A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
The phrase that preceded the biggest client losses during my 20-year career in brokerage was "it's a great story" as a description of small-cap stocks. Stories by their nature are sanitized, palatable versions of reality and were frequently used to hide inconvenient truths like high valuation levels, regulatory risk and unproven business plans.
Tim Richards from the indispensable Psy-Fi blog supports this contention with a detailed discussion of how and why investors should avoid storytellers at all costs. The discussion is very much related to Daniel Kahneman's book, Thinking Fast and Slow, which shows the limitations of our usual rule-of-thumb method of reasoning. Mr. Richards writes, "it's not surprising that we're inclined to favor people who tell stories over those who crunch data. Words are human, numbers – somehow – are not. But the real stories lie in the numbers and, in investment, people who tell stories without the numbers are mystics and shamans, or worse. "
"Mistrust the financial storytellers" – Psy-Fi blog
A CBC report over the weekend describes how inflation is killing the Canadian middle class. The report is accurate in one sense and extremely misleading in another. In not defining where the inflation is coming from – largely food and energy costs – it is doing readers a disservice.
High energy and food costs definitely make consumers poorer, but by limiting discretionary spending everywhere outside of these areas, rising food and energy costs can be deflationary in the end, which is why the Bank of Canada remains more concerned about deflation.
For Canadians, this dilemma is often difficult to sort out because of the economic differences across the country. Rising energy costs, for instance, often cause 1970s-style wage-price spirals in Alberta as labour gets hard to find, but they have a significant dampening, deflationary effect on prices in Ontario and Quebec.
"Current inflation is killing off the Canadian middle class" – CBC
George Mason University professor Tyler Cowen made an important point in an essay for the New York Times. For all the Thomas Piketty-related hysteria regarding economic inequality within developed world economies, inequality between countries is declining significantly. In other words, globalization and the offshoring of jobs is making the Canadian labourers poorer relative to the domestic one per cent, but it's making the average Chinese worker a lot wealthier.
And no, neither Professor Cowen nor I are arguing that this means U.S. and Canadian economic internal disparities don't matter.
"Income inequality is not rising globally. It's falling." – New York Times
Bloomberg Businessweek reports that Amazon.com Inc.'s cloud computing business is among the fastest growing in the world. Amazon's current obscene price to earnings ratio of 570 times trailing earnings makes the stock a non-starter for most investors, but there are numerous other companies benefitting from the expansion of the cloud.
In a 2013 research report, Bank of America Merrill Lynch analysts listed Ten Important Cloud Companies to look at, including Adobe Systems Inc., Google Inc., Citrix Systems Inc., VMWare Inc., Salesforce.com Inc. and Red Hat Inc..
"Amazon's cloud is one of the fastest-growing software businesses in history" – BusinessWeek
Tweet of the day, on the 45th anniversary of the first moon walk, is from @noahpinion, "The total cost of the Apollo program, in 2010 dollars, was $109-billion: en.wikipedia.org/wiki/Apollo_pr… That's about 5 per cent of the cost of the F-35."
Diversion: The Atlantic's Derek Thompson introduces James Wolcott's Vanity Fair essay on 90s-related nostalgia, "No, No, Nine-Ettes" as "slack-jawed gosh-wow genius prose":
"No, no, nine-ettes" – Wolcott, Vanity Fair
Follow Scott Barlow on Twitter @SBarlow_ROB