It’s Monday, the best day of the week – if you’re not a human being with a job. Here are some nerdy thoughts to ruin your week before it even begins:
1 – Is There Such a Thing as Business “Cycles”? Here’s an interesting post from Tyler Cowen discussing the idea that business cycles might be totally random. I’ve never been a big proponent of the idea of a business “cycle”, you know, the sine wave looking kind of thing where the economy moves in a perfect sequence of peak, contraction, trough, expansion. Instead, I would argue that economy tends to trend and then occasionally veers in an extreme for some reason which causes a boom and then a bust. I imagine it a little bit like a driver who is tired and nods off. He drives straight for the most part, but as he grows increasingly tired he might nod off and veer off the road a bit and in response he overcompensates in the other direction before waking up and then slowly getting tired again. Rinse, wash, repeat.
I don’t know if that’s generally accurate, but I do totally agree with Tren Griffin and Howard Marks who wrote this:
— Tren Griffin (@trengriffin) May 8, 2016
Economists and politicians want to take the volatility out of the economy. But perhaps we need to just remember that the boom and the bust is part of the way human emotions will always play out across time. It doesn’t mean we can’t add guard rails to the roads in case our driver nods off, but it also doesn’t mean we should strap him to the seat with his eye lids stapled to his forehead….
2 – Isn’t All Factor Investing Factor Timing? I was talking to Jake from EconomPic last night on Twitter about factor investing. Jake is very smart and I like him even though he’s a NY Mets fan. He was citing a fantastic new paper by Cliff Asness on factor timing. Basically, Cliff says you shouldn’t try to time factors by using a fund to time the market. For instance, if you believe in the value factor then you don’t try to time when value will beat growth. You just always hold value and assume it will generate its excess return across long enough time periods.
But this is what I don’t get about factor investing – at the fund manager level the manager is always timing the market because he’s not buying and holding one fixed portfolio of “value” stocks. He’s buying a portfolio that he claims will achieve the value factor in the future and then changing it when he thinks those securities have captured the value premium. In other words, he’s not just picking a “factor”. He’s timing the specific assets that he thinks will achieve that factor. Whether the specific assets actually achieve that factor is totally unknown.But what is known is that this approach will result in higher turnover, higher fees and higher taxes in pursuit of promising something they might not deliver – alpha, or excess return. So, I still don’t get the fuss here with factor investing….It looks to me like a new form of high(er) fee active management based on the theory that certain fund managers know which stocks will perform a certain way before they do. Is this really different than what active managers have been failing to deliver for decades?
I know I don’t make a lot of friends on Wall Street beating down the hot new strategy, but I really don’t see the “there, there”….
3 – Imagine a World where Economists Liked Each Other! I used to waste a lot of time arguing about economics. Then I realized that a lot of economics is just political ideology masquerading as science. And there’s no reasoning with political ideologues. Unfortunately, it looks like our national political nightmare is consistent with a broader economic nightmare – a world of extremely divergent views. For instance, here’s (conservative economist) John Cochrane making what I think is a reasonable point in favor of less government regulation, but doing so in a manner that is probably misleading. And then (liberal economists) Brad Delong and Noah Smith absolutely crush him for it. No, not just crush his argument, but crush the man as well. I really don’t like the personal nature of this disagreement, but what I really dislike is the fact that this is consistent across the econoblogosphere. And I worry that there’s more ideology driving many of these arguments than fact.
Economics blogs seem like one big running petty argument with the various schools constantly bashing one another. Now, I know that many economists will claim there are no “schools” and that economists really agree on more than they might convey, but if you read the econ blogs out there you can’t help but feel the aggressive angst between the main voices. It’s a bit sad in my opinion. Just imagine if economists agreed as aggressively as they disagree. I suspect our political discourse would be a little more reasoned and centered if many of our smartest policy thinkers were also in search of agreement as opposed to crushing their opponents and the “school” they support. Instead, we seem to have this oceanic divide and it’s now playing out in the most influential of political races as the two most disliked candidates ever are the only viable options….