Wage Growth, Groucho Marx Edition
May 7, 2019·3 comments
Wage growth numbers drive Federal Reserve decisions, election narratives, and investment strategies. Yet the official statistics rest on a layer of abstraction that doesn't exist in the real world. The average work week, reported as varying data, has barely changed in seven years. What happens when the decisions that move markets are built on this kind of statistical theater?
• The official wage growth number requires adding something that isn't varying. The Bureau of Labor Statistics reports wages as hourly rates, but collects them as weekly totals. To convert between them, they calculate average work week. That number has ranged from 34.3 to 34.6 hours over seven years. Statistically, that's noise, not data.
• The same small noise creates opposite effects in different years. In 2016, the noise made wage stagnation look better than it actually was. In 2018, the same mechanism made wage growth look worse. The real story shifted, but not because conditions changed. The abstraction changed how we see them.
• This matters for decisions that shouldn't depend on statistical theater. The Federal Reserve used these numbers to think inflation was dead. Midwestern voters used them to evaluate labor conditions. Investment strategies shifted based on how much the abstraction was overstating or understating reality in a given month.
• The reported numbers and actual numbers now tell different stories about the economy's health. When you strip out the work week abstraction and look purely at weekly wages, wage growth patterns look completely different. But the hourly wage version is what moves policy.
• The real question isn't whether you can see the distortion once someone points it out. It's whether you can make money understanding which narrative will drive markets when you don't yet know what reality will eventually prove true.
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Comments
Thanks for sharing this Ben. As a “premium” subscriber considering the upgrade to “Pro”, you hit on my exact issue in your conclusion. I can’t bring myself to base my investment decisions on the momentum of what I consider to be false cartoons. I don’t think that I could ever get my heart into it.
Can we make money by betting against cartoons that are a) false b) driving prices in a meaningful way and c) running out of steam? In other words, objective reality as gravity and crumbling narrative as a catalyst. Presumably the inverse (new narrative that is “true to reality” and gaining momentum) could also work. I know that this approach would reduce the opportunity set, but at least I would be able to respect my process and “serve my pack” with “clear eyes and a full heart.”
I think the way to invest in a Clear Eyes and narrative-aware way is this:
base your investments on a real-world view, because that’s the only investment that a real-person can stick with.
start buying when the narrative is against you … not all at once, because the narrative can always go MORE against you … but this is when you start to buy.
accelerate your buying when you see the narrative start to shift your way … this “discovery” phase is where you will make most of your money.
start selling when the narrative is with you … not all at once, because the narrative can always go MORE with you … but this is when you start to sell.
accelerate your selling when you see the narrative start to shift against you … this “Thermidorean” phase is where you can lose your nerve.
Wash, rinse, repeat. Like England, you have no permanent allies (or investments); you only have permanent interests.
Ben this may be the clearest and best investment “advice” I’ve ever read. And it’s also why I think a sell-discipline based on strict, conservative price targets will leave money on the table as often (if not more often) than it will prevent big losses.
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