What's the Good News?
Developing an ability to look at counterfactual information is one of the hardest things for a professional investor to do. Today, it's fairly easy to look at the world and see some pretty bad news:
- China is slowing - The government lowered its target growth rate to 7.5%
- India is caught in a vicious cycle of a weak currency and high inflation
- Europe is imploding - Of the 17 countries in the European Union, 12 governments have been voted out of office or collapsed in the last two years
- US corporate earnings are being revised downward – Analysts have revised down EPS estimates for five straight weeks.
All of this is not very good news. In fact, I could continue to look and find many more confirming data points.
This is because of a well-studied psychological behavior called confirmation bias. It's a tendency of people to favor information that confirms their beliefs or hypotheses. First observed by Thucydides, in the History of the Peloponnesian War wrote,
"It is a habit of mankind ... to use sovereign reason to thrust aside what they do not fancy."
Thucydides has been dubbed the father of scientific history because he ignored the Gods in 5th Century BC and focused his work on pure data gathering, standards of evidence, as well as cause and effect.
It's clear we, at Phillips and Company, have a bias toward a slowing global economy. In many of our portfolios we are holding near zero exposure to Europe. However, as professional investors it's also incumbent upon us to fight this human bias and look at the other side of our opinion. We must fight our desire and our natural psychological tendencies to seek confirmation of our opinions.
So here's, The Good News:
- US Household debt ratio has reached levels last seen in 1987, implying that the US consumer is in a better position today to consume than at any time in the last 30 years
- Personal income growth for the US Consumer is trending higher for the year
- The US Savings rate is still historically strong at 3.8% - Another bullet for the consumer to help prop up the economy
- In Europe, Germany managed to grow their economy by 0.5% from the previous quarter
- China’s target of 7.5% GDP growth is more of a floor than a ceiling target. They have a habit of surpassing them
- In India, The Reserve Bank is acting proactively by increasing liquidity through interest rate cuts and reducing the bank reserve requirements
After a healthy look at The Good News, it's still hard to change our opinion that the global economy is slowing. Frankly, it would be easier to blame the Gods but it would be a shame to waste all the good work of Thucydides some 2,600 years ago.
Tim Phillips, CEO – Phillips & Company