Happy Friday! There are more good news articles, commentaries, and analyst reports on the Web every week than anyone could read in a month. Here are the eight most fascinating ones I read this week.
1. The next recession
Josh Brown makes several important historical points about recessions in Forbes:
1. The first thing you have to be aware of is that this recovery officially dates back to the end of the last recession, pegged at July 2009 by the National bureau of Economic Research (the body that officially calculates these things).
2. That makes this particular recovery, pathetic though it may be, 38 months old already.
3. There have been 10 other economic recoveries following recessions since World War II.
4. The shortest recovery period (also called an "expansion") was 24 months long, from April 1958 to April 1960.
5. The longest expansion in the post-war period was 120 months, from March 1991 to March 2001.
6. The average economic expansion during this period has been 63 months, or roughly five years, in length.
7. Our current expansion of just over 3 years is roughly two-thirds of the way to that average length.
8. The best jobs growth we've seen in an economic recovery took place between 1982 and 1990, when employment jumped by 24%.
9. The worst jobs growth in an economic recovery was recorded during the last one, from 2001 to 2007, which was an anemic 6%.
10. The good news is that the average post-WWII recession has spanned just 11 months in length, therefore we are in recession less than 20% of the amount of time that we are in recovery or expansion.
2. Not as awful as we think you are
Many analysts and writers, including myself, have cited a statistic by Dalbar showing that average investors dramatically underperform the market. The blog Nerd's Eye View shows why the figure might be misleading:
Suppose the stock market doubled in year one and then stayed flat for nine years. Over the 10-year period, the market return is 7.2% a year. ... If an investor invested $1,000 every year in an index fund that exactly matched the market, the investor would have $11,000 at the end of 10 years. Only the first $1,000 doubled. The other $9,000 had a zero return. As a result, the investor's dollar-weighted return is only 1.7% a year for 10 years. ...
Now suppose the stock market stayed flat for nine years and then doubled in year 10. Over the 10-year period, the market return is still 7.2% a year. If an investor invested $1,000 every year in an index fund that exactly matched the market, this investor would have $20,000 at the end of 10 years, resulting in a dollar-weighted return of 12.3% a year for 10 years. It's higher than the market return because in the year when the market return was high, the investor had $10,000 invested, versus only $1,000 invested in the previous example.
Depending whether the market had higher returns in the beginning or in the end, investors are seen either as dumb or smart, even when they made no effort to time the market.
3. Seeing the forest through the trees
Derek Thompson of The Atlantic writes in two paragraphs most of what you need to know about the economy over the last few years:
I've written hundreds of articles about the economy in the last two years. But I think I can reduce those thousands of words to one sentence. Things got better, slowly.
Of course, there were peaks and valleys along the way. We tip-toed toward recession last summer. We flirted with a capital-R Recovery in the winter. We returned to the sad new normal in the spring. But basically: Things got better, slowly.
4. Easy pickings
Martin Wolf in the Financial Times makes a good point about past inventions being monumentally more important than advancements made in recent decades:
In the 2000s, the impact of the information revolution has come largely via enthralling entertainment and communication devices. How important is this? Prof [Robert] Gordon proposes a thought-experiment. You may keep either the brilliant devices invented since 2002 or running water and inside lavatories. I will throw in Facebook. Does that make you change your mind? I thought not. I would not keep everything invented since 1970 if the alternative were losing running water.
5. Money and happiness
Economist Richard Easterlin (an old professor of mine, coincidentally), writes in the New York Times about what wealth hasn't done for China:
Starting in 1990, as China moved to a free-market economy, real per-capita consumption and gross domestic product doubled, then doubled again. Most households now have at least one color TV. Refrigerators and washing machines -- rare before 1990 -- are common in cities.
Yet there is no evidence that the Chinese people are, on average, any happier, according to an analysis of survey data (link opens PDF file) that colleagues and I conducted. If anything, they are less satisfied than in 1990, and the burden of decreasing satisfaction has fallen hardest on the bottom third of the population in wealth. Satisfaction among Chinese in even the upper third has risen only moderately.
Stocks aren't like professional athletes who have hot or cold streaks. If there are big problems at a company, they usually aren't so easy to fix. Starbucks (Nasdaq: SBUX ) did an impressive turnaround and so has Ford (NYSE: F ) but those are the exceptions. Big problems like to hang around and drain a company.
I'm a cautious investor so I don't even try to time the exact bottom for a stock. A trend always runs much further than you think it could. But Dell has done one thing that I like very much: it initiated a quarterly dividend of eight cents per share. The company shouldn't have much trouble covering that payout. As an investor, that guarantees us at least some money back.
My strategy would be to choose an interest rate where I'd be comfortable owning Dell. For now, I'd say 4% is enough comfort. That translates to a price of $8 per share. If Dell wasn't paying a dividend, then I wouldn't even consider it.
7. This won't end well
Reuters shares a telling statistic about the state of today's markets. The headline says it all: "Fidelity's stock funds eclipsed by bond and money market assets."
8. A world drowning in debt
Kyle Bass, a hedge fund manager who made a fortune betting against the housing market, sits down for an interview with CNBC to discuss debt and its impact on the global economy. This is really good, really important stuff:
Enjoy your weekend.