On September 21, 1937, J.R.R. Tolkien’s novel The Hobbit was published by the British publishing house of George Allen & Unwin.
Publication marked a seminal moment in fantasy literature that paved the way for The Lord of the Rings series of books. Movies and television series followed decades later. The Hobbit follows the journey of Bilbo Baggins, a quiet and unadventurous hobbit who meets the wizard Gandalf and a group of thirteen dwarves led by Thorin Oakenshield. Bilbo joins them on a quest to reclaim the dwarves' lost homeland, the Lonely Mountain, and its treasure from the dragon Smaug. Along the way, they face numerous challenges, including trolls, goblins, wolves, and giant spiders. In one key moment, Bilbo separates from the group and discovers a magical ring that grants him invisibility. He also meets the creature Gollum, who possesses the ring but unknowingly loses it to Bilbo. Eventually, this motley group defeats Smaug, and the dwarves reclaim the mountain, but their greed for the treasure causes tension with the locals, who also seek compensation for their losses. A conflict nearly erupts until an even greater threat attacks, making fast friends out of near foes. Bilbo, having completed the adventure, returns home to the Shire, forever changed by his experiences but content to live a peaceful life again. The underlying themes of The Hobbit by J.R.R. Tolkien are rich and varied, exploring concepts of heroism, friendship, growth, and the battle between good and evil. Here are three lessons for the modern investor from the lands of Middle Earth: 1. The Hero’s Journey is not for everyone. Bilbo Baggins begins as a timid, comfort-loving hobbit but evolves into a brave and resourceful hero. The novel follows his transformation through trials, highlighting the theme of growth through adventure and adversity. And yet, when all is said and done (and in Tolkien’s works plenty is said / written), Bilbo decides to return to a quiet life and forget all about adventures. Bilbo Baggins was initially all for taking risks to get worldly and perhaps wealthy, the rewards seemingly well worth it. Then he endured those very risks and found the rewards insufficient to make him ever do it again. Understanding the Risk Premium, how much you would need to earn in return for exposing yourself to peril, is the key for those of us who are merely risking our personal fortunes and not our lives. Over the long term, taking on more risks should mean bigger rewards than taking few or more moderate ones, otherwise, there is no incentive to leave the Shire at all. Can’t handle the periodic adventures to the downside? Then it is okay to avoid them. Stay home. Be boring. But realize that without some risk, your overall returns are destined to be boring too, and so might the retirement for which you are saving. 2. Greed has its consequences. The desire for treasure, particularly the hoard of the dragon Smaug, represents the destructive power of greed. Thorin's obsession with reclaiming his ancestral wealth leads to conflict and tragedy, emphasizing how material greed can corrupt even noble causes. Investors tend to worry about risk when markets are frothy and focus on returns when the bourses are becalmed. They forget that the two are related. In other words, being greedy increases your risks at all the wrong times. 3. You can’t control all of the variables. Chance and fate play a significant role, especially when Bilbo finds the One Ring. Tolkien emphasizes the role of unseen forces guiding events for a greater purpose. This theme carries into The Lord of the Rings, where Bilbo’s discovery of the Ring has far-reaching consequences. Your decisions also have future consequences too. So be sure you know what you can control (planning, strategies, tactics) versus what you can’t (politics, market forces, volatility.) Focus on getting that one ring…I mean one thing…right. The relationships formed among Bilbo, the dwarves, and characters like Gandalf underscore the importance of companionship and good counsel. These bonds give Bilbo the strength to face his fictional challenges, but a good relationship with an advisor can help you face yours in the real world.
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🗞️Easy Like Wednesday Morning? Fed Rate Cuts Are Looming – Is That a Good Thing?🗞️
The Federal Reserve is gearing up for another big meeting on September 17-18, marking the sixth of eight meetings scheduled this year. At these meetings, the Fed assesses the state of the economy and decides whether to adjust monetary policy, which includes potentially cutting interest rates. So, with the next meeting just around the corner, let’s talk about what’s happening with inflation and why rate cuts could be on the horizon. 📉Inflation: Cooling Off or Heating Up Again?📈 For a while, it seemed like the Fed was winning the battle against inflation. From mid-2022 to mid-2023, we saw a lot of progress, and many believed the worst of the pandemic-era inflation was behind us. Then, the first quarter of 2024 came along, and inflation started to creep back up, making people question whether the Fed could actually cut rates anytime soon. But there’s good news. Recently, inflation has resumed its downward trend. The Consumer Price Index (CPI), which measures how much consumers are paying for goods and services, was up just 2.5% over the last year – the lowest it’s been since inflation started spiking back in early 2021. On a shorter time frame, inflation has been cooling even faster, rising at annualized rates of just 1.1% over the last three months and 2.0% over the last six months. This points to a gradual easing of inflationary pressures. The Producer Price Index (PPI), which tracks prices from the sellers’ side of the equation, also rose by 0.2% in August. Overall, producer prices have been moderating after some sharp increases earlier in the year, although energy prices have played a big role in these slower inflation numbers. If you take energy out of the equation, inflation is still lingering, so the Fed might not be out of the woods just yet. ✂️Will the Fed Cut Rates This Week? With inflation slowing down, many expect the Fed to cut interest rates in September. But before we get too excited about cheaper borrowing, there’s a lesson we should remember from history – specifically, the 1970s. Back then, Fed Chairman Arthur Burns faced a similar situation: inflation had spiked, then appeared to cool off. Under political pressure, Burns decided to ease monetary policy too soon. The result? Inflation came roaring back, leading to an even bigger crisis. Burns’ experience serves as a cautionary tale about how tricky inflation can be and why the Fed needs to act decisively without letting political pressure sway its decisions. Cutting rates prematurely could reignite inflation, and we could find ourselves in a similar situation to what happened in the 1970s. 📚 Have We Learned From the Past? The big question is, will the Fed make the right call this time? While inflation seems to be under control for now, history shows that it can resurface quickly if not handled properly. The Fed will have to walk a fine line between supporting economic growth and making sure inflation doesn’t come back stronger. As the September meeting approaches, all eyes will be on the Fed’s next move. Will they cut rates and risk repeating the mistakes of the past, or will they stay cautious? Can both things happen at the same time? We’ll just have to wait and see. On September 14th, 1752, the British Empire adopted the Gregorian calendar, skipping 11 days from September 2 to September 14 to align with most of Europe.
The Gregorian calendar was introduced by Pope Gregory XIII in 1582 to reform the Julian calendar, which had been in use since 45 BCE. Established by Julius Caesar, it set the year at 365.25 days, with a leap year every four years. However, the actual solar year is approximately 365.2422 days, causing the calendar to drift by about 11 minutes per year. Over centuries, this slight difference accumulated, leading to a discrepancy of about ten days by the 16th century. That calendar drift was causing issues with calculating important dates, particularly Easter, which was based on the vernal equinox. The Council of Trent (1545–1563) recognized the need for calendar reform to bring Easter back in line with the original date set by the First Council of Nicaea in 325. Pope Gregory XIII, with the help of astronomers and mathematicians, including Aloysius Lilius and Christopher Clavius, introduced a more accurate leap year system. A year is a leap year if divisible by 4, but century years (e.g., 1700, 1800) are only leap years if divisible by 400. This adjustment reduced the error to 1 day in about 3,300 years. The Gregorian calendar was initially adopted by Catholic countries such as Spain, Portugal, and Italy in 1582. Protestant and Orthodox countries were slower to adopt the change due to religious and political reasons. Russia did not switch until after the Russian Revolution of 1918, and Greece only adopted it in 1923. Over time, the Gregorian calendar became the international standard for civil use. However, some religious communities still follow other calendars for liturgical purposes (e.g., the Hebrew, Islamic, and Orthodox Julian calendars). Today, the Gregorian calendar is widely used worldwide for secular purposes, and it remains the most accurate long-term calendar system in use. Last week, we had a significant adjustment to the annual employment data in the United States, and those who didn’t follow the data collection methodology closely decried the discrepancy. Using the Gregorian calendar as an example, here are several lessons for the Modern Investor regarding statistical sampling in government data: 1. Reports are a representation of reality, but they are not reality. Just as the Gregorian calendar was introduced to more accurately represent the true length of the solar year (365.2422 days), statistical sampling in government data aims to accurately reflect and predict the population or phenomenon being studied. Inaccurate data collection methods, similar to the inaccuracies of the Julian calendar, can lead to long-term drift or bias in results. It happens all the time. The details matter. Yet many economic statistics are published based on the presumption that one-third of the data is enough to predict all of it. For instance, Gross Domestic Product (GDP), the market value of goods and services produced within the country, is used to measure our overall all economic growth or contraction. Three estimates are provided each quarter for GDP; the advance estimate only contains data for the first month, while the other two are inferred using statistical means. Likewise, after two months, the third month is extrapolated, and the first estimate is struck from the record. Even after the quarter concludes, there are revisions years later due to data that is deduced at first and replaced later with real figures. So GDP, like the employment figures, is both closely watched and subject to significant revisions, which is not a great combination. 2. Statisticians attempt to balance simplicity with precision, never achieving either. The Gregorian calendar's leap year rule balances simplicity (a leap year every four years) and precision (skipping specific century years), making it more accurate and more usable but still slightly flawed. Government statisticians have limited resources, so their efforts will never be perfect either. Don’t give too much weight to initial impressions. 3. The delays can be dangerous. The Gregorian calendar took centuries to be adopted globally, leading to misalignments in international schedules. Similarly, when agencies inevitably delay updating their statistical data, it can lead to real-world discrepancies and confusion for investors. 4. Remember, the initial picture is only the initial picture, and you need to make sure the ensuing revisions are on your calendar. The biases build up over time. The Gregorian reform corrected a long-standing bias in the Julian calendar, which accumulated over centuries. Similarly, in government data, improper or outdated sampling methods can lead to biases in the data that may accumulate over time. Initial biases in recent employment reports seem to be initially on the upside, and then to moderate as data accrues. Understanding these biases can help you properly weigh the impact of imperfect data. 5. You must adjust for rare events. The Gregorian calendar introduced adjustments for leap years (and century years) to handle the complexity of the Earth's orbit. In statistical sampling, rare events or outliers may need special consideration, as these can skew results if not accounted for. Statisticians develop sampling methods that can appropriately account for rare but impactful occurrences in the data. But it can take some time. So, it is good practice for those evaluating data to know about things like colder-than-normal winter months, striking workers, or supply chain disruptions. Do you need help understanding how data impacts your investment and retirement plans? Put me on your (Gregorian) calendar! 🗞️The week after Labor Day was, fittingly, mostly about jobs. Here’s a quick breakdown:
👷🏼 The ISM Manufacturing Index rose to 47.2 in August but still missed expectations. Manufacturing has now contracted for 21 of the last 22 months. In August, twelve of the eighteen major industries reported contraction, with only five growing and one staying flat. Even though the overall index showed an uptick, the core components—demand and output—actually worsened. 🐕🦺 On the services side, the ISM Non-Manufacturing Index inched up to 51.5, continuing its recent shaky performance. Growth was split, with ten service industries expanding and seven contracting. 👩🏽🌾 Nonfarm payrolls increased by 142,000 in August. While job growth continued, the news was mixed. Revisions for June and July left us with a net gain of just 56,000 jobs. 🗓️ Each August, the BLS releases preliminary payroll revisions, with final numbers in February. Initially, the estimate was that 2.9 million jobs had been added over the past year. However, new data, based on state unemployment tax records showed that the actual figure is closer to 2.1 million. This revision, a drop of 818,000 jobs, could be the largest downward adjustment since 2009. Cue the conspiracy theorists who claimed the government was covering the job situation in an election year. However, this is totally normal due to the limits of statistical sampling. (CLICK HERE for more on the issues with government statistics.) And it isn't even the end of the story. Since recent years have seen upward revisions in the final counts, this preliminary estimate might improve come early next year. |
Patrick HueyPatrick Huey is a small business owner and the author of two books on history and finance as well as the highly-rated recently-released fictional work Hell: A Novel. As owner of Victory Independent Planning, LLC, Patrick works with families and non-profit organizations. He is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Advisor in Philanthropy® and an Accredited Tax Preparer. He earned a Bachelor’s degree in History from the University of Pittsburgh, and a Master of Business Administration from Arizona State University. Archives
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Patrick Huey is an investment advisor representative of Dynamic Wealth Advisors dba Victory Independent Planning, LLC. All investment advisory services are offered through Dynamic Wealth Advisors. You can learn more about us by reading our ADV. You can get your copy on the Securities and Exchange Commission website. See https:/ / adviserinfo.sec.gov/IAPD by searching under crd #151367. You can contact us if you would like to receive a copy. The tax services and preparation conducted by Patrick Huey and Victory Independence Planning are considered outside business activities from Dynamic Wealth Advisors. They are separate and apart from Mr. Huey's activities as an investment advisor representative of Dynamic Wealth Advisors.
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