You can lead a horse to water...
In the age of "Big Data" interpretation remains the missing link
I have noticed over the years one particular skill that is lacking even among the majority of intelligent people and that is the ability to interpret information. It is this common trait that I have observed which distinguishes those who are truly adept in their chosen field from the ‘also-rans’ and the mediocre. Here is a sample of the spheres in which I have witnessed the many who can’t versus a mere few who can interpret information:
theology
financial markets
risk management
astrology
economics
asset management
Take for example, the following chart that I recently published on Twitter. Few were able to understand the information which I had evaluated, gleaned insight from and subsequently presented in a clean and simple form. Admittedly, FinTwit is full of people who simply want you to give them their next profitable trade idea without having to think for themselves, but even some who consider themselves analysts seemed to miss the point. The general gist of people’s interpretation was that I was indicating that the S&P 500 Index on a standalone basis (i.e. in ABSOLUTE terms) is at fair value in mid-2021.
To the thinker however, the chart says something like this:
“The relationship between the real economy (as measured by GDP) and the financial economy (as measured by the S&P 500 Index) seems to have a direct correlation with interest rates. More specifically, the lower interest rates go, the further the real economy is left behind as the financial economy benefits.
Further, the only occasions in which this relationship broke down over the last 60 years was when the actions of the Federal Reserve both caused and then burst speculative asset price bubbles. There is an irony here given that the Fed occasionally expresses concern about the potential risk of asset price bubbles but simultaneously denies their existence under their watch. This chart shows that the Fed’s interest rate setting mechanism has a direct relationship to inflating the financial economy and that they have been systematically in the process of creating bubbles for the last forty years.
Finally, what this chart shows is that, as indicated by the current level of interest rates, the S&P 500 Index - and thereby the financial economy - appears to be approximately at some form of fair value in mid-2021, but only RELATIVE to the real economy.
I suppose if you wanted to extract one last piece of information from the chart, it would be that the Fed finally lost the ability to have any meaningful influence on the real economy at the Global Financial Crisis. Since then their actions have been entirely directed at the financial economy. Desperate times.”
They say a picture is worth a thousand words, but when the words inside people’s heads are afflicted with biases and prejudice then the picture is worthless. No. This chart does not tell you if the U.S. stock market is a buy or a sell or even if it is trading at fair value. This chart shows you a systemic weakness inherent in our economic structures and financial framework, and that is its primary weakness - it’s too big picture for most people to comprehend. As such, they interpret it using whatever capacity they have. As Anaïs Nin so beautifully put it:
“We don't see the world as it is, we see it as we are”
Nevertheless, I published the chart. I did it for the same reason that I came up with the idea for it. Curiosity. I am always asking questions and, reflecting my own bias, I published the data in a way that requires - that encourages - people to question and find meaning for themselves. It’s how we grow our understanding. Take time to slow down and play a little. Let your thoughts wander - it’s highly productive in a world that demands activity. You’ll be amazed at what you discover.