Narratives and statistics of current economics
There has been a shift from focus on obtaining the information to filtering. In the past, an edge could be created by driving up state to a mall to count the people in the stores. However, access to data such as imagery and online reviews in aggregate can create more useful insights. There is a premium on understanding how a business works and how the numbers fit into a model to structure the stream of data.
Decision makers rely mainly on two voices: inside and outside. However, it appears that some people around us live with more than two. Inside helps one use past experiences and logic to forecast. While, the outside uses general statistics. Being somewhere in the middle between clinical and complex seems like a good bet to move beyond simple biases. Humans tend to organize past experiences into coherent stories. Instead of Homo sapiens, Stephen Jay Gould would argue we are Homo narrator. Using an outside voice, helps bring external information to our self.
One useful statistic is that automobile loans are past $1 trillion in the United States and make up a significant portion of consumer debt. These loans logically seem like a leading indicator for economic conditions. Most likely, any defaults would be an individual’s first on a productive asset. People need a car to go to work and get food. But, there may be a day where people work at home with Amazon delivering all goods. The rise in automobile loans can be attributed to competition amongst lenders to loosen standards and the lack of regulation for creditor quality verification. Loans have a lower likelihood than expected to continue to increase due to the increased losses being experienced by lenders due to a fall of used car prices. Subprime borrowers were behind the most on their loans in October 2016 since 2010. However, the auto default index, which measures default rate for all auto loans has remained in its 4-year range. Any changes should be closely watched.
The narrative currently is being driven by government policy and possibly disintermediation by technology. Central banks have been propping up less efficient businesses and markets. Examples are easing of credit standards and financial engineering by companies with low returns on invested capital. Despite the massive easing done by the government, productivity may need more time to increase for credit confidence to rise. As software becomes more intuitive and integrated, the U.S. company will begin to enjoy more productive teams. In the credit markets, losses could begin to compound leading to a deterioration of credit rating. As groups become less worthy, there may be a reduction in credit lending and a lower than expected money velocity and inflation. The narrative may begin to unravel with a slowdown in growth until a deleveraging occurs so the system resets and people can pursue new opportunities.
Government is largest creditor. We are in a community bound together by financial ties. Society is a lattice of people where most rise or fall with the tide. To detach from this group, opportunity for fruitful investments are increasingly only being found in small spaces. Inefficient and increasingly private markets are where the best deals can be found where the games are easy and there are higher proportions of foolish players.
Another potential risk is the balance between capital and labor. Short story: capital is winning. There may be a day where both overlap.
Also, China and other predominately commodity exporting countries account for ~40% of the global GDP. A possible slowdown China will have ripple effects on the developing world and could boost the U.S.’s relative strength.
Historically, it is nearly impossible to time the market, but preparations for the storm can be made. People familiar with American football know the best defense is offense. Moreover, historical statistics show being an owner is more lucrative then being a lender.
Joshua Elkington
San Francisco, CA
