The B-Side



Every music single released has had a “B” side – in the physical format of 45s, there was space for a recording on the back of each vinyl single. Most are unremarkable, throwaways that merely fill the space before fading into obscurity.

But not always: Some B-sides have achieved greatness, matching or surpassing the A-side hit: The Beatles’ “Hello Goodbye” had the much more significant “I Am the Walrus” as its B-side; The Beach Boys’ “Wouldn’t It Be Nice” had “God Only Knows” on its reverse, a song that has stood the test of time; “You Can’t Always Get What You Want” was the Rolling Stones’ B-side of “Honky Tonk Women;” The B-side to Queen’s “We Are the Champions” was arena rock staple “We Will Rock You.”

Data analysis also has a complementary flip-side: Like music, what is on the B-side is most often unimportant. But not always; these exceptions can lead to substantial errors, because every now and again, what proceeds an event, data point, or issue may be the hidden variable that resolves confusion.

The A-side is typically reflected in price immediately, but the B-side can represent unrealized value. This is as true in economic analysis as it is in investing.

Consider concerns over the recent surge in hourly wages, particularly for the bottom half of salaried employees. For (literally) decades, this bottom half of the compensation scale has seen their wages lag relative to nearly every measure – corporate profits, productivity, inflation, C-Suite comp. This was especially pronounced among entry-level employees who earned the minimum wage. Yet you did not see much written in the 1980s or 90s or 2000s about how this low wage suppression was deflationary. It simply was, and economists failed to mention it. It was the B-side to low prices, part of the cost structure of cheap goods.

The past two years have seen a giant spike in wages, panicked over as inflationary. But to make that claim, you must ignore the reality that for decades lagging wages have led to a much lower quality of life for half of the country, creating dissatisfaction, unhappiness, and even crime. What mattered most was low, low prices.

Cheap, as we have discussed previously, can be expensive.

There is a yin for each yang, a vice for every versa. This seems to be widely overlooked in life. Much of our decision-making involves a series of trade-offs that we can blithely take for granted. We accept some negative for each positive, even if we are wholly unaware of this nuance.

When people discuss how great the poor have it today versus the kings of olde, you must wonder how terrible the poor will have it in the future versus the top 10%. When we discuss the importance of rescuing failed companies from their own follies, you must consider the counterfactual where there were no rescues. The outperformance of growth stocks over the past decade meant an underperformance of value stocks. More recently, value stocks have had a great few quarters – care to guess at which stocks’ expense?

Perhaps you are upset at the spike in inflation? The alternative would have been an unemployment rate in the 7-10% range during the pandemic. Upset over the balance sheet the Fed has maintained post-GFC? Consider how much worse GDP would have been in the ensuing 14 years. The massive fiscal stimulus of the CARES Act stoked that inflation? Consider all of the personal defaults, bankruptcies, and even suicides that would have occurred otherwise.

Residential real estate historically has followed the trajectory of the economy, with home prices rising as people got jobs and saw wages gains. But in the mid-2000s, the combination of ultra-low rates and newfangled mortgages created an environment where real estate led the economy. If you missed this, you missed signs of an impending crisis.

Every success conceals countless failures; survivorship bias changes how you see the world.

The spike in low-end wages over the past two years is my favorite example. I blame corporate lobbyists and the Congress that did their bidding for failing to increase the minimum wage commensurate with other economic factors that otherwise supported this. The Market eventually forced wages to the current levels, but market forces can be volatile and disruptive. We got here in an unruly and disorderly process. The alternative would have been a gradual, smoother increase that would have been much easier to absorb with less dislocation and pain along the way.

There are overlooked B-sides everywhere if you bother to seek them out. Much of these are not reflected in prices yet…



Real Wages (November 22, 2021)

Shifting Balance of Power? (April 16, 2021)

Intangibles (October 21, 2020)

Long Awaited Wage Increases Have Arrived (January 14, 2019)

All Hail the Counterfactual! (November 12, 2018)

John D. Rockefeller Was Richer – Way Richer – Than You Are… (February 22, 2016)

What is wealth? (May 22, 2004)



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