Still in thrall to the Phillips Curve?

In response to the recent nomination of Janet Yellen to become the next Vice Chair of the Federal Reserve (replacing retiring Vice Chair Donald Kohn), economist Larry Kudlow has written an article entitled "Yellen is spellin' future inflation."

Kudlow states that "Ms Yellen is a distinguished economist who unfortunately subscribes to the Phillips-curve model that trades off unemployment and inflation."

Although he does not cite hard evidence that Dr. Yellen subscribes to the Phillips curve model, she has in the past cited texts that support the Phillips curve view, including the 1996 paper authored by her husband, Nobel laureate and UC Berkeley Professor George Akerlof (along with co-authors William Dickens and George Perry). She has also stated that some inflation is good in order "to grease the wheels of the labor market" -- in other words, to increase employment, a clear tenet of the Phillips curve view (and the conclusion of the 1996 essay authored by Akerlof et al).

We have previously discussed the problems with the Phillips-curve view of the world, as well as evidence that Fed chairman Ben Bernanke is "still in thrall to the Phillips curve," as Steve Forbes wrote back in June 2008. For those previous discussions, and what this means for investors, see "The Fed drops the mask," "Who are you going to believe . . . ?" and "The Fed's oversteering and the wreckage of the past decade."

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For later posts on the same topic, see here:

• "Glenn Beck is an economic butterbar" 11/04/2010.

• "Likelihood of Fed over-steering increases" 01/25/2011.

• "Inflation is a monetary phenomenon" 03/07/2011.

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March 9 anniversary

There are plenty of stories out today about the one-year anniversary of the bull market, and in one sense we'd like to simply ignore it, because we often emphasize that investors should focus on businesses rather than markets (see here for instance).

However, the return of March 9 -- the day that marked the pit of the most ferocious bear market in nearly seventy years -- is a good day to actually re-emphasize that very lesson.

There are plenty of investors who, stunned by the precipitous drops in the market, were ready to jump off at the absolute bottom of the ride -- and many who actually did. We ourselves know of some whom we "talked back from the edge" and of others who actually sold their portfolios, following the (awful) advice of their "financial advisors" (now their former financial advisors) in March of 2009.

We have written a series of articles about the Dalbar studies that show this same deadly pattern destroying investor returns over and over -- and noted that the Dalbar data implicates "financial advisors" as part of the problem (see here and here).

The advice of focusing on the underlying business rather than the market helped investors during those dark days of March, 2009 -- because (as we have written many times) the panic of 2008 and 2009 was primarily a financial panic caused by Wall Street-specific issues, and those who owned shares of good, well-run businesses did not need to sell them at fire-sale prices because of the happenings on Wall Street, as we explained in this post.

We are not just saying this with 20-20 hindsight, either. On March 2, 2009, for example, we wrote an important post entitled "Don't get off the train" which cautioned investors against stepping out of the market and being left behind.

Now that things have gotten better, and investors can view the dark days of last year from a bit of a distance, it is important to revisit these lessons, and resolve to focus on businesses and less on the twists and turns of the markets, bear or bull.

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

• "Great minds think alike!" 03/19/2010.

• "Market-timing and train-timing" 05/25/2010.

• "Be centered, be still -- 2011" 03/17/2011.

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Have you heard of this company? DLB

In previous posts, we have discussed some of the characteristics of a Taylor Frigon growth company, and have highlighted some examples -- most recently Tractor Supply and Resmed.*

With Oscar weekend approaching, and plenty of buzz in Hollywood about 2009 being the "year of 3-D," we thought we would highlight another growth company, Dolby Laboratories.*

While most consumers are familiar with the name Dolby, because the company licenses their technology to manufacturers of consumer electronic equipment, many do not realize that Dolby equipment is also used by almost every professional studio in the production of music and movies and other professional media content (such as the Dolby-E encoding equipment pictured above).

And while moviegoers may have thought that 2009 was the year of 3-D, with the blockbuster success of James Cameron's Avatar (featuring Dolby 3D) they may not be aware that seventeen more big-name 3-D films are set to hit the screens in 2010, including another edition of Shrek, another Friday the 13th, a third Toy Story, and the return of Tron in Tron Legacy, as well as several others. Many will feature Dolby 3D, in addition to all the Dolby technology that is used in other aspects of movie production.

The dawn of modern 3-D may well transform the home theater as well, with Sony recently announcing a $200 3-D blu-ray player and Philips announcing 3-D LCD televisions to ship this summer.** Remember that Dolby technology is licensed by many consumer electronics manufacturers, who see Dolby as an essential partner (Dolby long ago decided to license their technology rather than make consumer electronics gear themselves, opting for the role of partner rather than competitor to the consumer electronics companies).

We believe that focusing on the fundamentals of well-run businesses in front of fertile fields of growth is important for investors in all economic environments, and that they can be reminded of that concept the next time they hear the media talking about the business of entertainment.


* The principals of Taylor Frigon Capital Management own securities issued by Tractor Supply (TSCO), Resmed (RMD), and Dolby (DLB).

** The principals of Taylor Frigon Capital Management do not own securities issued by Sony (SNE) or Philips (PHG).

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

• "Have you heard of this company? HITT" 07/06/2010.
  

• "Have you heard of this company? IIVI" 08/05/2010.

• "Have you heard of this company? CHRW" 09/20/2010.
  

• "Have you heard of this company? NAT" 11/22/2010.

• "Have you heard of this company? EZCH" 12/09/2010.

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Avatar and long-term inflation

Every now and then, a fact or illustration arises which vividly reveals the long-term corrosive impact of inflation, that insidious force which usually remains invisible and all-but-unnoticed.

The following chart (from IMDb data) shows estimated US box office records for the all-time biggest movies. Note that while the current box office champion, James Cameron's 3-D science fiction adventure Avatar, recently became the all-time worldwide box office champion by overtaking Cameron's Titanic in total ticket sales, when adjusted for inflation of ticket prices it is only ranked number fifteen (this list shows domestic ticket sales because, when adjusting for the inflation of the US dollar, US box office figures are used rather than world-wide figures).

1. Gone with the Wind $1.538 billion
2. Star Wars $1.355 billion
3. Sound of Music $1.084 billion
4. ET $1.080 billion
5. Ten Commandments $997 million
6. Jaws $975 million
7. Titanic $977 million
8. Dr. Zhivago $945 million
9. Exorcist $841 million
10. Snow White $829 million
11. 101 Dalmations $760 million
12. Empire Strikes Back $747 million
13. Ben Hur $746 million
14. Return of the Jedi $715 million
15. Avatar $708 million so far

In other words, much of the credit for Avatar's record-breaking box office figures can be attributed to inflation of ticket prices -- which is to say, to the declining purchasing power of your money over long periods of time. Because much smaller amounts of money purchased so much more back in the day when Gone with the Wind was in theaters, its sales figures (which seem small by today's standards -- only $198 million) still make it the all-time box-office champ in the US ($1.53 billion in today's dollars).

Even when inflation is "relatively low," it cuts the purchasing power of everyone's money over the decades. At a 3% annual rate of inflation, money loses fully half of its purchasing power in about 23-and-a-half years. The most recent Dalbar study of investor behavior (2009) showed inflation averaging 2.89% over the past 20 years.

In spite of its ravaging power, it is easy to overlook the impact that inflation has on a family's long-term wealth and estate over the decades. Little illustrations such as the disconnect between Avatar's sales in current dollars versus its standing when adjusted for inflation can serve as valuable reminders of this slow decay over time.

We have written several times about the subject of inflation, and why the best defense against its effects over time has been ownership of growing companies (and not commodities such as gold). For readers interested in reviewing some previous discussions on this subject, we would recommend:

• What about commodities? (part 3) 11/20/2009.

• Stand still, little lambs, to be shorn 06/03/2009.

• Liberty and property 07/03/2008.

• The Inflationary Fed 02/27/2008.

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One of the best explanations you will hear of the financial crisis and its aftermath

This remarkable video from economist Brian Wesbury is one of clearest explanations you will hear on the financial crisis and its aftermath.

It is entitled "TARP was a mistake."

One of the hardest-hitting points that Mr. Wesbury makes in the video is the fact that, to this day, the view that Congress needed to somehow use taxpayer dollars to buy up troubled mortgage-backed assets is not challenged by members of either side of the political aisle in Washington. Nowhere can we find a politician brave enough to say that the very idea of buying back troubled assets was mistaken.

Mr. Wesbury also points out that at the time, he was arguing that changing mark-to-market accounting rules would have fixed the problem, rather than spending taxpayer dollars. He cites this video from September 2008 in which he made that argument (and he was also making that argument in writing in many places leading up to September 2008).

We have noted before that we are also on record saying that mark-to-market was a big part of the problem (as early as this post from March 2008). We also publicly stated in April 2009 that it was time to retire TARP (and since then have argued that we certainly don't need to compound it by continued TARP-like "stimulus" or "jobs" bills).

We have long believed that a crucial component of investment is the ability to sort out the real situation from the "conventional wisdom" in various matters large and small. We believe that having a correct understanding of the Financial Panic of 2008-2009 will be extremely important to investors for many years to come.

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