This note is almost entirely ripped off from Jesse Livermore at Philosophical Economics who is smarter and a better blogger than me.
A couple weeks ago, I wrote a post leaning into DB’s claim that investors had gotten out of equities and that a reallocation back into that asset class was due. My point was that all assets are owned by somebody, so there can be no “reallocation” ex post beyond that associated with net issuance or revaluation.
Perhaps what DB meant was that equities were in strong hands and that the weak (retail) hands were out. That would have been a prescient argument, although – in fairness – the argument offered by DB got to the right conclusion, which is practically all that matters.
Anyhow, along the way, I mentioned that the least incoherent way I have seen the issue of allocation assessed was by Jesse Livermore over at Philosophical Economics. His post on this issue, from December 2013, is here. I think it is worth the read if this subject interests you.
With the third quarter flow of funds report made available on Thursday, we can now see a measure of Jesse’s allocation metric through September. Equities are up about 4% since the end of September and I assume (based on VERY crude eyeballing) that this means the allocation was up probably about half that amount. So you may consider the chart as being estimated to the close Friday. The allocation “implies” a return of 4 to 5% nominal over the coming decade. Not alarming, but not great.
Allocation data are quarter-end converted to monthly as repeat.
Jesse’s claim that the allocation leads returns is partly tongue in cheek. There is some data mining involved here, and what is really driving the relationship is that the allocation is driven by valuation which is in turn mean reverting, at least historically. It is not necessarily that investors have a Wyle E Coyote moment where they suddenly realize at the top of the bull that they have too much equities and then try, collectively unsuccessfully, to sell.
Still, it is a fun chart. And the logic behind the allocation metric seems more compelling to me than does the work from DB. Of course, DB’s argument argument rhymes with a point about weak hands that may have worked on this occasion. Can’t argue with PnL.
Hot Russian ladies
For some reason, when I navigated over to Philosophical Economics to re-read Jesse’s piece on the aggregate equity allocation, the advertising field populated with this image.
Love is what they seek, like Chris Christie.
I know that the ads these days are targeted based on where you go on the web. But I can’t figure out what I have done that would prompt this. * Maybe commenting on how Putin stole the election? Most comments about Putin are complimentary because Americans these days are collectively spineless. And maybe an interest in Putin means a taste for the Hot Russian ladies?
When I see this image I have three thoughts. First, challenge! Second, she is going to hurt her back. And third, gooddam Putin.
Can I get the car separately, or does it have to come with?
* I did click on and then go all the way through the 15 shortest celebrities in Hollywood.
Simon Wren-Lewis hates event studies
I am putting words in his mouth, but that is the inescapable implication of his windy claim that street or City economists are just making shit up when they try to link the daily change in a financial asset price to some sort of news. Paul Krugman has called this “up and down economics”, disparagingly. Wren-Lewis believes that even the business economists know they are wrong, and that they are just playing an attention seeking game.
I love that idea so much that it is the theme of my blog. Street and City economists are often full of it. Consider these examples:
Let’s say that the Fed came and did $333 billion of surprise QE and then the 10-year Treasury yield went down 15 basis points. Only a very dumb, publicity-seeking street/City economist would infer from this that QE is worth 45 basis points per trillion done.
Let’s say that the odds of Brexit (temporarily) went up one day by 10% and the FTSE went down 1.5%. Only a very dumb, publicity-seeking street/City economist would infer from this that Brexit would be worth 15% off the FTSE “right off the bat.”
Let’s say that the odds of Trump winning the presidential election went down (temporarily) one day by 10% and the S&P went up 1.2%. Only avery dumb, publicity-seeking street/City economist would infer from this that Trump would be worth 10 to 15% off the S&P.
Shockingly, the anecdotes above, though, are real and come respectively from academic advocates of QE, Larry Summers and the Brookings Institute. May I also point out that Wren-Lewis is in the can’t-fail camp when it comes to H money? To understand things, one really must be a professor.
Weenies of the people
With the country going to hell, liberal intellectuals figure this is a good time to have a debate about whether people against that “sneer” at those who are ok with it. Does the east coast liberal elite (of which every no-income blogger is surely a part) look down its nose at the dumb, low-achieving white racists in the sticks or not? Tough, tough question. As usual, the liberals pick their battles with exquisite timing.
Kevin Drum of Mother Jones thinks it is so obvious that the coast “sneers” at the middle. He provides a long list of the ways “we” do that, which reads to me like an opportunity for Drum himself to do some sneering. This proves he is elite.
But who cares? I don’t think either side wants to invite the other over for the weekend. The reason this whole discussion has come up is that, as often, one side has recently imposed its political values on the other. And now that other side is going to have to live with the result.
My take is that stupid is as stupid does. This is not about how much starch is in your diet. We don’t like one another. Shock-ER. It would be nice, though, if you could avoid taking down yourself with me close by.
This whole discussion rhymes with the very similar debate around fake umbrage. On this, you need to read Tony Yates. The excellent post is a few months old and apparently a reaction to Brexit. But the election got Economist’s View to link to it recently, which is how I saw it.
Summary: Did “I” somehow seem to hurt your feewings? Here, let “me” do something massively mutually destructive to make you feel better. Explaining you are mistaken would be too condescending.
Speaking of Tony Yates, I guess he has had it up to here with people saying economists don’t do much. This is preemo snark. I think if you substituted in Fed official for scientist and businessman for mechanic it would work just as well. You would then have Jamie Dimon telling the Fed it is ok to raise interest rates. Phew! Having said that, physics predicts better than macroeconomics, Dr. Yates.
Five year old boy has not internalized Ocham’s Razor
Last night my boy suggested that there might not really be a Santa Claus. My instinct was just to tell him he is right, but my wife overruled me and sustained the fib. She spotted me god, so I will let her have Santa. We keep the King’s peace here on Beinn Bhiorach.
I was pretty impressed that my little guy had figured this out so quickly, so I asked him what he thought caused the presents to arrive. The Easter Bunny, possibly in league with Santa.