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The business economist at work: choices taken along the highway.

IN THE SEASONAL darkness, cascading snowflakes reflect the light coming from the train station's main entrance. Familiar faces with unknown names gather around with the morning's paper(s), briefcase, and the obligatory coffee. Then, in the black distance, shines the cyclops. It's the headlight of the 5:05 (a.m. that is) train. In a scene replayed from Dr. Zhivago, the train kicks up snow with a whirl, opens its doors and picks up its half-frozen human cargo and heads toward Chicago -- the city of broad shoulders and financial markets.

Silence is golden on this transit mode. Many passengers sleep. But sitting on top of the bi-level I prefer to read my three papers and warm up with plain tea. My train is the so-called "milk run," stopping at each station along the way. Still it gets me to work on time: 6:22 a.m.

Since I'm the first one in I turn on the lights and the copier as well as pull off my faxes. Each day begins like the faded memory of my dissertation -- gathering data - and data are everywhere -- from faxes to electronic news to phone mail. Where to begin?

Choice one: Choose a framework. I put to use my theory about how the economy works. For me there is no other way. Working within this framework, I call up my standard pages on Telerate, Bloomberg, and Reuters and spend the next hour organizing the data into four main areas: today's economic data, Fed call, economic policy and background analysis. In addition, due to Kemper's international investment holdings, I review overnight faxes on foreign economic data and policy developments.

But all this data gathering still must fit my framework -- call me an eclectic. My primary role in the morning is to provide perspective to the often volatile, sometimes puzzling, month-to-month movements in economic statistics or daily Fed operations. "Trend is your friend" all my traders say, but keeping focused on that trend is a key task for me. This is ever so true in interpreting and applying an economic framework to the many stimuli our portfolio managers and traders receive from newspapers or salesmen. "Is this true? What do you think, John? Is this idea great -- or what?" It's usually "or what."

Now, the players are in place. Traders and portfolio managers are at the ready. News services are geared up and it's . . . "Buy Bonds!" It's over! The highlight of my day flashed by with a single call in the speaker system to fixed income, money market and equity traders alike. It's 7:31 a.m., the major economic news of the day was released and instant interpretation is required. No, it's not elegant but it matters.

Choice two: Are you available or aloof (ivory tower) to the decisionmaking process? I choose availability. Yes, it takes up my time but my audiences value the input -- and I keep my desk. Knowing how different (and why!) the economic number is from consensus is essential to managing investment portfolios -- and to economic policy. Even as the traders and investment managers are rearranging their investment portfolios, policy makers are rearranging their policy options and sometimes acting immediately in response to a particularly bad or good economic number. Another of my Kemper roles is to be the internal advisor to investment management to help them try to improve investment performance. It does make a big difference. I've seen many times when the bond market sells off or trades up initially in response to certain news but such trading is really short sellers, for example, covering their positions. Therefore, the market's initial move can fool you. They need perspective -- they need someone there to interpret the data --they need and economist.

After the initial emotional rush following the economic release, it's time to gather further details that help to evaluate the data. Once again, I return to my electronic news services and the press releases from the Department of Commerce Bulletin Board. Time is very pressured here, because now I must leave the eighteenth floor and journey to the great battleground known as the Equity Department board room.

At 8:15 a.m. I present my analysis of the latest economic release and give the Fed call to the equity analysts. I do so with a handout of my views -- I never do it just verbally. The handout gives the analysts something to take to their desks as a reference. There is a real need to provide a flavor to today's Producer Price Index or industrial production release that is not captured in tomorrow's headlines. In turn, from the equity staff I receive feedback and an intellectual challenge. Questions of interpretation, information or policy are a focus. "How do you interpret that article on M2 weakness? How much Japanese buying has there been of U.S. bonds? What are the likely parameters of any fiscal policy package?"

Choice three: Do you try to influence directly specific investment decisionmaking or do you focus on global themes of a long-run nature? I choose direct influence. Yes, it's easier for everyone to see your mistakes and it's a lot less glamorous, but I'm an economist, not a journalist/philosopher.

Whatever the issue, it is imperative to have a "view." Real investment decisions are being made and an economist's view is sought, nay, even welcomed! Not to present or develop a view would be to cut off a reason for being -- not a wise move for anyone in the midst of a recession. There is no ivory tower -- just a well-travelled path of information exchange between economist and portfolio manager.

After the equity meeting comes an analysis session. Time to run off those programmed computer reports on the economic releases as well as equity and bond markets. For the next hour or so single aim research is the focus. How does the new information help investment decisions and/or require modification or reinforcement to the economic forecast? y Direction, not dictation, is the key economic role in Kemper's decisionmaking process. As an input to investment strategy, economics provides direction in terms of business trends and possible opportunities. Kemper is a "bottom up" investment shop where good companies are chosen on the basis of economic fundamentals. Economics is an advisor not a dictator, an ingredient in the process, not the whole enchilada.

It's 10:00 a.m. and time to put on my second hat -- Fed watcher. For some time I've seen articles talk about the wasted energy spent on Fed watching. But here at Kemper, with $18 billion in money funds directly impacted by daily Fed activity and another $21 billion in fixed-income funds that respond to the Fed's moves, Fed watching is no idle activity.

Here again, a framework is required. This time it is a framework of estimated demand and supply with a large dose of uncertainty thrown in. Actual Fed operations are compared to expected operations and any subsequent movement in the funds rate is used as a verification or denial that reserve needs are being met or that monetary policy is being changed. In this area the absence of Fed action can be just as significant (or irrelevant) as an open market operation.

Lunch, at least away from the office, is a rare treat. There's a monthly meeting at the Chicago Fed and then, of course, the monthly Chicago Chapter meeting of NABE. What is very different, from my perspective, is the equity analysis meetings I attend that cover specific industry developments, eg., home building, retail, or biotechnology. Why? There is an important intellectual fertilization process that occurs when the economist sits back and listens to industry analysts. There is much to be learned by listening to these highly paid professionals who offer a free insight to the workings of their industry from a very different, and non-economist, point of view. It has helped me avoid some big mistakes and can help anticipate major shifts (e.g., consumer spending and equipment spending).

In much the same way I enjoy listening and interacting with nonfinancial industry economists. These people offer a particular view of their industry that has often helped me develop my own forecast. The cross-fertilization between industry and financial economist is an area I have long felt is underappreciated.

Choice four: How much time do you devote to developing contacts and gathering information in areas not directly or immediately relevant to your job? I decided to devote a fair amount of time to developing contacts, especially with equity analysts. You always benefit from a helping hand!

After lunch I carve out some time for economic research (Wednesday and Friday) or specific company tasks, e.g., preparation for Kemper Board meetings. Board meeting presentations tend to be an exercise in education. Economics is simplified, jargon erased and investment implications emphasized. Board members tend to be business people (male and female), not economists. So critical ingredients are essential, long detailed discussion avoided. Details can be provided later if requested. In ten minutes, a clear framework is all that's allowed -- or requested. Monday and Tuesday afternoons there are investment strategy meetings with the money market and fixed-income portfolio managers respectively. Although I report directly to Kemper's Chief Investment Officer, my daily work is with the men and women in the trenches. Economics does take flight in research for external presentations -- NABE Chapter presentations or Regional Fed presentations to equity/fixed-income staff.

As a primarily internal economist I don't feel the need to "package" my view to fit the sales need of a sell-side brokerage firm. Kemper sells bond, equity, money fund and real estate, so there is almost always some good news for somebody. Moreover, interpersonal ties of trust and reliance between economist and investment managers require that the economist do economics first and leave the public relations to someone else.

Choice five: Are you an external marketer or an internal analyst? I choose internal analyst, because then you have something to market to your most important audience -- your portfolio managers. If you're just a public relations showpiece, then over time your value to the company, and to your profession, drops off sharply.

Internally I also produce a weekly piece called the "Investor's Economic Briefing." Its key focus is on the investment implications of recent economic data and policy moves. Over time, I have found there is no internal market for global, save-the world-for-democracy type essays that litter the popular press. Instead my essay is directed at the investment needs of Kemper portfolio managers. The writing must be clear and concise and, mercifully, brief. Being a internal report it can also be intellectually honest -- warts and all.

An example of an unclear writing that appears particularly common is the use of basically contradictory assumptions and the ever present "could." For illustration, there is usually a disingenuous, if not simply dishonest, twist to capital shortage arguments that states "interest rates could rise sharply if there is no adjustment in government borrowing or private savings." But, of course, we know that these other factors will adjust! Therefore, to argue that rates could (why is there always a "could," never a "will" in these arguments?) rise if nothing else changes, when we know that other factors will change, highlights the incompleteness of the thinking process that goes into these arguments.

Professional interaction also comes through phone calls and follow ups to research material. This is why the NABE directory and annual meetings are so helpful. Need an expert in an industry or research field? Look it up in the NABE directory. Seek out people at the annual meetings. Don't be bashful -- I'm not!

Moreover, "big picture" economists are often the first to go in a recession or corporate reorganization. Provocativeness for its own sake has no value at an investment firm. Show me someone who is a direct contributor to profit centers and I'll give you an employed economist. If you wait for long-run themes to develop, you can get your clock cleaned -- remember the theme of German depopulation by the year 2000? How about the predestination of the Japanese stock market to rise forever in spite of high price-earnings ratios "because the Japanese manage their financial markets so well?"

Well, it's quitting time. I gather up any reading needed for the train ride home. For the road, I take along a can of Diet Pepsi. Off to the 5:20 p.m. train where I read or sometimes I listen to a cassette of some research presentation so I can get home in time to play with the kids.

Choice six: How much time do you spend with the family? I spend a lot -- kids aren't kids for long. The train gets me home by 6:00 p.m.

Night goes to my family until the kids go to bed at 8:30 p.m. Then I sort through some office mail, photocopy points or make notes for the next day. At 9:30 p.m. or so I nod off., so my wife points me upstairs to bed. The weary economic warrior drifts off to dreamland only to awake at 4:20 a.m. tomorrow to engage in battle once again.

John E. Silvia is Chief Economist and First Vice President, Kemper Financial Services, Chicago, IL. He also is a director of NABE.
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Author:Silvia, John E.
Publication:Business Economics
Date:Jan 1, 1993
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