Fisher Investments Editorial Staff
Others

Fool Me Once, Shame On Me?

By, 06/10/2011

Story Highlights:

  • Deciphering the financial news is an important aspect to successful investing.
  • There are many ways to misuse economic data to support an argument; thus, it’s important to pick it apart to fully understand the implications on the market.
  • Likewise, beware politicians posing as economists—there’s no place for political arguments in investing. 

Deciphering financial news and understanding the real market impact are difficult challenges—and, truth be told, they make fools of many investors. Especially so in a world where breaking news hits Twitter and Facebook before the major news networks even have a chance to gas up the news van.

For example, on Thursday, one news story on the shrinking US trade deficit in April cautioned: Don’t get too excited—as Japan recovers (which seems likely in the coming months) imports to the US will likely rebound, causing  our trade deficit to increase.

Follow that? Japanreaccelerating would be a bad thing because it would cause the US trade deficit to widen again. First, this assumes trade deficits are bad, a shrinking deficit good and a surplus ideal. Not so—a point we’ve discussed many times in the past, like here, here, here and here. It’s the totality of trade globally that matters most. Moreover, Japan reaccelerating is only a bad thing if you care very specifically about the US exporting more to Japan than they import to us—which seems like an odd way to measure economic health of a single country or the world.

MarketMinder’s mission is to dig through the clutter you often get from the financial media and try to decipher what’s useful, what’s less useful and what’s just misleading or meaningless. So here goes: That month-over-month imports declined by $1 billion in April isn’t terrific—a result driven largely by declining oil imports and a -13% dip in automobile-related goods imported from Japan due to earthquake-driven supply chain disruptions. But that’s more than offset by the $2.2 billion gain in US exports. It’s positive not because the trade gap shrank, but because total trade increased.

As for Japan, as its post-earthquake recovery takes root, it’s likely some US economic data cited as being soft—that impacted by the supply chain—will likewise improve. For example, the focus on trade deficits dismisses re-exporting: Imported Japanese auto parts frequently become pieces of American automobiles and other goods. So it’s likely a restart in Japanese production could aid US manufacturers encountering a lack of critical Japanese components—enabling them to export more final goods. That’s an incremental economic positive looking forward that you don’t explicitly get reading most financial media.

But trade deficit reporting is just one timely example of the challenges financial reporting can pose to investors. Another? What we at MarketMinder affectionately call “political economists.” These fine folks come from both sides of the aisle. Frequently, they’ll laud their party’s ideas with, ahem, at times selectively chosen data or bemoan the supposed economic idiocy of the party they don’t support. Now, that’s fine and dandy if you’re trying to win a debate. And politics and economics can and do intersect at points, but they’re just as often at loggerheads. So for investors, mixing the two can be treacherous waters.

Political biases run deep, and blind agreement with an economic argument in tune with your political point of view can lead to a very biased conclusion economic facts don’t support. (Like arguing Herbert Hoover’s government spending cuts triggered the Great Depression. But Hoover didn’t cut spending; he increased it!) What’s key for investors is to keep the author’s motives in mind to facilitate getting to the economic heart of the matter—and weigh this with some cold, hard facts.  

As investors, the challenge is to read the news and pick it apart to understand what’s really going on behind the scenes and between the lines—which can take quite a lot of practice. In our real-time, mobile-download world, information is fast and easy to acquire. But for investors, that’s only half the story.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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