Paradigm Shift

In the world of corporate governance (and maybe in life), being good is necessary, but often, it is even more important to appear to be good.

Perception is everything, and it pays to know when market participants view a glass as half-full or half-empty and do your best to detect the moment of paradigm shift, because it’s really just like the old Earth, Wind and Fire song: After the love is gone, what used to be right is wrong.

20061104-001Bershire Hathaway’s earnings surged more than fourfold, as its insurance business benefited from an absence of catastrophe losses.

Corn prices are up nearly 55% since September, fueled by the booming ethanol industry. But the trend is bruising livestock farmers and has Wall Street fretting over profits at food manufacturers.

The jobless rate fell to a five-year low of 4.4% last month. Payrolls grew by 92,000, fueled by service-sector gains. Divergent data in the labor reports have raised questions about which is more reliable. — WSJ.com

I was unable to resist writing this article because the headlines at WSJ.com are softly whispering the words “paradigm shift” in my ear and got me thinking about a number of things that happened in the market this week.

Do you remember the big non-farm payroll number blowout to the upside in early 1996? At the time, people were still running scared from the 80s and early 90s, even though things had been looking up since 1994. When the number came, it shattered the half-empty glass, and before we knew it, the words Phillips Curve and inflation were back on the lips of the FOMC. For years after that, it was always “all hands to battlestations” in the CBOT bond pits during the morning of the non-farm payroll release.

For some reason, forecasting is difficult. As a non-econometrician (heavy lifting and torturing data is best left to Michael Stastny), what I can say is that the rest of us can apply the sentiment cycle in order to observe a large paradigm shift. Usually, the headlines tell us everything we need to know.

Is job growth stronger than it looks?
The Bureau of Labor Statistics said non-farm payrolls, based on a survey of establishments, rose by 92,000 (or 0.07%) last month. But its smaller survey of households found employment rose a whopping 437,000, or 0.30%.

First, we had the Berkshire Hathaway good news. Then we are told that corn prices are sharply increasing, and of course, reading between the lines, it was the second sentence in the third headline that screams “inflation on the brain”, because they are digging deep to find data that supports the inflationary mindset.

I asked Michael what he thought of the household survey data vs. the non-farm payroll data, and of course, he has been there, done it. Michael pointed me to James Hamilton’s Econbrowser blog and I found some additional comments there. For the record, Hamilton is the reigning deity of time series analysis.

The difference in perception is startling compared to how it was only three years ago when I wrote the infamous bond rant at my old site. We are now officially focused on forecasting inflation. I know, I know; there are many who think that housing is the Achilles Heel that precedes Armageddon, but with everyone working flat out, pockets of speculative excess in real estate can probably be liquidated in an orderly basis.

Oh, Canada

That thought lead to reflection about what happened in Canada this week: $20 billion wiped out, thanks to the government crackdown on income trusts. I personally don’t care whether the ruling was good or bad, but could someone please tell the Prime Minister that investor confidence is everything?

People love to moan and complain about the U.S. market, but let’s face it, the market is mature and well structured. We have enough problems in this life without having to worry about Mongolian and banana republic style policy changes.