Wednesday, April 29, 2009

The Stupidity Pandemic; U.S GDP Tanks

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The handling and coverage of the current swine flu outbreak has lots of lessons for investing. While the word pandemic is constantly being used by medical authorities for the spread of the flu, the only pandemic that seems to exist is the stupidity in handling and reporting the problem. No realistic concept of probability is being utilized in the amount of attention being paid to this incident. The same problem causes bad investing decisions. Meanwhile, the U.S. GDP figures were released this morning and the 6.1% decline was much worse than analysts had expected.

In my experience, doctors generally have a poor sense of probability and they also tend to be bad investors. The complete lack of context and statements from the medical establishment about the swine flu outbreak vividly illustrate this. Flu of some sort is omnipresent in the U.S and it is a major cause of mortality with an average of 36,000 flu related deaths annually in the 1990s. The very young, the old and the immune compromised are particularly at risk. By any statistical measure, the numbers for the recently discovered swine flu are insignificant. It has only gotten any attention at all because a new strain has been identified. Until an infant death was reported today in Texas, the mortality of this flu outside of Mexico was zero and it would be reasonable to conclude that this new flu is much less risky than the ordinary strains we have to deal with every winter. The U.S. medical establishment's record of handling of swine flu in the past is also rather tarnished to say the least. A vaccine to prevent it in 1976 (the disease never really showed up despite dire warnings of impending peril - there were only 200 cases and one death) killed and crippled far more people than those who got the disease. It was thought at the time that the deadly 1918-1919 flu pandemic was swine flu. It was not, it was a type of avian flu.

Probability always needs to be taken into account when deciding what action to take. Worrying about risks that are minimal are a waste of time. People make the same mistake when investing. Their view of risk in the market tends to be highest at the bottom when this risk of losing money is actually minimal and lowest at the top when the risk of losing money is the greatest. Successful investors look for opportunities where the probability of winning is over 50% (if it is under 50% you are gambling and not investing). The higher your chances of winning are above the 50% level, the better. Over time, you will ultimately make money with this strategy, just as gamblers ultimately lose because they deal with probabilities of less than 50%.

The GDP report this morning was dismal to say the least. Analysts had expected a drop of 4.9% and the number came in at 6.1%. The drop in Q4 2008 was 6.3%. This is the first time since the deep recession of 1974-1975 that GDP has declined three quarters in a row. Highlights from the report: Exports collapsed 30 percent, the biggest decline since 1969, the decline reduced GDP by a record 4.06%; Investment by businesses tumbled a record 37.9 percent in the first quarter, while residential investment dived 38 percent; Business inventories plummeted by a record $103.7 billion in the first quarter and this lowered GDP by 2.79%. Consumer spending supposedly rose by 2.2% from the very depressed levels at the end of last year. I am skeptical of this however, but then again I am skeptical of many things - and for good reason.

NEXT: Markets Rise Depsite Swine Flu Scamdemic

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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