The New York Times Indicator

September 7, 2009

John Maynard Keynes described speculation as essentially trying to guess what other people are going to guess, and doing it better than they guess how you’re going to guess. I think this also describes macro-level investing, i.e. allocating capital based on economic data. As I stated in my last article, focusing on a decent cash flow avoids many of the problems that come from market correlation, leaving you with only the strength of your own analysis to worry about. However, the New York Times has given us a macro indicator that even the most cynical and suspicious of us can get behind. And it’s not even in their business section.

dunceIt is, in fact, the New York Times Bestseller List. In a classic investment comedy book, Rothchild’s A Fool and His Money, the author found a newsletter that went through the bestseller lists, and found that the optimum strategy was to peruse the lists for finance and investment books and then do the exact opposite of what the books recommend:

“In the early 1920s Edgar Lawrence Smith wrote…Common Stocks as a Long Term Investment. This book was ignored during the entire period when it would have been a good idea to buy stocks. Suddenly it became a best-seller in 1929…During the entire period from 1932 to 1967…not a single investment book became a best-seller…until Adam Smith’s Money Game was published in 1968, after which the stock market promptly topped out and collapsed. In 1974 Harry Browne’s You Can Profit from a Monetary Crisis…turned half the reading public into gold hoarders, and was followed by a severe decline in the price of gold. Gold didn’t rise again until there were no gold books on the best-seller list…Then it hit $800 an ounce. In the early 1980s, several national bestsellers (most notably Howard Ruff’s How to Prosper During the Coming Bad Years) predicted high inflation forever…a sure sign that inflation had abated. Later in the decade, Jerome Smith’s wildly popular book The Coming Currency Collapse, a terrifying rationale for the total collapse of the US dollar, sold out several editions just as the dollar began its remarkable three-year bull market. Megatrends, a summer favorite in 1983, predicted the triumph of high technology and pronounced the smokestack industries dead. Along…came a genuine depression in the microchip and computer industries and a huge drop in the value of technology stocks, while smokestack industries revived.”

The book was published in 1988, but a sequel would bear up this conclusion. During the dot-com era, Dow 36,000 was published in 1999. The next year the Dow hit 11,750 and then fell to 7286, hit an all-time high of 14164 in 2007, and it looks right now like 36000 is decades of inflation away. And, who could not have predicted the death of the real estate market from the popularity of the Rich Dad series? In 2007 one of’s bestselling books was Bogle’s Little Book of Common Sense Investing, which advised focusing solely on index funds, right before the indexes collapsed, prompting a swarm of articles  about a negative return over ten years (although counting from a bubble to a collapse is kind of cheating).

Right now the New York Times list is devoid of financial books, which is tentatively a good sign for the financial public. Although Rothchild and his newsletter deemed it significant that books on a given subject were not on the list, I think the presence of a book is more important than its absence. #19 this week, however, is Fareed Zakaria’s The Post-American World, about the rise of China and India and the global middle class. It is more optimistic than the title would suggest (and why not? It was first published in April 2008 when the world was better stocked with optimism).

image002As an aside, China has pegged its currency to the United States dollar for a number of years, in order to perpetuate the trade deficit and build up a substantial pile of Treasury holdings. We ran the price of oil up to $140 a barrel just to shake them off, and now they have the flaming nerve to complain about inflation and suggest that the world needs a new reserve currency. Interestingly, that article also talks about China seeking to switch from export dependency to internal consumption. The trouble is that China’s rapid growth built half of an economy, with the United States and its other importers providing the other half. Since demand creates supply, but supply does not create demand, it’s fairly clear who got the right half. So, for everyone worried about the decline of America’s economic influence, rest assured that when we go down we can still take the rest of the world with us. And, if the New York Times indicator works true to form, the global middle class is doomed anyway.

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