Mid-Life MBA: The Art of Business

British economist, John Kay has just recently published a new book, “The Hare and the Tortoise,” a collection of essays.  Not yet available in America, it has been available in England since June 5th and may be ordered through Amazon.UK.  A quick peruse of his website will soon whet anyone’s appetite for more.

In one recent essay published at Johnkay.com, he pnders the conclusions of Philip Tetlock’s new book Expert Political Judgment (Princeton University Press) and reframes the oft used concept of the hedgehog and the fox to explain why, as Tetlock’s study found over a period of 20 years and 30,000 predictions from 300 experts, that amateur prognosticators performed better than the experts. As a small consolation he found that experts did perform better than chimps who answer randomly.

In considering the seemingly paradoxical finding he asks the question, “Why are the predictions of well known experts worse than those of people who linger in obscurity? Isaiah Berlin’s distinction between the hedgehog, who knows one big thing, and the fox, who knows many little things, provides a clue to the answer.”

The quotation itself is based on a line found among the fragments of the Greek poet Archilochus which says: “The fox knows many things, but the hedgehog knows just one.” For those familiar with Jim Collins’ book, “Good to Great,” it is the “hedgehog concept” that offers superiority but for Kay it is the inherent qualities of the fox that, for differing reasons, lend advantage in a complex world.

Kay writes, “But these hedgehog characteristics are exactly those that politicians, journalists and business leaders demand of advisers and commentators. Harry Truman famously sought a one-armed economist, who would never say: “On the one hand, then on the other.” Broadcast media look for snappy soundbites. Corporate executives demand “the elevator pitch” for new ideas. Fund managers want specific forecasts. Business audiences do not want to hear that the world is a complex and uncertain place. But, unfortunately, it is.”

Rich Lowery at National Review Online has published an intriguing analysis of George Bush’s economic accomplishments with tax reductions, increased spending and overall reduction of the deficit as a percentage of GDP.

Lowery points out how according to Brian Riedl of the Heritage Foundation, if annual spending increases in the Bush years had been limited to the rate of the Clinton years, roughly 3.3 percent, there would be a federal surplus now. Instead, spending has been growing at 8 percent a year. That demonstrates that the formula for deficit reduction from the 1990s—moderate-spending restraint coupled with higher-than-expected growth-generated revenues—would work again today, if only someone could manage the moderate-spending restraint.

Can anyone say “Laffer curve?”

A US News article recalls the legendary moment in 1974 when economist Arthur Laffer supposedly traced the Laffer Curve on a napkin at the Two Continents Restaurant in Washington, D.C. at a dinner attended by Donald Rumsfeld and Dick Cheney. Some time later, he sketched it for Ronald Reagan.

“It was a doodle,” said Laffer, in an interview with US News writer Paul Lim. Known to many as the father of supply-side economics, or as former President Bush once called it, voodoo economics. 

“The drawing in question was a graph that illustrated a theory now widely embraced by conservatives: If tax rates are lowered, tax revenues can actually grow as economic activity is spurred. Laffer’s igloo shaped curve illustrated how at either 0 or 100%, tax revenues will be 0 as increasing taxes serve as a disincentive to producivity.

In any case, Laffer and Reagan were eventually proved correct, Bush senior was proved wrong, and Bush junior in the company of Dick Cheney are producing positive results in keeping with their promise of overall deficit reductions.  Now if they could only slow down the spending…

The Conference Board, an industry-backed research group, said its index of leading economic indicators fell 0.6 percent to 137.9 in May following a 0.1 percent decline to 138.7 in April.  It was the index’s 3rd decline in six months, and the lowest figure since a reading of 136.9 in October. The drop accompanies gasoline price run-ups, interest rate creep, and a chilling real estate market. 

The labor department has also reported the largest jump in numbers of Americans filing for unemployment in five weeks. and the commerce department has reported another 0.3% slip in orders for durable goods.  Orders for transportation equipment fell by 2.9% reflecting a 17.9% fall in demand for commercial aircraft after a previous 29.7% drop. 

While the economy surged by 5.3% in the 1st quarter of 2006, a downward adjustment to 3% is expected for the remainder of the year, largely reflecting decreased consumer spending as a function of tightening credit.  Consumer spending is responsible for two thirds of economic activity.

A senior executive at Volkswagen has denied any additional job cuts beyond the previously announced 20,000 jobs over the next three years but admits that the situation is “serious.”  Like other auto manufacturers, VW too has faced competetive pressures in recent years and additonal cuts of another 10,000 jobs had been rumored earlier last week.  This follows a year after a damaging scandal where a number of senior executives were fired for taking illegal payments for supply contracts in India.

The LA Times ran a story today that once again invoked the dreaded “S” word: stagflation.  Stagflation in the seventies was the double jeopardy of rising prices in the context of a languishing economy, a condition on which monetary policy bears only minor influence (okay, bad pun).

“The economy could be facing a bout with stagflation,” said Peter Morici, a University of Maryland business school professor. “My feeling is we’re headed for a tragedy here.”

Dean Baker, co-director of the Center for Economic and Policy Research, said he also viewed stagflation as a possibility as credit tightening further damps the housing market and puts a crimp on the spending of homeowners.

“The May price data provides grounds for concern on several fronts,” he said.

“I think we’re in for some tough times.”

The DJIA has beat it back into the black in a stunning two day recovery of almost 300 points.  The Nasdaq showed its largest gain in two years.  Some of it had to do with good news from Caterpillar, some of it had to do with good news from Goldman Sachs and Lehman Bros earlier in the week and then Bear Stearns today (NI up 81%), more of it probably had to do with Bernanke’s doveish comments and improved reports from the Feds.

Still, the economic indicators remain mixed and most agree that at least a quarter-point interest rate hike is in the works. “It’s a resignation rally,” said Bob Hynes, senior market analyst at IFR Markets. “People are resigned to the fact that the Fed is going to go higher.”

I agree and remain concerned about macroeconomic pressures.  Aggregate demand is still being driven by war (that and the relentless appetite for consumer credit at any price) and even with slight pull back below $70.00 for oil, fuel costs continue to drive inflation.

Despite reports on inflation and the looming Fed increase the dow bounced back 110 basis points today.  I wish the economic indicators were substantial enough to point to more than a sucker’s rally but in my opinion they do not.  Even the WSJ reported the one day upturn in terms of disbelief, “Stocks advanced Wednesday, even though a stronger-than-expected inflation report heightened expectations the Federal Reserve would raise interest rates again at the end of June”

Many downturns over recent weeks came in late trading after a positive uptick.  Today stocks bounced 40 points higher following positive announcements from Boeing, partly pumped by the delay on Airbus A-380s.  Airbus’s parent company EAD dropped 26% yesterday as investors panicked while Boeing rose 6.5% today following a new Singapore Airlines order for 20 Dreamliners.  Overall trading was mixed with as many stocks rising as falling. 

I still can’t see jumping back in until September.

Barrons reported that James Bailey, an insider at Getty Images, a visual content producer, has doubled his holdings.  He has purchased 10,000 shares at $65.48 each for a total investment of $654,800.00.  The stock had hit an all time high of $95.43 on November 22nd 2005 but had recently been at a 52 week low of $58.50.

The Index of the Bombay Exchange Sensitive Index (Sensex) - the benchmark index of the Bombay Stock Exchange (BSE) has lost 25% since its May 10th peak. It is the oldest stock index in India.  The Indian market lost 331.34 basis points today alone in an unpredictable bout of seesaw trading.

A commentator from Mumbai reported, “Concerns over liquidity and mutual funds redemption are dogging market sentiment. “Liquidity is going to tighten. The easy availability seen over the last two years is not going to remain. And with commodity prices ruling high, corporate numbers will not look too attractive. Added to this there have been rumours of a leading mutual fund calling up to stop redemption. There is total withdrawal of buying interest,” said a dealer.”

Again, another almost 100 point drop in the Dow.  What’s up?

Jim Jubak says it well on MSN, “Don’t Bet the Ranch on a Rebound.”  While he doesn’t believe the stock market rally is dead, he suggests that there are too many uncertainties afoot to risk much in the short term.  He does go so far as to admit that the rally that began in 2003 is getting a little “long in the tooth.”

Bearmarketcentral.com goes a little further: it’s bad and only going to get worse.  A great book with a similarly pessimistic outlook is “The Bear Book,” by John Rothchild.  Give it a read if the notion resonates with you.

Bear market musings on PBS.org features several brief articles and comments on bear markets by a variety experts including Peter Lynch.  Read it for some sobering perspective before you reinvest in those Latin American or Emerging Market stocks and funds.

Where the market is going tomorrow is anyone’s guess but I’m doubtful that there should be much rush to buy back in before the fall at the earliest.