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Trading Banks are Not Central Banks
I am not in any sense a “bank hater” – that oh so popular persona favoured by numerous customers who seem to forget that:
- there are no free lunches
- that they love secure deposits
- that but for debt most homeowners would never get to buy a house
- that in NZ a significant tranche of Australian shareholders bear the risks of lending
Still – that is no reason to either listen or take too much notice of trading banks busily telling the RBNZ what to do – a highly popular sport amongst trading bank “analysts” at present. There is no reason to suppose that trading bank analysts have any better idea of how to do the RB’s job that the RB itself – dangerously however for the rest of us – they do know their own bank and its strategy all too well and are, in this sense no different to (say) the liquor industry advising on what our liquor laws should be – simple rent seekers.
A few things we do want from the RBNZ are:
- consistency over time in policies reflecting the long term (which is not the next quarter) objectives for a strong economy,
- Independence – in particular independence from objectives such as growing a residential debt book, or getting “new homeowners into homes”,
- a medium to long term view and a set of behaviors which are consistent with that view and the broad direction of the governments overall (not just monetary) policy.
- A firm stance which stands back – well back – from the noise of trading banks and others seeking whatever interest rate matches their tactical position over the period till they next report.
Adoption of this boring but highly functional approach has been shown to serve us well.
When political decisionmaking is a bad choice
Recent years have seen an increase in political involvement in large scale projects which essentially have little to do with politics. Why is that a problem?
Political decisionmaking is aimed, at bottom at producing votes. It matters little whether votes for left right or centre – the output is votes.
Problem is:
- votes do not produce health treatment
- votes do not produce plant and equipment
- votes do not produce roads, or bridges or infrastructure
Indeed they produce votes. Nothing else (more than a few nasty side effects as well).
And yet our politicians and their govts are donkey deep in decisions about these outputs yet we need them quite regardless of whose got the votes, they need to be financially sound, they need to match demonstrated needs of myriad groups and individuals, they need to be professionally designed and delivered and they need to work.
Votes and those who hold them have little or no expertise in any of these domains – they are politicians ever bound by aspirations of gaining and maintaining power.
Their better contribution would be to:
- stay out of pretending they have expertise. Simple truth is – they don’t
- stick to setting and maintaining rules for independent professionals who do know what they are doing
- holding such independents to account by rewarding success and penalising failure (heavily) promptly
- growing some expertise in supervising contracts (of all kinds) that will produce the outcomes needed regardless of votes.
Representation Achieved by Force Fails
Law which purports to “require” representation fails two fundamentals of democracy:
- Laws which include or exclude, are instruments of force not voluntary commitment
- Democracy, rightly or wrongly, requires voluntary action
While attempts to camouflage this bare bones fact may sound elegant and seemly the law in this role is the ugly instrument of yesterday’s armies and operates by force and the threat of force. Representation which cannot be achieved without behaviour enforced by law is neither voluntary nor democratic.
Berkshire Hathaway – Strong Result
There are a handful of larger companies, and there are older companies, but there are few companies that have been around as long as Berkshire that have compounded as consistently. In this sense the stock is at least a reasonable proxy for a diversified exposure to relatively conventional US stocks.
Earnings Recap
Berkshire Hathaway’s most recent quarterly release beat analyst estimates on both the top and bottom lines, with metrics such as:
- $85.93 billion in revenue, up 21% year-over-year,
- $8.065 billion in operating earnings, up 12%,
- $35.7 billion in net income,
- $16.25 in GAAP EPS,
These earnings metrics were all well ahead of average. GAAP EPS, in particular, was 364% ahead of analyst estimates. It’s possible that some analysts have taken Buffett’s words to heart, and are using operating earnings as their “EPS” metric. If that’s the case then, with 2.184 billion ‘B’ shares outstanding, EPS was $3.69, which was also ahead of the $3.50 estimate. Especially noteworthy in the release was $4.4 billion worth of buybacks, which helped propel EPS slightly higher, and showed management’s commitment to returning value to shareholders.
Not only did all relevant metrics beat analyst expectations, but underwriting earnings rose from $167 million to $911 million largely through turnaround of the auto insurance business .
Will Higher Interest Rates Demolish Equities?
It is commonly supposed that the higher interest rates currently being deployed by central banks to address inflation are very likely to depress share prices. US data suggests that inflation is the bigger danger.
For the period 1928 to 2021 annual returns show:
With rising inflation average returns sat at 5.6%
With falling inflation average returns sat at 14.7%
In contrast
With rising interest rates average returns sat at 9.7%
With falling interest rates average returns sat at 9.6%
Data: Ben Carlson drawing on US Securities data (Blog A Wealth of Common Sense)
There seems to be no discernible trend associated with interest rates whereas rising inflation seems to be worse news than falling inflation – at least for the US. A proximate explanation may be that inflation, being an across-the-board erosion in purchasing power, is difficult to escape whereas share prices being driven by numerous factors only one of which is the immediate cost of money (at least in the shorter term) exhibit a more muted response to interest rate rises.
Subjective Superiority
In their path breaking paper of Kahneman and Tversky worked with perhaps the two major breakthroughs that set the scene, explicitly, for the cognitive behavioural movement that developed from there on. At last count in that rough but for these purposes reliable enough source Wikipedia I found no fewer than 173 allegedly different but supposedly identifiable cognitive biases, tendencies and distortions. Really? A reasonable argument exists to suggest that by far the majority of these can, given some thought, be collapsed to the original Kahneman and Tversky categories “framing” and “risk aversity”. Their elaboration may or may not be useful depending on purpose which might span a spectrum stretching from pursuit of understanding to the attaining of tenure.
A category which remains at best implicit and is, at the other extreme simply missing I chose to call “Subjective Superiority Dominance”. This term seeks to capture the propensity we seem to have for:
- Thinking we have the best judgment, the closest to true explanation, that we make the wisest of choices, that our conclusions are the best, and in assessing our own interpretations of the myriad situations and activities which make up life, we see ours in a more favourable light than those of others. In short, our ubiquitous conviction that on most if not all matters we are “right” relative to the alternatives; and what’s more,
- We are frequently of the view that others ought to adopt our views, preferences (for music, art, books and so on), and favoured explanations. We see our views as correct and right not just for us but for all others since they are “right”. Period. Others we think, would be better off through adopting our views and abandoning the errors of their ways in favour of our superior approach to whatever is in question.
My suggestion here is not so much that this habit, bias or tendency arises from some base motivation, absence of intellect or malfeasance but rather that it exists in readily documented form to (no doubt) greater and lesser extents as a close to universal trait and is thus a factor ever influencing behaviour.
This factor is I believe critical in trying to better understand explanatory schemes.
The notion is explored further elsewhere, and a better description of the phenomenon appears in James Otteson’s “Seven Deadly Economic Sins”, Cambridge University Press, 2021.
Memory History Reality
From Ralph Ellison’s essay on Minton’s Playhouse, 1958:
[Of] those who came to Minton’s… no one retained more than a fragment of its happening. Afterward the very effort to put the fragments together transformed them – so that in place of true memory they now summon to mind pieces of legend. They retell the stories as they have been told and written, glamorized, inflated, made neat and smooth, with all incomprehensible details vanished along with most of the wonder. (quoted by DeVeaux, S. in The Birth of Bebop, Univ of California 1997.)
Which is a useful description of how the process of recalling and retelling risks draining the very life out of the events we seek to capture. This is a fundamental limitation of any method we might devise for describing or relaying objectivity. Dealing in objectivity becomes elusive and awkward.
Taking Risk Seriously
A friend, Stephen Jennings, has always had a great knack for expressing tough ideas very succinctly. Here he is on risk – very pithy, apparently obvious, but frequently ignored here is one of his summaries of risk:
If you want to do risky things, you have to accept that things will go wrong. You can’t say you’ll take the good times and have a lot of success then be resentful when things don’t go well.”
11 Jan 2022
No Full Substitutes
“You can’t replace reading with other sources of information like videos, because you need to read in order to write well, and you need to write in order to think well.”
— Paul Graham
One reason is that:
Writing is often the process by which you realize that you do not understand what you are talking about.
