Retail investors love hard to value stiocks

 

How do retail investors behave? I wish I knew. It seems that they have an increasing impact on some markets, but where is the focus? A paper titled "The Retail Habitat" seeks to answer this question and finds that retail investors prefer to trade hard-to-value stocks. Stocks with a lot of retail trading have more intangible capital, longer-duration cash flows, and are more likely to be mispriced. So why do retail investors focus on the harder-to-value names? The authors do not fully explore this critical issue. They just identify the stocks that seem to have more retail focus. I would suggets that that retail traders focus on big bets, the lottery tickets. The lottery ticket names, of course, will be stocks that can possibly produce large gains.

Asset allocation is always about the stock-bond correlation

The primary asset allocation decision is based on the relationship between stocks and bonds. If the correlation is negative, there is a significant benefit to holding bonds. If the correlation is rising and positive, the bond diversification benefit is limited, and it is time to consider other alternatives. The trend is not favorable to bonds. The long-term trend is higher, though the recent trend has returned to negative territory.

Meaaurement uncertainty is real

 

Macro investors have to deal with measurement error within government data. This is the second year in which we have seen major revisions to labor data. Last year, a major seasonal adjustment affected employment numbers. This year, there has been a significant change due to benchmark revisions. The two charts below provide evidence of what has happened to the labor data. The first chart shows that nonfarm payrolls have been revised down by approximately 1 million jobs. In the second chart, you can see the monthly change.

This new data provides further evidence of the K-shaped economy. Some of the revisions are based on demographics, so they do not translate into higher unemployment, but they do create a more confusing picture of the macroeconomic environment, which will impact bond returns in particular. 

I use macro signals to improve my trend- and price-based signals, but when macro data are noisier, the value added by macro analysis diminishes.

Innovation, industrial policy and controlling the fate of nations

 

How Progress Ends: Technology, Innovation, and the Fate of Nations, by Carl Benedikt Frey, is one of the most important economic and policy books of the last year. It is especially relevant given the discussion following the Draghi Report that has influenced European thinking about the need for change and innovation. Frey makes an important argument that economic progress is a combination of innovation, which often occurs in a decentralized environment, and the implementation of scale through bureaucracy. He develops this argument through close observation of 1,000 years of history across different economic systems around the globe. Technological progress and economic growth are inevitable. There needs to be a special combination between technology and bureaucracy.

Frey draws a distinction between technological innovation that often occurs in a decentralized environment, where experimentation and exploration of new ideas take place. The technology then has to be put to use, which requires a bureaucracy or centralization to effectively employ it. Some countries did not get the technology right because bureaucracy stifled innovation. In contrast, other countries lacked technological advances but were able to grow by harnessing their bureaucracy to build on others’ innovations. 

The EU needs new technology, but that is not enough. There also needs to be a bureaucracy that not only gets out of the way but also uses its power to allow for economies of scale.