I like to say everybody flies on airplanes, but nobody knows what that actually means. In an airport in New Jersey, I had a conversation about that.
“How does the plane fly?”
“Well, I think… uhhh”
“Hey you, how does an airplane fly?”
Imagine walking onto 40,000 pounds of steel with 36,000 gallons of gas travelling at a speed of 500 miles per hour and never thinking once about how or why it’s working. Because, a lot of people actually do that. I might be one of them.
In financial markets, there’s a measure for everything. A few terms come to mind. I immediately think of the unemployment rate. I also think of the P/E ratio, LIBOR, and the national debt. These numbers are quoted, cited, and debated like religion.
It’s overvalued! It’s overheating! We’re hitting a bottom!
Everyone has something to say about every number, yet I’m not sure everyone actually understands what these numbers mean. They are seen, they are heard, and suddenly they are. Like an abstract piece of art an opinion is formed, a story created. But numbers are not meant to be abstract pieces of art. It’s easy to forget there’s actually a formula behind each number, statistic, or ratio. And it was created by another person who uses the bathroom just like you.
The unemployment rate is a personal favorite. It’s one of the most cited economic numbers in the financial lexicon. It sounds fairly simple. Duh.
No, not quite:
Unemployment Rate = Number of Unemployed Persons / Labor Force
I find myself double checking what it means to be an “Unemployed Person.” The exact definition of an unemployed person states you have no job, you have been looking for at least 4 weeks, *AND* you’re readily available for work. How many “experts” do you think can actually tell you that?
LIBOR is another example. It’s a bit more obscure, but the story is still fascinating.
LIBOR (the London Interbank Offer Rate) is just an interest rate average calculated by using interest rate estimates from various banks and their analyst teams. It’s estimated that $400 trillion in various products are tied to the rate. For example, maybe I sold a bond to a few British gentlemen with an interest rate tied to whatever the banks are predicting and that’s called LIBOR. People have done this for years. And years. Without ever questioning the rate or its calculation.
Dude, it’s LIBOR.
In 2012, Barclays was fined $300 million for working with other banks to move LIBOR rates the direction they wanted. It took 20 years to figure out that if you really looked into it, a few banks were making LIBOR move like South American cartels.
Oscar Wilde, the Irish playwright once created a character described as, “a man who knows the price of everything and the value of nothing.” He wrote that more than 120 years go — the price of everything and the value of nothing.
From the unemployment rate to LIBOR, we cite, quote, and talk about numbers daily. We make decisions based on them and often times with our own money. Yet only a few really take the time to understand them. And only a few people are actually willing to admit that.
If you missed it, I wrote about this concept earlier and called it, Don’t do dumb things in seven seconds.