heck they arrived at those particular descriptions.
To help you better judge some of the more mysterious economic platitudes being thrown around, let's look at some simple statistics, all publicly available, to help you get a better feel for where things really stand. Then, you can fill in your own adjectives—big, small, troublesome, uninteresting, insightful, or anything else.
First up is the "troubled" economy. Over the last few weeks, I've heard the ‘R' word—recession—thrown often and with a lot of concern. Moderate pessimists suggest we could be headed for a recession in 2008, and I guess they're right; almost anything could happen in 2008. Hardliners insist a recession is not only possible, but inevitable. Others argue we're already in a recession.
Problem is: How many folks even know what a recession is? The most widely used definition of a recession is a year-over-year decline in a country's gross domestic product (GDP) for two or more consecutive quarters. That means it's not necessarily a recession if there's local weakness in your town or state, or because your brother-in-law got laid off, or because you're having trouble flipping the house you bought two years ago for a nice profit. Nor is it a recession because a politician you don't like is in office or because "things just don't seem as good as they used to."
The last seven quarters of GDP growth look like this:
2006 Q1 +4.8%
2006 Q2 +2.4%
2006 Q3 +1.1%
2006 Q4 +2.1%
2007 Q1 +0.6%
2007 Q2 +3.8%
2007 Q3 +4.9%
Quick question: In which two consecutive quarters are these numbers declining? Answer: None. There are pundits who have been calling for GDP growth to stumble for at least the last 18 months, and they've been wrong every single quarter. Maybe they'll eventually be right, but keep in mind anything said about a future quarter is a prediction. I once predicted in 5th grade that everyone would one day wear sparkled socks like Michael Jackson. I'm still waiting on that one.
Next topic—the "melting" subprime market. In case you've been living under a rock for the last year, here's the scoop: Quite a few people who probably couldn't afford to buy homes tried to anyway, and now they're defaulting in higher than expected numbers. That's bad for those buyers, and bad for the financial institutions that dabbled in exotic instruments backed by the debt. But we have yet to see this spill over into the dreaded "credit crunch" that was supposed to be the capital markets endgame. Most markets of the world are functioning quite fine today, thanks very much. We've previously pointed to low credit spreads as a sign of this, but there's an even simpler method. Credit is the same thing as a loan. If you look at outstanding commercial and industrial loans, i.e. credit, you'll see it has increased every month this year:
Month Outstanding Loan Amount
If credit were being "crunched," loan activity would be leveling off or contracting. It's not. Unless you're a big bank trying to raise money for your troubled SIV, chances are it's not materially more difficult to get a loan now than it was a year ago.
Final topic—the "struggling" stock market. It's unbelievable how many people I speak with contend this has been a poor year for stocks. A similar number espouse, "Stocks just seem too risky right now."
Huh? Volatility has picked up in recent weeks, that's true. But even combined with the correction we had this summer, this year hasn't been any more volatile than normal. The MSCI World Index returned about nine percent for the year—not a barn-burner by any means, but still far outpaces what you could have earned in cash or low-risk fixed income alternatives.
Moreover, if you look sector by sector, some areas have done extraordinarily well. Here's the MSCI World top five:
Sector YTD Return
Telecom Services +21.5%
Consumer Staples +18.3%
Moral: When you see analysis bolstered by adjectives, not data, it pays to check out what's really going on. Very often, you'll find you come to a completely different conclusion than the teller of the tale. And when it comes to your investment portfolio, having accurate—and unbiased—information is vital.
But in case you choose not to follow this advice, and you'd like to tell me about it, feel free to do so. Some suggested adjectives for describing the above: sagacious, riveting, delightful, perspicacious…
Sources: Federal Reserve, Thomson Financial Datastream