Wednesday, May 28, 2008

Big changes coming












While most of the financial media focuses on the price of oil and what it will do to consumer spending in the next few months, a tectonic shift in technology is underway that will have enormous consequences over the next several years. Investors who are myopically focused on the short-term, speculative, sector-timing or cycle-timing schemes that dominate much of what passes for "investment" these days seem to be blind to this major development and will only notice it after it is too close to ignore.

We have written in previous posts about the impact that the ability to move exponentially larger amounts of data -- including video data -- will have in the next several years, including fundamental changes in computing and television.

Now, Sony (a major television manufacturer) has announced an agreement with cable companies by which new televisions can have internal hardware and software that enable features that currently require an external set-top box -- including "two-way" features. In other words, "smart" features which currently are an option for those who choose to purchase additional services are likely to become standard features in future televisions.

But this is only the beginning of a wave of changes which will be enabled by the rapidly expanding ability to easily send and receive huge amounts of data, including video data, over the internet.

As George Gilder foresaw in Life After Television in the early 1990s: "What is driving the 'telefuture' is not any convergence of films and TVs, consumer electronics and publishing, computers and games. What is driving the change is the onrush of computer technology invading and conquering all these domains. The computer industry is converging with the television in the same sense that the automobile converged with the horse [. . .]".

The ramifications of this shift will not be limited to how the average individual consumes video entertainment (although that will also be significant). It will enable valuable new possibilities in medicine, in business consulting, in the creation of wider markets for all kinds of specialized goods and services, in education, in defense, in transportation, in logistics -- in short, it could conceivably impact virtually every aspect of life.

Small news items largely ignored by the headlines today continue to indicate that this major shift will indeed take place. Investors who are pursuing longer-term fields of growth, rather than calling the next short-term move of this sector or that sector, should take note of these indicators.


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Monday, May 26, 2008

Memorial Day May 26, 2008














On Memorial Day we honor those who solemnly swore "to support and defend the Constitution of the United States against all enemies, foreign and domestic."

It is also fitting to consider that the Constitution they have defended and laid down their lives to protect is the source of all the freedoms we enjoy in America, guaranteeing the right of the people to be secure in their persons and property against seizure, a right upon which all the creation of value and wealth and security that we enjoy is founded. America has the oldest existing Constitution in the world, and those of us who enjoy its freedoms are indebted to those who have defended it through the centuries even to the extent of the sacrifice of their own lives, and who continue to do so today.
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Thursday, May 22, 2008

The active vs. passive debate




















In our previous post, we pointed out features of mutual funds which can act as an obstacle to following the Taylor Frigon dictum of building future wealth upon a foundation of the ownership of successful business enterprises benefiting from capable and dynamic management operating in a future field for fertile growth, and owning them over a long period of years.

This discussion naturally brings up the debate over indexing or what has been called "passive management," because a large number of investors who do realize the drawbacks of mutual funds use those drawbacks as arguments in favor of investing in index funds or other vehicles designed to capture a market or portion of a market.

At the very outset of the discussion, we should note that using the drawbacks of mutual funds as an argument for passive management is illogical, because (as we have argued) the drawbacks to mutual funds stem from the ways in which they impede the investor's ability to own exceptional companies for a long period of years. Running from a vehicle that impedes such ownership to a vehicle built on the outright rejection of the concept of ownership of exceptional companies is not a logical move.

Many index fund backers and other passive management supporters do not have the background in selecting companies which would enable them to see that the problems with mutual funds are primarily related to the extent to which they impede ownership of exceptional companies for long periods of years.

We explained previously that advocates of passive management (such as Vanguard founder John Bogle, pictured above) argue for the ownership of markets rather than the ownership of businesses, in posts such as this one and in our commentary entitled "The Emperor's New Index Fund."

Advocates of passive management often adopt a very condescending attitude towards the very concept of trying to select superior companies, arguing that the issue has been settled beyond doubt. An example of such condescension is found in this reproduction of the opening arguments in an active vs. passive debate which took place in 1995. It is a good example of those arguments, touching on most of the main points used by advocates of passive investing.

The author of that piece, Rex Sinquefield, not only argues that academia has proven beyond any shadow of doubt that belief in active management is simply "no longer a credible position," but also goes so far as to co-opt the economic triumph of free-market capitalism over central planning as an argument for passive management! He does so by implying that active management is somehow a rejection of the idea that "markets work" and that anyone who believes -- along with Adam Smith and Friedrich Hayek -- that markets do work should ipso facto be an advocate of passive investment.

In fact, he jokes that the only people who still disagree with Smith and Hayek are "the North Koreans, the Cubans, and the active managers."

But, which is more aligned with the principles of free-market capitalism: the idea of allocating capital to successful business enterprises, or the idea of allocating capital indiscriminately to all businesses in a blanket fashion? As we have argued elsewhere, in free-market societies, most people do not allocate their own "human capital" by indiscriminately working for any business in any industry as if one is just as good as another (Sinquefield himself did not do so). Why would they allocate their financial capital that way?

Furthermore, opponents of active management often describe active management as being dependent upon finding bits of information before the market has time to react to those bits of information, trading on inefficiently-distributed information before the market has time to adjust. While this kind of behavior is what many think of as "investing," we have argued that this picture of investing is not the whole picture (although Wall Street and the financial media tend to reinforce that point of view).

The classic investment philosophy we have described in previous posts, and that was practiced in previous decades by Dick Taylor and Thomas Rowe Price, was not based on any such attempts to "dip and dart, pick stocks and time markets" as Sinquefield describes. It is not based on an attempt to exploit temporary inefficiencies or unknown information, but rather upon the long-term superiority of business fundamentals to market-timing schemes. It also accords very well with the principles of Adam Smith and Friedrich Hayek.

As for the very common assertions made by advocates of passive management that "all studies to date" show no evidence that any strategy can be better than owning markets, consider any list of the wealthiest Americans published this year or in previous years going back for about a century, and ask yourself how those individuals became that wealthy. Did any of them achieve their great wealth through a system advocated by promoters of passive investing, or was it rather through a process that more closely resembles "the ownership of successful business enterprises that continued to grow and prosper over a long period of years"?

In the same 1973 tract in which he explained his Growth Stock Theory of Investing, Mr. Price also published the results of his portfolio from 1934 through 1972. Over the course of those forty-two years, the increase in market value of his portfolio was at a compound annual growth rate (CAGR) of 11.9% per year, versus the Dow Jones Industrial Average's CAGR of 6.2% per year. The dividend increase of the Dow over the same period was 5.4%, versus 9.4% for Mr. Price's portfolio. Advocates of passive management dismiss any out-performance by some managers as "nothing more than one would expect by chance" (to use the phrase of Mr. Sinquefield). However, it is difficult to argue that the record Mr. Price achieved following his method of selecting well-run businesses in front of fertile fields of growth was a "chance" anomaly that persisted for a period of over four decades!

Finally, it must be noted that index or ETF investing in practice often boils down to owning this slice of the market and then that slice of the market and thus "market-timing" in the very way that Sinquefield eschews, dipping and darting and picking and timing but doing so by picking "sectors" or "capitalizations" or other large groupings rather than individual stocks.

Investors today will encounter many arguments that present the superiority of passive management as an unassailable fact. However, we would caution investors not to be too easily dissuaded from the sound principle of ownership of businesses.

For later posts dealing with this same topic, see also:


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Tuesday, May 20, 2008

Some drawbacks of mutual funds





















We've written in numerous previous posts about our conviction that "ownership of successful business enterprises which continued to grow and prosper over a long period of years" should form the bedrock foundation of capital investments for most investors. While there are many other important investment strategies which should be added in certain situations (such as a strategy which will yield current income, or a strategy which gains exposure to earlier-stage enterprises), these should still be built upon the foundation of the ownership of successful business enterprises.

We have also shared some information about obstacles investors face even if they understand and agree with this philosophy. Principal among these obstacles is the intermediary system of "wealth management" that has developed over the past few decades, which separates investors from those who actually evaluate and select those individual businesses (see, for example, this previous post).

However, there is another major obstacle to the investor's ability to build a foundation on the ownership of successful businesses over a long period of years, one that is so widespread and so basic to the modern investment landscape that most investors would be shocked to learn that it has such drawbacks: the mutual fund.

In 1980 there were about $135 billion in assets in all the mutual fund investments in the United States -- today there are more than $11.7 trillion (ICI). Mutual funds are very scalable, and with the proliferation of intermediary "wealth managers" and "financial advisors" who do not actually manage money but instead "outsource" the management to others, the assets committed to mutual funds grew significantly.

But the mutual fund model has many drawbacks, some of which are not fully understood even by very wealthy investors.

One drawback is that the individual investor no longer owns the securities (such as the shares of common stock) in his own account, but rather owns shares of the mutual fund, as depicted in the diagram above. An open-ended investment company (the more precise term for a mutual fund) is a pooled vehicle, in which the assets of the investors are pooled, and the pool owns the shares rather than the individual investor, who owns shares in the pool instead. This serves to distance the investor from the ownership, and brings about a variety of other side-effects which impede the investor's ability to build a foundation of ownership for "a long period of years."

One significant negative side-effect is the tax drawbacks to the mutual fund's pooled ownership structure. We discuss some details of this tax drawback in a commentary we published called "Separate Portfolio Advantages" which is available on-line. The tax drawbacks to mutual funds can be extremely damaging to wealthier investors, who are typically taxed at higher rates and have more exposure to a wider variety of taxes.

Another significant drawback to mutual funds is that they tend in many cases to rely upon an investment process that is based on the performance of markets rather than the performance of businesses, which is a crucial distinction. The reason for this tendency is again related to their pooled nature and to their size, as we detailed in this previous post. Basing your financial future on an ability to call the next move in a market (or, in the case of many mutual funds, of one sector of the market versus another sector of the market) is in many ways the opposite of basing your financial future on ownership of successful businesses for a long period of years.

We have also discussed the problems of "style drift" and "deworsification," both of which are also obstacles to the investor and both of which are tendencies that the mutual fund structure can exhibit, especially as a mutual fund's pool of assets becomes larger and larger.

In short, although there are mutual funds which are the exception to the rule and there certainly is a place for them with investors who are too small to adequately own individual companies outright, there are significant drawbacks associated with mutual funds. Many investors are not aware of these, although they should be in light of the popularity of mutual funds as an investment vehicle. Most importantly from our perspective are the ways in which these drawbacks tend to inhibit the average investor from pursuing what we know to be a successful formula for the creation of long-term wealth: "the ownership of successful business enterprises [. . .] over a long period of years."

For later posts dealing with this same subject, see also:
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Friday, May 16, 2008

Grading on a curve in the equity ratings business? ? ?













Wednesday, a major national broker-dealer announced its intention to change its equity research ratings system, starting on June 2 of this year.

The amazing thing about this new system is that it mandates a distribution of ratings within each "coverage cluster" (defined as a single analyst or multiple analysts sharing a common region, sector, or classification). Specifically, the guidelines will mandate that at least 20% of the coverage cluster will be ranked "underperform."

While there may be a perception among the investing public that analysts are reluctant to give negative ratings to the equities of covered companies, this new direction by a large firm closely resembles "grading on a curve." It basically says that in every classroom, the top students (up to a mandated limit) will get high grades, and the bottom students will get low grades.

Consumers of such research must therefore realize that a highly rated company is not highly rated in absolute terms but rather in relation to the other companies in a "coverage cluster," and likewise with negatively-rated companies.

The head of research stated, "The rationale for imposing distribution limits is simple: we want to ensure that our analyst distributions correlate more closely with historical return statistics of stocks." But this is ludicrous! By the very definitions of their ratings, the analysts are assessing the future performance potential of the company in question. They should not be forced to conform their prediction of future performance to a "historical" distribution of some group of companies in the past!

This is like saying that candidates for leadership positions will be judged on their own merits to a certain degree, but that the leadership positions must also be filled in a way that reflects the demographic percentages of the general populace. Why an investment firm would decide to do that with stock ratings is astounding.

It is even more astounding when investors consider the dramatically reduced analyst coverage at many big firms in the wake of their settlement with regulators in 2003 (in which three sell-side firms were accused of issuing fraudulent research reports, and seven others with issuing research reports which "contained exaggerated or unwarranted claims"). If stocks are now being rated based on their relative positions within a "coverage cluster," investors should be aware that many companies they might assume would be in that coverage cluster are not even covered, which further calls into question the concept of grading on a curve.

We have recently shared some of the guidelines that many decades of investment experience have shown to be valid guidelines for selecting businesses with superior prospects for capital investment. These guidelines are not relative guidelines but are based upon crucial, objective standards such as return on invested capital and compound annual earnings growth. We would advise investors that grading on a curve is a bad practice when it comes to deploying their own capital.


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Wednesday, May 14, 2008

"Capable, dynamic management operating in a fertile field for future growth"
















As we have repeated many times on this blog, the investment process we endorse is not based upon trying to time market movements but rather is founded upon ownership of carefully selected companies with certain characteristics which are held through the market and economic cycles. Please see previous posts here, here, and here for discussion of that major principle.

T. Rowe Price, who to the best of our knowledge (and his) was the founder of that theory and the first to publish a decades-long record of portfolio performance based on that principle, identified the most important characteristics of a company for investment in these words:

"When selecting growth stocks, the most important requirement is capable, dynamic management operating in a fertile field for future growth" ("A Successful Investment Philosophy based on the Growth Stock Theory of Investing," 1973).

Although based upon owning businesses for many years and not selling them and buying them back at every market turn, this is is not a "buy and hold" philosophy. There are "sell signals" -- they are simply based on signs in the company itself or the industry it operates in, rather than the fickle moves of the market. In fact, elsewhere in the same essay, Mr. Price wrote that his approach was to buy shares in promising business enterprises and then "stay with them as long as they were operating in fertile fields and benefiting from capable management."

The "as long as" part indicates that when you see a change in the growth landscape, or an indication that the company is no longer benefiting from capable management, it is time to put your capital elsewhere.

The above interview from this past Monday is an excellent discussion of some of the issues surrounding the evaluation of the management of a company. In it, Hank Greenberg discusses some troubling signs concerning the overall management of iconic insurance firm AIG*, a company he previously served as CEO and Chairman of the Board. Admittedly, he has a perspective which may not be absolutely unbiased when evaluating the current leadership, but the discussion hits on many of the areas you must look at when evaluating whether a company you are considering for the investment of capital is "benefiting from capable management." Further, his deep knowledge of the issues surrounding company management and his long years of experience with the company he is discussing are indisputable.

According to Mr. Price, this was one of the two most critical areas of evaluation for a company you own or would like to own. If you see troubling signals indicating management capability may be compromised, it is a sign that you should stop investing capital in that company and move it elsewhere.

* The Principals of Taylor Frigon Capital Management do not own AIG.

For future posts dealing with this same subject, see also:

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Tuesday, May 13, 2008

The inflationary Fed, part II











More observers are beginning to be concerned about inflation, particularly now that the widely-anticipated "recession" has not arrived and the credit scare that may have reached its height in March has been addressed by the creation of new lending facilities.

As we noted in March, those new lending facilities were an effective response that we thought would remedy the immediate financial crisis (although we also noted that they were created too late to save Bear Stearns, contrary to the popular opinion).

However, as we also noted previously (such as in this post from February entitled "The Inflationary Fed" and especially the post after that one entitled "A troubling quotation"), the Fed's recent round of lowering interest rates in an attempt to "steer the economy" is in an entirely different category.

As we wrote in that second post, "Many economic problems have been created by the Fed trying to steer the economy faster or slower using monetary policy, including the current credit crisis." Rather than trying to steer the economy, we argued, the Fed should focus on providing businesses with a predictable, stable currency, and then businesses will grow the economy, not central bankers.

Recently, Congressman Paul Ryan of Wisconsin wrote an article in the Wall Street Journal in which he argued the exact same point, noting that "When the Fed was created in 1913, its principal role was to maintain a sound currency with stable prices" but that in 1978, the Humphrey-Hawkins Full Employment Act of 1978 "changed the Fed's mandate, directing it to focus on long-term price stability and short-term economic growth."

While we agree with the general argument Congressman Ryan makes that the Fed should not steer the economy, we would also argue that the Humphrey-Hawkins Act of 1978 only made more specific the goals enacted in the landmark Employment Act of 1946, which stated that "it is the continuing policy and responsibility of the Federal Government to use all practicable means [. . .] to coordinate and utilize all its plans, functions, and resources [. . .] to promote maximum employment, production, and purchasing power" (full text of the 1946 Act available here). For a good discussion of the history of the Fed's mandate and the debate over whether it should try to steer the economy in addition to providing a stable currency, see the Federal Reserve Board of San Francisco's Economic Letter dated January 29, 1999.

If the latest round of boom and bust (this time in housing and CDO issuance) hasn't shown the folly of the Fed's attempts to steer "short-term economic growth," what ever will?

For a graphic view of the CDO-issuing explosion that accompanied the Greenspan Fed's lowering of rates to 1% for thirteen months between 2003 and 2004, see this previous post.

One perspective we have arrived at through many decades of observing this problem is that the positive aspects of capitalism which tend to work towards greater productivity and lower prices (as businesses compete with one another to add greater value to their customers) can offset the inflationary mistakes of the Fed. In heavily-regulated environments (such as those that characterized the 1970s), these positive aspects of capitalism are hindered.

These are issues that all investors should carefully consider and understand.

For later posts on this same subject, see also:

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Friday, May 09, 2008

Yahoo, Microsoft, and Cloud Computing












A few months ago, we called attention to the excellent article by George Gilder and Bret Swanson that pointed out some of the indicators of the arrival of the "third phase of Net evolution" that Mr. Gilder has seen approaching for two decades.

In the wake of the "collapse" last weekend of Microsoft's bid to buy Yahoo*, there has been plenty of analysis and commentary, but very little discussion of perhaps the most important aspect of it all, which is the fact that the deal itself (which may well still take place, according to astute observer Henry Blodget and others) is a very clear indication of the direction computer-enabled applications are moving.

The Gilder and Swanson article above, in fact, points it out: the fact that "PC-king Microsoft" must pursue "net-centric Yahoo" is a harbinger of the arriving paradigm of "cloud computing," in which the processes and storage that has been confined in boxes on your desk or in your home (where Microsoft has dominated) move back to the connected "cloud" of the internet (where Yahoo, Google, and other players have been better able to provide the tools users need for navigating and manipulating information), where users can tap into it at will from any location.

Many continue to be oblivious to the rapid arrival of cloud computing and the changes it will bring not just to entertainment but to many aspects of business, medicine, even the military. The willingness of Microsoft, the dominant company of the previous paradigm, to venture billions of dollars in pursuit of Yahoo, should clarify the central importance of this new paradigm.

*The Principals of Taylor Frigon Capital Management do not own shares of Microsoft (MSFT) or Yahoo (YHOO).

For later posts on this same topic, see also:
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Tuesday, May 06, 2008

A perspective on San Francisco's restriction of chain stores






Today, the San Francisco Chronicle reported that San Francisco "is increasingly hostile to chain stores and restaurants," meaning (in the definition of city legislation enacted a few years ago) any store or restaurant with more than eleven outlets nationally and two or more repeated characteristics among either trademark, merchandise, uniforms, facade, signage, decor, or color. Since 2004, San Francisco's planning code has banned, over large portions of the city, permits for new retail outlets to any business which is part of a "chain" or "formula store" as defined above.

The Chronicle tells us that planning commissioner Kathrin Moore, "who has been outspoken against chain stores, said they hurt local merchants and often are more harmful to the environment because their goods must be transported from outside the city."

Exactly how they "hurt local merchants" is not spelled out, but the economic answer is that chain stores (such as coffee chains or grocery stores) are often able to provide goods for less than local merchants can due to economies of scale. If chains are unable to provide goods of similar quality at lower prices, they would not be in a position to "hurt local merchants." Any large business got that way because they were able to provide value in some way that customers wanted -- and in most cases, successful larger businesses were once smaller businesses.

When governments artificially restrict competition in this way, they ultimately end up hurting customers, who are prevented from buying food, or coffee, or other goods and services that they want or need, at the most competitive prices available. Because they don't like hardware chains, government is effectively taxing everyone who wants to buy a hammer in San Francisco. With goods like food, which people must buy frequently, they are adding cost to everyone, including the lowest-income members of society, in exchange for their high-minded satisfaction in knowing that they are "helping local merchants" (at the expense of other merchants, and at the expense of their own citizens).

As for commissioner Kathrin Moore's second reason, the supposed environmental benefit from selling local goods instead of goods that "must be transported from outside the city," there are several important economic problems with this increasingly common environmentalist argument as well.

Aside from the fact that San Francisco is not a major grower of coffee beans (presumably, even local non-chain coffee shops must get the majority of their coffee beans from somewhere beyond the San Francisco city limits), the argument for consuming only local goods flies in the face of one of the greatest benefits of free economies -- the division of labor.

The division of labor enables areas that are better at producing one good (such as wheat, or automobiles) to produce that, in exchange for goods that are more effectively produced somewhere else (such as tropical fruit, or motion pictures).

San Franciscans who argue for "buying local" benefit from their proximity to some of the most productive produce-growing regions in the world, with world-class fruits and vegetables and wines and cheeses grown or produced nearby. But do people like Ms. Moore really believe that every city should only make available to their citizens locally produced wines and mangoes and pineapples and artichokes? Should Nebraskans convert land that is ideally suited for growing corn and instead plant bananas and zinfandel grapes so that the citizens of Omaha can "buy local" and be spared the evil of consuming "goods that must be transported from outside the city"?

The fact is that the ability to allow specialization is a hallmark of free economies, and that in communist countries during the twentieth century the division of labor broke down to such a degree that factories had to produce everything they needed themselves -- just as Ms. Moore would like to see San Franciscans do, apparently. On page 137 of his book, Capitalism, economist George Reisman quotes two authors who describe the contingencies that factories in communist countries had to take because they could not rely on the delivery of goods and services from elsewhere:

"There is considerable evidence that Russian plants do for themselves many things -- like producing screws with slow-speed machinery -- which could better be done by others -- in this case, specialized screw manufacturers using high speed equipment" (Henry H. Villard, Economic Development, NY: Reinhart, 1959, page 171).

"For a Soviet factory -- or a Soviet research institute -- the best response to unreliable business partners is self-sufficiency. When the planners decided to build the giant Fiat factory, they decided to make it almost entirely self-sufficient. Except for electrical equipment, window glass and tires, every part used in Zhiguli -- every nut, bolt, seat cover and piston ring -- is made in the factory itself. Gersh Budker's Institute of Nuclear Physics in Novosibirsk couldn't buy the instruments it needed, so the scientists there decided to make their own. This kind of self-reliance is expensive and inefficient." (Robert Kaiser, Russia, NY: Atheneum, 1976, page 338).

Someone should acquaint Ms. Moore and the San Francisco city planning commissioners with those quotations, particularly the last line that "this kind of self-reliance is expensive and inefficient." Those who advocate "buying local" instead of letting coffee-producing regions produce coffee and wine-producing regions produce wine are advocating that same kind of expensive and inefficient self-reliance, to the detriment of their citizens (whose food budgets are already straining from the increase in food prices caused by inflationary monetary policy and environmentally-motivated ethanol mandates).

Further, these kinds of government interferences in free markets always end up being unfair, arbitrarily privileging one business over another. Does the city of San Francisco prohibit the existence of banks that have more than eleven nationwide outlets within their "retail chain-free boundaries"? How about ATMs? Do the cars that citizens drive through the streets have to be built in San Francisco too (or were they shipped from other places)? How about the computers that the owners of "non-chain" retail businesses use to keep their Quickbooks, or the cash registers they use for their tills? And, note that this kind of restriction on who is deemed worthy of renting a piece of property means that city planners have decided that it is better to have a piece of commercial real estate sit empty than be filled with a paying renter who happens to be part of a chain -- which hurts the property owner in order to please those who find a chain store somehow more unsightly than a vacant building.

You may wonder what all this has to do with investing -- and the answer is that it is something that is very important for investors to pay attention to since it can have a real effect on value. We've written before about the fact that the Taylor Frigon strategy is directly descended from that developed by the late Dick Taylor and the late T. Rowe Price, most recently in this post.

In his 1973 essay, "A Successful Investment Philosophy based on the Growth Stock Theory of Investing," Mr. Price wrote that "the investment worth of a share of common stock is dependent upon many factors" and that investors must be alert to "changes in the social, political and economic trends."

He went on to say (discussing developments in the U.S. during the late 1960s and early 1970s): "Socialization of basic industries requires management to do more and more [. . .] at the expense of stockholders who are the real owners of business. The ecology craze is sweeping the country, forcing many industries to spend billions of dollars, increasing costs of production and reducing profits."

We hope that San Francisco's recent experiments in restricting the free market at the expense of businesses, property owners, and ultimately individual citizens is an anomaly and not an indication of trend that will infect other areas.

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Friday, May 02, 2008

Still not a recession, part II











Back when we were criticizing "The current recession drumbeat" of the media in November, or declaring in our "Happy New Year" post that, contrary to the conventional wisdom, a recession was still not imminent, there were very few others who agreed. By February 4, when we wrote "Still not a recession," the conventional wisdom was even more settled.

Now, however, the preliminary results are in and it appears the much-anticipated recession still has yet to arrive.

Here is a good post from Larry Kudlow yesterday quoting two good reactions to the first quarter GDP (including the aptly-titled "Dude, where's my recession?").

The most adamant recession predictions came from those who based their analysis on demand-side assumptions, such as the platitude that "the consumer is 70% of the economy."

Supply-side economists, such as Larry Kudlow, Brian Wesbury, and David Malpass, looked through a much clearer lens and saw the situation much more accurately. We have discussed the important difference between the supply-side (or production-based) and demand-side (or consumption-based) approaches several times, such as here.

We won't say "we told you so," because at Taylor Frigon Capital Management we do not base our investment discipline on the shaky practice of trying to call the next GDP number or the next move of the Fed. Doing so can end up causing you to "recession-proof" your portfolio at the worst possible time.

For future posts dealing with this same topic, see also:



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