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Minyan Mailbag - Stagflation

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Toddo-

Thought you might appreciate the graph below which shows the occurrences of the word "stagflation" found in U.S. print sources from 1/1/80 through today. The source is Lexis/Nexis.

Notice the jump after last week's job report. If "stagflation" is to become an economic reality it must first become present in the public mindset. The inference is that a growing number of occurrences of the word should be a good signal. When "stagflation" is on the cover of Time, and everyone knows it - it is probably maxed out as both an investment theme and an economic factor. This gives us an early indicator for any identifiable theme or investment idea

We've created search algorithms that allow us to reach into the Nexis database and track themes over time in order to gauge acceptance in the public mind. A bit like looking for the Denial/Migration/Panic tipping points. This is really nothing new and is a subset of the emerging science of memetics. Yet, it is not used by investors. The R&D took much much longer than I ever thought - but it is now complete. We use print as the web does not provide any real history and it is impossible to rapidly distinguish credible source material in HTML. Our analysis is based on over 10,000 print sources, including every major U.S. newspaper and business journal. We can drill down into individual articles or specific timeframes to better understand the nature of the news on that theme for any specific day.

One amazing result so far of this research is that the occurrences of the word "recession" accurately predict the NBER-designated recession dates 7-12 months in advance. In other words, this simple approach is better and faster at predicting recessions than the official recession-dating comittee.

Another benefit is the inferences we can make when a negative or positive stimulus loses its power. For example, a study of the words "terrorism" or "Iraq" correlate beautifully (negatively) with the S&P 500 into the March 2003 low then lose correlation - as those themes have lost their power to produce fear in investors. In the conventional paradigm - that "information has been discounted." After March 2003 "Earnings" became the operative positive theme. "Earnings" has just now turned from a positive theme into a negative theme.


All the best,

Minyan Andreas Calianos



R.P.

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