Photo: Adrian Pingstone; Source: Wikipedia
Every pilot receives some instrument training. This makes sense. There’s always a chance you can get caught by unexpected weather. Getting tossed around by turbulence when there’s no visibility outside is disorienting. You feel like you’re moving when you’re stable, you think up is down, and vice-versa.
The first rule that’s drilled into everyone getting instrument training is to trust the instruments. Our senses can and do deceive us. The fluid in the inner ear gets displaced by rapid motion, and makes us think that the world is spinning. Or we can get vertigo from a lack of visual cues. Pilots flying over an empty landscape at night sometimes confuse the stars in the sky with sparse lighting on the ground.
I think of instrument training when I think of today’s economy. Some say that the current growth cycle is getting long in the tooth. It’s true that this is one of the longest economic expansions ever recorded. But economic expansions don’t die of old age. Something has to pull them down. Yes, there are signs of late-cycle exuberance: paintings selling for hundreds of millions, crypto-currencies and other exotic instruments going parabolic. But it’s dangerous to listen to selected stories when evaluating an $18 trillion economy.
Leading Economic Indicators. Source: Conference Board, Bloomberg
Right now, the Conference Board’s index of leading economic indicators is rising, and has been since mid-2009. This composite has done a pretty good job of showing us when to worry about the economy. People may feel otherwise, but investing based on your impressions can be like doubting your instruments in the cockpit. Yes, instruments can fail and economic reports can give false signals. But it’s far more likely that the pilot’s or the analyst’s intuition is getting in the way.
“The wish is father to the thought,” Shakespeare wrote. When we want something to be true, we look for facts that confirm our impressions. In investing, as in flying, it’s dangerous to trust our feelings.
Douglas R. Tengdin, CFA