Tuesday, April 1, 2014

The Problem With Business Hagiography and Selection Bias

Fortune, "Inside J.C. Penney's 'Cleanse'"

"Clearly the approach worked for iPhones. Would it work for mattress pads and pantyhose?

Johnson wasn't going to wait around for an answer. When a director asked when he planned to test the notion, Johnson scoffed. Never mind that other retailers had tried such pricing only to see customers vanish. He had made his decision. After all, his hero, Jobs, disdained tests and instead relied on his gut. At the same time, Johnson didn't seem particularly interested in how Penney operated, according to Ullman. The outgoing CEO noted in a regular update to the board that the new CEO had not asked a single question about how the business was running."

16 comments:

Stagflationary Mark said...

The outgoing CEO noted in a regular update to the board that the new CEO had not asked a single question about how the business was running.

If this isn't a sign of what's wrong with our country, then I don't know what is.

My first question (of many) would have been related to this chart.

"How much more will you pay me for taking a job that may ultimately make me look stupid?"

"What can I do now to turn this around and/or not become a laughing stock?"

"What have you tried so far that hasn't worked?"

"How is morale?"

"How many smart people have quit?"

"Is there anyone you would let go and why?"

CP said...

Mark, isn't that an amazing story?

Is Johnson really that great at retail and designing stores or did the Apple products, so superior at least for now, sell themselves?

If you put the JCP merchandise in an Apple store and Apple products in JCP stores what do you think would have happened?

I'll bet it's not the stores.

Stagflationary Mark said...

CP,

If you put the JCP merchandise in an Apple store and Apple products in JCP stores what do you think would have happened?

I once bought Gold Toe socks at JCP. About a decade ago (give or take), Wal-Mart started selling them too at a much lower price.

I hoarded so many of those socks at Wal-Mart that I may never need to buy more. Seriously. Wal-Mart then stopped selling them (customers wanted even cheaper socks?). Go figure.

Haven't been to JCP since (only ever wanted the socks). Definitely one of my best hoarding "investments" ever.

I'll bet it's not the stores.

I think that is a very safe bet.

CP said...

Mark,

What do we think about current TIPS yields? They are in positive territory again after that lurch into negative last year...

CP

CP said...

http://blogs.wsj.com/economics/2014/04/03/the-downward-drift-in-inflation-adjusted-interest-rates-why-and-so-what/

Stagflationary Mark said...

CP,

In my opinion, this economy requires continually falling real interest rates lest the wheels fall off.

It will therefore be interesting to see what happens if/when even ZIRP can't generate much inflation (Japanese cash had a 0% real return for decades in Japan).

TIPS yields tend to be (relatively) high at the top of stock market bubbles (the past two) as investors embrace riskier assets. I'd say that's happening again.

Most people seem to think real yields are low right now. I'd argue that they are (relatively) high. Time will tell!

Josh said...

I disagree. While there is not any empirical proof that I am aware of, I believe that increasing rates from the 'emergency' 0% short term rate will actually help the economy.

I cannot say it better than Einhorn's argument about jelly doughnuts in 2012.

http://www.huffingtonpost.com/david-einhorn/fed-interest-rates_b_1472509.html

Stagflationary Mark said...

Josh,

Those who have given up on earning more will have to save more and spend less. This is the antithesis of a wealth effect, and their reduced spending is a drag on the economy.

I agree. As a saver, that's what I am doing.

Real yields are tied to real growth though, and there is no way this economy can grow like it once did (over full business cycles). There are so many long-term trend failures that I barely know where to start, and most appeared long before ZIRP appeared.

The 5 Charts I Shared with My Tax Preparer

And for what it is worth, I don't believe that the Fed actually is holding down interest rates. If they had done nothing then we'd be in a Great Depression and would have interest rates to match.

The Growing Deposit Glut

Banks aren't going to pay more interest on CDs when the money keeps piling in.

CP said...

"I told her that unlike Jeremy Siegel in February 2011, I did not believe that our economy could support high real interest rates. I backed up the truck while he was warning investors to stay away. I also told her that if I am financially ruined (possible) by owning TIPS, then I won't be alone. It is our debt that's propping everything else up. She said that must give me little comfort. I agreed that it didn't."

Stagflationary Mark said...

And if you truly want a sustainable economy over the ultra long-term then here is what a modest net real yield of just 1% looks like in a million years.

Exponential Growth and Immortality!

Now let's assume we buy a penny's worth of TIPS and continually reinvest. Let's also assume we live forever, or at the very least pass this savings down to our grandchildren (and so on and so on). Why not! Let's be optimistic for a change.

So how much money will we have made off of that penny in a million years?

Future Worth = $0.01 x 1.01^1000000 = $2.365 x 10^4319

That's a number with 4,320 digits in it. Mwuhahahahaha! We are going to be so filthy rich we won't know what to do with ourselves!!! That's in inflation adjusted dollars too! Just think of all the canned goods we'll be able to hoard!!


That's a ponzi scheme pipe dream. It's what the typical locust must expect at the beginning of a swarm. Not going to happen.

I will feel more than fortunate if I get a real yield of 1% over the rest of my lifetime. There will be many coming after me who definitely won't. It is not permanently sustainable.

CP said...

Mark,

Equity bulls think the stock market automagically goes up 8% per year. That's an increase of 10^33 in a mere thousand years.

CP

Josh said...

"In my opinion, this economy requires continually falling real interest rates lest the wheels fall off."

I am disagreeing with this comment in that I think continually falling real rates are holding the economy back from higher growth.

With interest at the lower bounds, I think the economy gets stuck in a cycle that is hard to break out of.

CP said...

Mark, this was in today's Prechter letter:

"Lower interest rates simply mean a slower rate of accumulation, which likely will jeopardize their minimum goal. The only recourse for this investor is to save more."

I think you'd agree!

Stagflationary Mark said...

Josh,

With interest at the lower bounds, I think the economy gets stuck in a cycle that is hard to break out of.

I totally agree. Perhaps we shouldn't have created $10 trillion dollars worth of commercial bank deposits then. Banks have zero incentive to raise CD rates when there is so much money out there attempting to earn interest.

Even if we do pay more interest on the $10 trillion, then the $10 trillion will grow even more and cause even bigger problems down the road.

Long-term matters and yet all we do is think short-term. There is no way we can realistically expect $10 trillion to earn exceptional real rates of inflation adjusted return over the long-term.

Stagflationary Mark said...

CP,

I think you'd agree!

Absolutely!

The sooner one figured that out the sooner that person was willing to lock in a long-term real yield before others did. I speak anecdotally of course, lol. Sigh.

CP said...

"If you put the JCP merchandise in an Apple store and Apple products in JCP stores what do you think would have happened?"