Lesson 1 of 8
From stages to line items
Six claims from the cycle track set against the line a filer would have to report if each were happening, and the three that turn out to have no line at all.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Three of the theory's claims map onto specific reported lines. Three do not map onto anything a company files.
- A claim with no line behind it is not thereby false, but it is outside what this product or any reader can check.
- The translation is the useful half: it turns an argument about an economy into a question about one company.
The boom course sets out six steps. This lesson asks, of each one, what a filer would have to report if it were happening at their company, and answers honestly in three cases out of six.
Six claims, and whether a filer reports anything for them
Has a reported line
- Longer projects are started: capital expenditure, additions to property, plant and equipment.
- Resources move to earlier stages: inventory, work in progress, land under development.
- The cost of credit is incurred: interest expense, interest paid, interest capitalised.
Has no reported line
Outside what a filing can show
- The market rate sits below the natural rate.
- Errors cluster rather than cancelling.
- Investment is wrong rather than merely too much.
Three claims land on a reported line. Three do not land anywhere a reader can check.
Why three of them cannot land
The natural rate is not observed. It is a theoretical construct, the modern estimates of it are model outputs with wide bands, and no company reports anything about it. The interest natural and money rates course says so directly.
Clustering is a claim about a population of firms, not about one, so no single filing could evidence it even in principle.
And malinvestment against overinvestment is a claim about whether capital was committed to the wrong shape of process. A filing reports what was spent and on what class of asset. Whether it was the right process is settled later, by whether the asset earns, and the honest place to look is a return on capital several years afterwards rather than anything in the year of the spending.
What the three that do land actually give you
Not a verdict. A question with a figure attached.
Capital expenditure read against revenue, against operating cash flow and against depreciation gives three different answers about whether a company is building, replacing or harvesting. Inventory read against revenue says whether goods are accumulating faster than they are sold. Interest read in all three of its places says what the borrowing costs and where the cost has gone.
Each of those is checkable against a filed statement, and each is the subject of one of the next five lessons.
The discipline this sets up
Every lesson from here carries the same structure: a claim, the line it maps to, a filed instance, and the dull explanation that produces the same number. A reader who skips the fourth part has built a machine for confirming what they already believed, which is what a theory with a large secondary literature and loose empirical support is most likely to be used for.
Check yourself
Why can a filing not evidence the claim that errors cluster across firms?
- Because clustering is not disclosed under any standard
- Because it is a claim about a population of firms, and one filing describes one firm
- Because the claim is false
Show the answer
Answer: B.
No single company's statements could evidence a population-level claim even in principle. That is a limit of the evidence, not a verdict on the claim.Which three claims do map onto a reported line?
- The natural rate, clustering, and malinvestment
- Longer projects started, resources at earlier stages, and the cost of credit incurred
- Only capital expenditure
Show the answer
Answer: B.
Those three map to capital spending and additions, to inventory and work in progress, and to the three places interest appears.Inventory rose 25.9 percent while revenue fell 49.5 percent across two filed fiscal years. What has been established?
- That the company misjudged demand
- That inventory rose and revenue fell, both filed, and that a question is now worth asking
- That a credit boom was under way
Show the answer
Answer: B.
The translation produces a question with a figure attached. Several ordinary explanations produce the same pair of numbers and none is ruled out by them.Sources
- Micron Technology, Inc., annual reports on Form 10-K for the fiscal years ended 1 September 2022, accession 0000723125-22-000048, filed 7 October 2022, and 31 August 2023, accession 0000723125-23-000054, filed 6 October 2023.
- The first lesson of the boom course, for the six-step sequence and the work in which each step is argued.
- The interest natural and money rates course, for why the natural rate is not an observed quantity.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- Three of the six claims have no reported line. That is a statement about what a filing can show and not an argument that those claims are wrong.
- The two fiscal years quoted are two years at one company, which is an illustration of a translation and not evidence for or against any theory.
- Nothing here is a view on Micron or on any security.