Random Musings on Markets 2019: Random and Hum

This week’s not-weekly selection of curious financial news includes a look at what consumer confidence doesn’t tell you (spoiler alert: It is what consumers may actually do), great humor from British politics, a look at niche economic indicators and the Loch Ness Unagi. We hope you enjoy the read!

Feelings Aren’t Self-Fulfilling Prophecies

Over the last couple of weeks, we have seen a lot of handwringing along the lines of “Oh no, consumer confidence is tanking, what if households’ fear of recession starts a recession because everyone stops shopping?” There are a few problems with this line of thinking, not least the historical tendency for consumer spending to be more stable during recessions than most presume, as most spending goes toward services, not discretionary things like eating out, tchotchkes and tourism.

But for argument’s sake, let us set that aside for a moment and pretend these questioners are correct that, in theory, consumer spending could be an economic swing factor. Is confidence predictive? Could we all think ourselves into a recession?

As these next two charts show, probably not. The first shows UK retail sales and consumer confidence. The flagship confidence survey across the pond measures confidence on a positive/negative basis. General optimism is above zero. General pessimism is below. People have been generally pessimistic for most of this expansion, save for a burst of cheer before the Brexit referendum started hogging every last brain cell. Yet retail sales kept on rising much more often than not.

It has been much the same in the US. In its gauge, The Conference Board indexes consumer confidence to its 1985 level. Confidence trailed that for this expansion’s first five years—retail sales still rose. They haven’t noticeably strengthened since confidence passed above 100 in 2016. So we rather doubt another weak patch really does much. Heck, if people taking these surveys are anything like us, they probably indulge in a little retail therapy to chase the blues away.

Exhibit 1: UK Consumer Confidence Isn’t Predictive

Source: FactSet, as of 8/30/2019. Retail sales volumes and Gfk consumer confidence, July 2009 – July 2019.

Exhibit 2: Neither Is US Consumer Confidence

Source: FactSet, as of 8/30/2019. Retail sales values and Conference Board consumer confidence, July 2009 – July 2019.

Look, we aren’t saying all is rosy, and we are very, very sorry to go all serious in Random Musings!^TM We just thought a Random Correction of Bad Logic might benefit you folks. And now, back to the jokes. 

On Everyone’s Favorite Brexit Meme

As a reminder, we are politically agnostic and favor no politician, political party or ideology in any country on Earth. We don’t play favorites. We do, however, love it when politicians do amusing things. Like when former UK shadow chancellor Ed Balls tweeted his own name. And danced to “Gagnam Style” on Strictly Come Dancing. And baked a cake on the celebrity Great British Bake Off. And became besties with former Conservative MP Ed Pickles while they served on the committee for the forthcoming Holocaust memorial.

Lest you think we played favorites because of our humorous fondness for a former Labour Member of Parliament (MP), we would also like to go on record with our humorous fondness for a certain Conservative MP who launched a thousand memes after being photographed mid-blink while reclining during Tuesday night’s contentious Brexit debate. We would like to tip our hat to the right honourable gentleman for joking about it on Twitter. We would like to thank him for hosting the world’s most low-key, sleep-enabling^[i] podcast. We would also like to ask the Internet to cut the man a wee bit of slack. Who among us hasn’t been photographed blinking and looked like we were asleep! Who among us hasn’t felt the need to occasionally recline or shift position after sitting in an uncomfortable chair for hours on end! Who among us hasn’t been frustrated to be one of the few who can’t leave a meeting that half our colleagues have walked out of! Honestly we haven’t seen anything this endearingly awkward since that time David Cameron talked about “chillaxing” (or, we guess, that time he left his kid in a pub). It is way better than Boris Johnson in his colorful jogging outfits.^[ii]

Anyway, here’s to politicians for giving us unintentional chuckles, which really are the best kind.

On Narrow Economic Indicators

Of late, we have noticed pundits tending to scour economic data and feature funky stories on niche series they think illustrate larger problems. RV sales, tourism. Things like that. But the narrower you go, the more volatility such series are likely to show.

The same holds for jobs data. Earlier this week—prior to the US Bureau of Labor Statistics announcing US employers added 130,000 jobs in August—several outlets featured worries over falling temporary employment and weekly hours worked in the prior three months. One outlet claimed the weakening is “significant because, much like the proverbial canary in the coal mine, it often presages wider weakness in the jobs market.”

Now, as we often write on these pages, jobs data don’t predict. They are late-lagging, as employers typically make hiring decisions in response to economic conditions. So whether they tell you much about the future trajectory of hiring just isn’t all that significant for investors. But our interest here is different.

You see, when Friday’s report hit, it showed temporary employment spiked—with employers adding 15,400 temporary jobs in the month. (Note: Those are private temporary jobs, not census hires.) That is good enough to erase all the declines the past three months! Yet we have seen no article hyping this as a sign the labor market is about to ramp up. Most focused on slowing headline job growth. Curious.

Anyway, we aren’t trying to make a huge deal out of this. But we think it illustrates the perils in trying to draw big conclusions from very limited and narrow datasets. Just remember that when you next hear folks fulminating about their pet secret economic indicator.

Nessie Is Real!!!!!

Look we don’t do conspiracy theories, and we demand evidence for basically everything. We also cling to a childlike sense of wonder at the world, so if there is one thing we love, it is all those scientists who have periodically tried to track down the Loch Ness Monster.

So we were very intrigued by a Washington Post feature on some scientists who analyzed DNA in 250 Loch Ness water samples in order to figure out of Nessie is real and, if so, what sort of creature she might be. As it turns out: “They found no evidence that the lake harbors a prehistoric reptile, and no DNA from sharks, catfish or sturgeons, some of the other animals put forth to explain the myth. There was a lot of genetic material from eels, however.” Their hypothesis: Nessie is a very large eel.

That would be one heck of an unagi!^[iii] The largest eel caught on record was about 12 pounds, while one of the more recent Nessie sightings—captured on video—was a marine animal about four meters long.

Now, you might not think Nessie is relevant to investing. But you would be wrong. Fisher Investments founder and Executive Chairman Ken Fisher once wrote a book all about how fathoming the unfathomable was key to getting ahead in the market. If you can fathom the existence of Nessie, then that trains your brain to fathom other nutso things, like bear markets ending, economic rough spots being slowdowns rather than recession and Brexit going ok. The same mindset that inspired these scientists to do deep research, out of sheer wonder, can inspire you to do the same for markets.

It doesn’t matter that Nessie isn’t some real-life Denver the Last Dinosaur.^[iv] If she is an eel, great! All we want is some large creature to keep hope alive. Long live Nessie and her descendants!

Enjoy your weekend.