William Of Occam Visits 200 West

| About: iShares 20+ (TLT)
This article is now exclusive for PRO subscribers.


People waste a lot of time doing research to come to common sense conclusions.

You don't need to "prove" common sense. That's why it's common sense.

These efforts do produce some pretty graphs though.

Greetings from a place that is not as beautiful as where I was yesterday.

This will be a quick one, but I think it's important. This is going to sound arrogant (and it probably is), but sometimes I think my ability to quickly synthesize information exceeds that of the smartest people on the Street. That's not to say that I'm actually smarter than they are. I'm almost certainly not. I've never even been "upstairs" except on some meetings where I had to help new hires explain a business model to execs.

But going back to the whole "Golden Retriever" thing, some of these people couldn't speak in plain English or draw common sense conclusions if their lives depended on it. It's the same phenomenon that proliferates across graduate schools. Have you ever read copious amounts of peer-reviewed academic journal articles? Well I have and let me tell you something -- these people are spending years (literally years) to draw conclusions that William of Occam would have come up with in milliseconds. Consider for instance, what I said earlier today about the new bear market in crude:

Here's the thing: you want to pay attention to all of the discrete data points, but you can't miss the forest for the trees. I've been saying oil was going back down since… well, frankly since it went back up. Just like I've been saying that the yen is going to appreciate right up until Taro Aso intervenes in FX markets.

And I didn't have to shake a magic 8-ball to make those calls. For oil, you just have to look at the fact that there's so much supply out there that people are going to have to start storing the stuff in their swimming pools and the demise of the FCF negative US shale space was not only inevitable (you can't operate forever with persistent funding gaps), but is muted by increased Iranian, Iraqi, Russian, and Saudi supply.

Let me give you another example of why you should think more like William of Occam and less like a chief Wall Street economist. Here are some excerpts from a Goldman note out this morning (emphasis mine):

Economic data "surprises"- the difference between reported values for major economic indicators and consensus forecasts-have had a limited impact on US Treasury yields lately. Typically, Treasury yields rise on news of stronger-than-expected economic growth as investors anticipate either higher inflation and/or tighter monetary policy, and fall on news of weaker growth as markets discount lower inflation and/or easier monetary policy. In recent months, yields have had a much smaller reaction than normal to these types of data surprises. In Exhibit 1, we show the estimated impact of a 10-point surprise in our MAP index-a scaled measure of US growth surprises-on Treasury yields by year, controlling for changes in both risk sentiment (using the VIX index) and oil prices. The impact on 2-year yields has fallen to the lowest level since 2012, and the impact on 10-year yields has fallen to the lowest level since our dataset begins.

The limited impact of data surprises on rates is surprising given that the funds rate is no longer pinned at zero, and the Federal Reserve is actively considering further rate increases.

Now let me make a couple of things clear. First of all, the note I'm referencing is actually great and those quick excerpts don't do it justice. So this isn't an attempt to disparage it. In fact, I'll probably talk more about it later and I sincerely appreciate the analyst's work on it.

But, there's nothing "surprising" about this phenomenon at all. Treasury (NYSEARCA:TLT) yields aren't reacting to data surprises because quite clearly, data surprises make absolutely no difference anymore when it comes to Fed policy. Consider this from Bloomberg's Richard Breslow:

Sometimes there's no substitute to reading the original. The speech given by New York Fed President Dudley this week is one of those times. He made it clear that financial conditions do indeed have a big influence on him. He's a believer that the transmission of monetary policy to the real economy depends, to a large extent, on how it helps deliver "appropriate financial market conditions." And when he analyzes financial conditions, he is very much looking at the global picture. The feedback loop from decisions made by the Fed on the world's economy and vice versa is as strong as ever. Nothing can be done in isolation. Not the words of a man preparing to damn the torpedoes.

No indeed. What matters is financial conditions, not the economy. Especially considering that given the schizophrenic nature of the data that emanates from the US government, there's really no telling what the economy is doing.

Of course don't think Goldman doesn't know this. It's alluded to in the full note excerpted above.

The point here is simply to say that I could have told you what the results of that study would be before it was conducted.

So could William of Occam.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.