Big Data

Sharing from my friend David :

Big Data
March 31, 2014

A billion hours ago, modern Homo sapiens emerged.

A billion minutes ago, Christianity began.

A billion seconds ago, the IBM PC was released.

A billion Google searches ago … was this morning.

Hal Varian, chief economist of Google. “Beyond Big Data,” NABE annual meeting, September 10, 2013, San Francisco. Reprinted in Business Economics, Vol. 49, No. 1. For details on NABE see:

· 2000-plus: Estimated number of times the online activity of an average internet user is tracked every day

· 868: Number of websites among the 2510 most popular in the US where Twitter can track the activity of visitors

· 1205: Number of websites among the most 2510 most popular in the US where Facebook can track the activity of visitors

· $27.61: Estimated annual value to Facebook of a very active US female user’s data ($22.09 for a male)

· 700 million: Approximate number of adult consumers in the global database of Acxiom corp., a leading data broker

· 3000-plus: Number of shopping tendencies Acxiom says it can measure for nearly every US household

Sources: Acxiom Corp; AVG PrivacyFix; Wall Street Journal, March 24, 2014, R1, “Big Data”

OK, so where are we going with this?

Financial TV, radio, print, and internet-based discourse is continually saying something like, “The Fed is printing all this money, and we are going to have a big inflation, and interest rates will go shooting up, and the economy will go in the tank.”

Right-wing Tea Party Republicans continually harangue about the huge coming federal deficits and the massive cost of entitlements. Intransigent left-wing Democrats stress income inequality and the need to raise taxes on the rich in order to achieve fairness. Both of these bookends of the political spectrum are embroiled in primary political fights, after which they will try to shift adriotly toward the center for the general election in November. While making a noisy show of dueling each other and their primary opponents, they will accomplish little.

Meanwhile – and quietly – the economy of the US continues a slow recovery, interest rates stay low, the governmental deficit shrinks (under 3% of GDP now and falling), and the current account deficit falls as energy production in the US rises and displaces the marginal need to import. Inflation remains under the Fed’s minimum threshold of 2%. Stock market volatility spikes on news events and then recedes.

So where are we going with this?

The lists at the beginning of the discussion highlight evidence of sources of massive gains in productivity and how they are achieved. Read the WSJ piece and the NABE piece for more details. The bottom line is that rising productivity means low inflation pressures and higher business profits and improved quality of living for those who desire to use these productivity gains for personal consumption, medical care, and business development or for familial and interpersonal relationships. “Big Data” means productivity gains. That means we are all way more efficient at what we seek to do.

This rise in productivity is happening while the classic economic twin deficits are shrinking and stabilizing. Capitol Economics sums it up this way: “The US economy is the closest it has been to both internal and external balance in more than a decade.” We agree. Furthermore, the trends that are carrying us toward these twin balanced positions are accelerating forcefully. The external balancing is progressing on the back of the nation’s growing energy sector, which is creating thousands of jobs in many regions of the country. The internal budget balancing progresses amid the push-pull of polarized politics in this election year and through the 2016 presidential election.

We may be poorly governed. We wish Democrats and Republicans would cooperate. But if they don’t, we as a nation go on anyway, with gains in productivity that we achieve not because of our politicians but in spite of them.

All this sums up to a continuing bullish outlook for the stock markets and a prolonged period of lower inflation and lower interest rates. The best guess, and it is just a guess, is that the short-term rates in the US will be close to 1% or lower for another two years or longer. Those short rates tend to anchor the long rates. There may be a glitch in labor markets tightening faster than folks expect. Or there may be a bifurcation in the unemployed cohorts, and Alan Krueger and co-authors of the recent Brookings paper will be right. That would mean labor costs will start to rise sooner than expected. See “Are the long-term unemployed on the margins of the labor market?” Brookings Panel on Economic Activity, March 20-21, 2014.

So our somewhat benign outlook still has risks attached. There are always risks attached.

But we remain invested in the stock markets, and we remain invested in the bond markets, and we believe the flight to cash or near cash, which yields near zero, is a mistake. Markets may correct and allow for entry points, but the trend is still up. Bond markets may have volatility, but receiving more than 4% tax-free is a nice reward under current circumstances of low inflation and low interest-rate policy and improving external and internal balance in the United States.

It is springtime. One hundred million Google searches occurred during the time it took me to draft this text. It will be electronically edited twice. Then spell-checked. Citations will be verified by editors. Publication will be in a text format to reduce risk of malware infection. The message will be sent to thousands of readers and hundreds of journalists and media folks, and Twitter and Facebook will expand its reach to any who wish to read it. That entire process occurs with enormous productivity.

Happy Spring. Enjoy Big Data. It is here to stay, and we have only just begun to experience the results.

David R. Kotok, Chairman and Chief Investment Officer

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Inflation, Crimea, Markets

Shared by my friend David Kotok:

19:28 (36 minutes ago)

Inflation, Crimea, Markets
March 19, 2014

Every month the Cleveland Fed computes and publishes a median CPI and a 16% trimmed-mean estimate of the CPI. They add these calculations to the headline CPI and the CPI excluding food and energy. In a few seconds one can see the monthly rates of change for the last six months and the year-over-year rates of change.

Anyone may obtain this detail from the Cleveland Fed, which makes it available on their website ( and will send it to you as an email. (Contact I read this email notice monthly as it is received.

For the last six months all measures of monthly change have been either 0.1% or 0.2%. There were no expectations for a change of course. The matrix of four ways to view the CPI monthly change in each of the last six months shows 24 data points, and all of them are very benign when it comes to this approach to measuring inflation.

A second panel shows the percent change for the last 12 months. The range of the 24 data points spans 1.2% low to 2.0% high. All points fall within that band.

Let’s interpret this for financial markets and for business planning. First, markets. Inflation is clearly benign as measured by the CPI. It is in a holding pattern of somewhere between 1% and 2%, depending on how one measures it. It is not rising and it is not falling. All this is happening while the policy-setting interest rate in the United States remains near zero. As today’s Fed meeting result will affirm, there is little likelihood that the policy-setting interest rate will change any time soon. And there is little likelihood that the inflation rate will change soon, either.

Financial markets are proceeding with their advance based on this outlook continuing for some time. In the interest rate arena, expectations are that the near-zero rates will prevail for at least another year or two. That means security valuations based on shorter-term interest rates will continue to be robust. Hence, though stock markets may become more volatile and reactive to geopolitical events, they still have an upward bias.

Bond markets seem to be contained within trading ranges. Even the municipal bond market seems to have stabilized now that Puerto Rico has succeeded in its bond issuance and raised $3.5 billion in new cash. Detroit is gradually working out a settlement path. Worries about Chicago becoming the next city “shoe to drop” are in the Muniland conversation. Time will tell what will befall the Windy City. Cumberland avoids Chicago’s city debt; it may or may not become another type of Detroit event but why take the risk.

Stable inflation and lower volatility in the bond arena mean that businesses can be forward-looking in their financial planning. There is a growing sense that some capital expenditures may be made and that some financing may be undertaken. We see some of that with our clients. For planning purposes, a stable, low inflation rate is very helpful and removes the inflation distortions that happen with inventories and financial statements. Earnings portrayed in those statements are of a higher quality in reported terms since they are not distorted by inflation.

To sum up, the inflation outlook continues benign. This means little pressure on the Federal Reserve to change interest rate policy in the near term. So we expect modest but continuing economic growth in the US. It will be coupled with a Fed policy of gradualism, with scheduled tapering until a neutral central bank position is reached. And then a gradual policy shift of the maturity structure of the central bank’s balance sheet will commence.

We are fully invested in our US stock market-oriented ETF accounts.

A word on Ukraine. We expected Russia to “annex” Crimea. Our baseline case was not to raise cash unless we saw actual military movement. We would raise cash in the event of a shooting war. We did not raise cash on the bluster of political talk. Putin had the upper hand, played it, and won. The traditional Western powers had a weak hand and were without any reasonable choice. So they practiced restraint in arms and substituted lots of bluster.

So be it.

David R. Kotok, Chairman and Chief Investment Officer

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