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Econometrics, Accents, . . . and socks

05/15/2013

Yesterday morning, I was in Indianapolis and spent three hours listening to a brilliant Italian mathematician speak rapidly in a thick Italian accent, as he discussed numerous, long complex formulas with lots of Greek letters.  (You know, the type of formulas that Warren Buffett doesn’t trust.)  Listening required absolute focus, and I was exhausted after those three long hours.

The short version is that binary economic data operates under six different scenarios; meaning the binary relationships we assume, such as between unemployment and inflation, are different depending upon whether GDP growth is high, etc.  I’ll you spare the details, but my thought was a sarcastic “you’re kidding me?”

The most interesting part to me was that an investor can normally use diversification to hedge most risks.  However, the one risk that cannot be diversified, according to our speaker, is political risk.  This increased uncertainty means investors must expect a greater return for the risk they are taking.  Up to this point, I agree.  Then, he explained the strong market rally we’re seeing now is due to investors demanding more return . . . OK, I lost something in his translation on that one . . . or he is simply wrong.

One other thing jumped out at me.  It took two hours of formulas to conclude that (1) the stock market likes Republicans better but (2) the stock market performs better under Democrats.  I’ve heard this for years and saw the mathematical proof today and just wondered “so what?”

It’s gratifying that I can still stay focused so long — until I realized I learned a great deal about something I either don’t believe or don’t care about.  Just think, I could have spent the time playing golf or even re-arranging my sock drawer instead!

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