One important element of my work at FATrader will be Practical Investment Economics (PIE). [Sorry. The site founders told me to do that!] Gaining a significant investment advantage often requires knowing just a bit more than most others. I will help you become a better investor by testing and honing your critical thinking, with a focus on economic indicators and issues. If this sounds too much like a class, keep an open mind. I plan for us to have some fun with these topics.
The Appeal of Charts
Charts are inherently attractive because everyone thinks they understand them. Rather than a difficult and careful explanation of some concept, it is easier and often more persuasive to present your position in a chart.
What do you think of this one?
The author’s point is emphasized with the red text and upward arrow. But are loans a bad thing?
Too many loans can be bad if more people are unable to pay. The author concludes the argument with two points:
- This constitutes a “bubble” in auto loans
- Increasing interest rates will burst the bubble.
Whether this is bad for the auto industry or the overall economy is left to your imagination. While I have selected one interesting article for our study, this factoid (one item in a report from the NY Fed) was extremely popular. Many thought leaders on Twitter picked it up, with likes and retweets mounting into thousands. Let’s take a closer look.
What other reasons might there be for these facts? More cars? More loans? Bigger loans?
Is the chart trend a real problem for the auto industry? Dealers – new and used – are less stringent than other consumer lenders because they can repossess a car. Sometimes they can even “turn it off” with factory settings.
In fact, all of these possibilities are accurate. The chart below is much more meaningful and tells quite a different story.
Test assertions by flipping the argument
One useful and entertaining test for a chart-based argument is to see if reversing it makes sense. Here the strong growth in auto sales supposedly is a bubble and signals an economic problem. Does this mean that flat or declining auto sales would represent economic health? That makes no sense.
Which came first – the indicator or the viewpoint?
The large number of economic indicators makes it easy to find something to support a pre-conceived position. Those on a mission have plenty of data and research tools to mine for something that is superficially persuasive.
As investors we can be informed contrarians when we spot such nonsense.