On a Cash Course

It’s hard to pin down distance when dealing with stellar objects, even those in our own neighborhood.  Nothing stands still.  Everything spins and rotates and moves all catawampus.  Still, if we were to measure the distance from Earth to Mars, when closest, the two are roughly 34 million miles apart.  If that sounds like tight quarters, they are also 55 million kilometers apart.

But wait, you say, aren’t you just saying the same thing in two different ways?  Yes I am, I reply, but does it really matter?  I mean, a million here, a million there; it’s still a far piece.  Unless, of course, you get a whole lot closer.  The 1999 crash of NASA’s Mars Climate Orbiter happened because data in inches and feet were used to guide it as if the units were metric instead.  Big $125 million oops there.

Understanding the language being spoken is obviously very important.  Here at Atlas we occasionally refer to a piece written by the San Francisco branch of the Federal Reserve back in August of 2011.  It discusses the correlation between two age-based American populations and the stock market’s price to earnings (P/E).  The P/E ratio is a well-known, popular method of valuing statistical measures of our equity markets.  But value should not be confused with price since price is just one of the factors which comprise the ratio itself.  The remaining component, earnings, can be tricky as an eel to grab hold of, and that’s where the paper tends to drift.  While thought provoking and a good read (if you’re interested, here’s a link to it), discerning when the authors are describing valuations versus price can be tricky.  As one point toward the end, they actually make the leap from value to price, applying the whole to their age-based ratio, and coming up with a rather dour forecast for the next couple of decades.  They offer up a brief list of caveats, and I’m certain many more could be found with little effort.

Nothing is more dangerous to the health of your portfolio than an economist with a ruler.  That said, here at Atlas we have always favored the demographic argument as primum mobile for this current period of economic history.  We will keep their conclusions in mind, but they will not form the prime directive of our investment decisions.   (by J R)