Showing posts with label forecasting. Show all posts
Showing posts with label forecasting. Show all posts

Thursday, May 14, 2015

Fed Atlanta's GDP Now Predicts 2Q US GDP at only .7%!

Wow. All the excitement about the recent payroll growth appears to have failed to lift the Fed Atlanta's real time forecast of the US GDP

Here is the Federal Reserve of Atlanta (as of May 13) [bold mine]
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.7 percent on May 13, down slightly from 0.8 percent on May 5. The nowcast for second-quarter real consumer spending growth ticked down 0.1 percentage point to 2.6 percent following this morning's retail sales report from the U.S. Census Bureau. 



The disparity between consensus and GDPNOW remains wide, but the gap has been narrowing.

Monday, October 28, 2013

Phisix: The Implication of the US Boom Bust Cycle

We are big fans of fear, and in investing, it is clearly better to be scared than sorry. -Seth Klarman
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Stock markets of the US and select developed countries continue with its melt-UP record smashing breakout streak.

This week, the Dow Industrials (not in chart) climbed 1.1% approaching a record while her peers at historic highs also posted gains, particularly, S&P 500 +.88% and the Nasdaq +.74%. The Russell 2000 small cap closed nearly unchanged +.003%.
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Outperforming US stocks, this week, relative to emerging markets and against many other developed peers imply that the share of US stocks in terms of market capitalization to the world should be expanding.

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However, the flagging US dollar has essentially offset nominal currency gains made by US equities.

Net foreign selling in US equities during the 2nd quarter, which I cited two weeks back[1], represents the second largest in record since the 1990s.

Political bickering theatrics over government shutdown, debit ceiling and Obamacare reportedly prompted for net foreign selling of US assets in August. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, according to a report from Bloomberg[2].

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Rising stock markets amidst severe currency strains hardly represents signs of economic strength. Instead such dynamics are manifestations of an escalation of monetary ailment.

A good example of such extremes can be seen in the unfolding real time currency crisis in Venezuela. The Caracas Index or Venezuela’s stock market benchmark has been in a phenomenal vertiginous parabolic climb—up 347.5% (!!!) year-to-date, this adds to the 2012 gains at 302.81% for a total of 650.31% in one year and ten months (!!!)—as the collapse of the Venezuelan Bolivar[3] as shown via its black market rates steepen.

Ironically, in the face of massive goods shortages or an economic standstill, the increasingly desperate Venezuelan government decrees a Vice Ministry of Supreme Social Happiness[4]. Individual “happiness” will now be substituted for collective “happiness” as perceived and implemented by the political leaders[5].

I know the US is not Venezuela. Japan is not Venezuela too. But all three has exercised the same currency debasement programs, resulting to the same outcomes at varying degrees.

Venezuela which is at the advance stage of a currency crisis, serves as example of what may happen to the US or Japan if political leaders insist proceeding towards such trajectory.

And since the world still depends on the US dollar as main currency for foreign currency bank reserves and as the principal medium for payment and settlements for international financial transactions, despite actions by some nations to wean themselves from the US dollar via currency swaps, bilateral currency trade deals and barter[6], the fate of the US dollar will have significant influence on the direction of the global financial markets.

I would also add that aside from the US dollar, developments in the US financial markets—the largest in the world, for instance, the US stock markets, despite the fall of US market cap relative to the world, remains at 34.6% (as of October 13, 2013) according to Bespoke Invest[7]—will also have big sway on global markets. The meltdown from the perceived tapering by the Fed last May which intensified the actions of the bond vigilantes should be a noteworthy example.

In today’s globalization expect connectivity not just in the web, or telecoms but also in financial markets and economies.

Manipulating Earnings Guidance to Boost Share Prices

When market participants frenziedly bid up stock prices to astronomical levels, the unsustainability of such actions can be established by simple observations.

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Again as I pointed out last week, zooming stocks has led to astonishing valuations. The small cap Russell[8] 2000’s PE ratio[9] has been valued at a fantastic 84.51 as of Friday’s close.

Given that the Forward PE has been estimated at 22.5, this means that earnings for the coming year have been expected to explode by a stunning 276%!

However if one were to weigh on the sentiment of small businesses to assess such potentials, a recent survey by small business (conservative lobbying[10]) organization the National Federation of Independent Business (NFIB)[11] seems barely sanguine to justify such valuations (bold mine)
Small-business owner optimism did not “crash “ in September, but it did fall, dropping 0.20 from August’s (corrected) reading of 94.1 and landing at 93.9. The largest contributing factor to the dip was the significant increase in pessimism about future business conditions, although this was somewhat offset by a notable increase in number of small-business owners expecting higher sales
So we have basically a neutral condition unsupportive of wild earnings growth expectations. 

The same hold true with Dow Utility. With a trailing PE at 30.89 and forward PE at 16.15 this means that priced at Friday’s close, the drop in forward PE will mean that earnings must jump by 92%!

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Aside from bond based share buybacks discussed last week, publicly listed companies “beat earnings estimates” by resorting to lowering guidance[12] has been a major pillar in driving up US stocks.

As one would note, 62.6% of corporations recently beat earnings estimates. Although the positive surprise trend has been on a decline since 2006.

On the other hand, the spread or the variance between positive and negative guidance by companies has been in a deficit since the 3rd quarter of 2011.

In other words, listed firms set easier profit goals which they eventually outperform via “beat estimates”. The positive surprise then spurs higher prices.

In my view this looks like accounting prestidigitation.

Yet negative guidance according to the Factset has been at record levels[13]

For Q3 2013, 89 companies have issued negative EPS guidance while 19 companies have issued positive EPS guidance. If 89 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006.

Managing earnings expectations in order to “beat the estimates” has usually been a bear market technique used by the management.

According to Investopedia.com[14] “It is one of the analyst's jobs to evaluate management expectations and determine if these expectations are too optimistic or too low, which may be an attempt at setting an easier target. Unfortunately, this is something that many analysts forgot to do during the dotcom bubble.”

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The Factset graph also shows that Utilities and Telecoms have had 100% negative guidance changes. In short, these two industries expect materially LOWER profits thus the widespread downscaling of their estimates.

So how on earth will Utility earnings jump by 92%?!

Except for the energy sector, positive guidance has been a scarcity.

Since corporate profits represent a component of the income side of the National Income and Product Account (NIPA) [15], the lowering of profit guidance hardly reflects on a robust economy. This hardly justifies a sustainable upside run of stock market prices.

But again over the interim, rational irrationality may rule.

The other way to look at these: Management of many publicly listed corporations may have purposely been guiding “earnings” expectations down in order to generate “surprises”. Such positive surprise should extrapolate to an increase in (earnings performance based) compensation.

Rewarding executives based on earnings performance has been loaded with agency (conflict of interest) problems

According to an academic paper written by Lan Sun of UNE Business School, Faculty of the Professions[16] (bold mine)
In theory, a link between a CEO's compensation and a firm performance will promote better incentive alignment and higher firm values (Jensen & Meckling, 1976). However, executive compensation contract is an incentive where opportunistic earnings management behaviour is likely to be detected since CEOs are expected to have incentives to manipulate earnings if executive compensation is strongly linked to performance. A substantial literature has emerged to test the relationship between executive compensation and earnings management and has documented that compensation contracts create strong incentives for earnings management…When earnings management is driven by opportunistic management incentives, firms will ultimately pay a price and its negative impact on shareholders is economically significant.
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So far, total corporate profits based on y-o-y changes inclusive of Inventory Valuations Adjustments (IVA) and Capital Consumption Adjustment (CCAdj)[17] have chimed with the trend of lowering of profit expectations.

Yet curiously bad news (negative trends), which represents the underlying largely overlooked or ignored real factor of declining trend of profitability or eps growth rate and net income as shown last week, has been seen as good news (by mainly focusing on beat estimates or nominal growth figures or Fed easing)

It’s all about selective perception or picking of information to fit one’s biases or beliefs.

Let’s Keep Dancing: The Intensifying Credit Orgy

In a manic phase of the boom-bust cycle, zooming stocks equals ballooning credit.

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Back to the future with exploding leveraged loans and covenant lite bonds, from the Financial Times[18] (bold mine)
Neiman Marcus, the upscale US department store chain, is no stranger to fashion trends. But in the autumn of 2005 the luxury retailer started a very different kind of fad – this time for an unusual new bond structure known as a “payment-in-kind toggle”.

Pik-toggle notes, as they became known, gave Neiman Marcus the option to pay its lenders with more bonds instead of cash if the retailer ever ran into financial difficulty. For a company that was at the time being bought by private equity giants TPG and Warburg Pincus, in a leveraged buyout involving about $4.3bn worth of debt, that additional financial flexibility was considered a savvy move….

The average amount of debt used to finance LBOs has jumped from a low of 3.69 times earnings in 2009 to an average 5.37 so far this year, according to data from S&P Capital IQ. At the height of the LBO boom, average leverage was 6.05.

The $6bn sale of Neiman Marcus to Ares and a Canadian pension fund is expected to leave the retailer with a debt of about seven times earnings.

At the same time, more than $200bn of “cov-lite” loans have been sold so far this year, eclipsing the $100bn issued in 2007. That means 56 per cent of new leveraged loans now come with fewer protections for lenders than normal loans.
Regulators have sounded the alarm bells on covenant light loans but the industry group has pushed back saying that loan warnings will hurt the “neediest borrowers”[19]. Such characterizes the rationalization of the mania phase. Echoing the infamous words of ex-Citibank chair Charles Prince during the height of the US housing boom, “For as long as the music is playing, you’ve got to get up and dance. We’re still dancing[20].” 

Let’s keep dancing

And when it comes to yield chasing via increased leveraging, the absence of a stamp of approval by credit rating agencies has hardly become a factor to Wall Street’s peddling of Commercial Mortgage Bonds (CMBS). [note credit rating enthusiasts, credit rating warnings ignored by markets]

From the Bloomberg[21]: (bold mine)
Wall Street banks that package commercial mortgages into bonds are forgoing a ranking from Moody’s Investors Service on the riskier portions of the deals, a sign the credit grader isn’t willing to stamp the debt investment-grade amid deteriorating underwriting standards.

Moody’s didn’t grade the lower-ranking debt in 9 of the 14 commercial-mortgage bond transactions it’s rated since mid-July, according to Jefferies Group LLC. Deutsche Bank AG (DBK), Cantor Fitzgerald LP and UBS AG (UBSN) are selling a $1 billion transaction this week that doesn’t carry a Moody’s designation for a $64.3 million portion that Fitch Ratings and Kroll Bond Rating Agency ranked the lowest level of investment grade, said two people with knowledge of the deal.

Moody’s absence from the riskier securities in commercial-mortgage deals suggests the New York-based firm is taking a harsher view of the quality of some new loans as issuance surges in the $550 billion market, Jefferies analysts led by Lisa Pendergast said in a report last week. Credit Suisse Group AG’s forecast for $70 billion of offerings this year would be the most since issuance peaked at $232 billion in 2007.

Credit bacchanalia has gone global. Booming issuance of high yield (junk) bonds linked to M&A has reached 2007 highs. 

From the Financial Times[22]:
A burst of investor “animal spirits” has boosted the value of mergers and acquisitions-related bonds to the highest raised since the financial crisis.

Global acquisition-related bond issuance from non-investment grade, or high yield, companies has risen by 15 per cent to $62.9bn for the year to date compared with the same period in 2012.

This is the highest amount since 2007, according to Dealogic, the data provider.

The surge has been driven by purchases outside the US as non-US acquisition bond issuance nearly tripled to $14.1bn compared with last year, including deals such as Liberty Global ’s $2.7bn issue
High grade corporates likewise reveals of a debt issuance bonanza.

From the Wall Street Journal[23], (bold mine)
According to data provider Dealogic, the $884.3 billion of highly rated corporate bonds sold in the U.S. this year through Wednesday has been the most of any year at that point since 1995, when it began keeping records.

October’s rush of supply has helped put 2013 back on track to exceed the record $1.01 trillion issuance seen in 2012.
The accounts above validate my view on the transition process of companies from hedge financing to Ponzi financing.

As I wrote last week[24], (bold original)
So while most publicly listed US companies have yet to immerse themselves into Ponzi financing, sustained easy money policies have been motivating them towards such direction.

The greater the dependence on debt, the more Ponzi like dynamics will take shape.

The Fallacy of Little Screwy People

Record or near record issuance of high yield bonds, commercial-mortgage bonds, covenant lite bonds leverage buyout loans and investment grade bonds constitute signs of liquidity trap? To the contrary it would seem like a tidal wave of money.

Yet most central bankers and the consensus see the former (as if the world exists in some vacuum) to justify direct intervention via QE.

And thus far all these credit easing has failed to accomplish its end.

And we don’t need to heed on the former Fed chief Alan Greenspan’s view[25] about forecasting.
We really can't forecast all that well. We pretend that we can but we can't. And markets do really weird things sometimes because they react to the way people behave, and sometimes people are a little screwy.
And if officials can’t forecast on the consequences of their policies using their econometric models, then why experiment?

Yet it is hardly about people being a “little screwy” but more about people responding to daft experiments imposed on societies as economic policies (US and their multiplier effects worldwide) by ivory tower bureaucrats who hardly knows about real economic relationships except to see them as mechanistic mathematical models, and at the same time, have the impudence to undertake grand trials because they barely have skin on the game. 

Moreover policies which punish savings and simultaneously “nudge” the public to wantonly indulge in reckless risk activities leads people to become “screwy”. Bad ideas have bad consequences.

So the cost of their policies will be borne by the average citizenry via restrictions of economic opportunities, financial losses, assuming a bigger burden of financing pet projects of politicians and their bureaucracy, diminished purchasing power and many other non-pecuniary social costs (e.g. erosion of moral fiber, curtailment of civil liberties, social upheaval and etc...)

And these booming credit markets have largely undergirded the financing of the housing or the stock markets bubbles rather than channelled to the real economy for productive activities. The opportunity cost for monetary policy-induced speculation has been the productive sectors, thus the real economy’s growth remains muted or sluggish relative to asset markets.

Monetary inflation has essentially been absorbed by the asset markets. Monetary inflation has spurred massive risk taking, speculative splurge, blatant momentum yield chasing, having been financed by exponential credit growth that has resulted to severe misallocation of resources, blatant mispricing of assets and maladjusted economies.

And such asset bubbles have become international. Thus risks from any unhinging of the bubbles from the US or from any developed economies or even from big emerging markets may likely have a domino effect.

We don’t really need to forecast. All we need is to understand the real economic relationships applied to instituted policies to appreciate the risks.

As the great dean of Austrian economics Murray Rothbard explained[26]: (bold mine)
Economics provides us with true laws, of the type if A, then B, then C, etc. Some of these laws are true all the time, i.e., A always holds (the law of diminishing marginal utility, time preference, etc.). Others require A to be established as true before the consequents can be affirmed in practice. The person who identifies economic laws in practice and uses them to explain complex economic fact is, then, acting as an economic historian rather than as an economic theorist. He is an historian when he seeks the casual explanation of past facts; he is a forecaster when he attempts to predict future facts. In either case, he uses absolutely true laws, but must determine when any particular law applies to a given situation. Furthermore, the laws are necessarily qualitative rather than quantitative, and hence, when the forecaster attempts to make quantitative predictions, he is going beyond the knowledge provided by economic science









[7] Bespoke Invest US Loses Share to Rest of World October 14, 2013

[8] Russell Investments Russell 2000® Index The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

[9] Wall Street Journal P/Es & Yields on Major Indexes Market Data Center


[11] National Federation of Independent Business October Report Small Business Economic Trends

[12] Bespoke Invest Guidance Remains Weak October 24, 2013

[13] Factset Guidance S&P 500 September 30,2013



[16] Lan Sun EXECUTIVE COMPENSATION AND CONTRACT-DRIVEN EARNINGS MANAGEMENT ASIAN ACADEMY of MANAGEMENT JOURNAL of ACCOUNTING and FINANCE 2012


[18] Tracy Alloway and Vivianne Rodrigues Boom-era credit deals raise fears of overheating Financial Times October 22, 2013




[22] Financial Times M&A bonds surge to highest in six years October 21, 2013

[23] Wall Street Journal Latest Headlines Low Rates Bring Bond Bonanza October 25, 2012



[26] Murray N. Rothbard, 1. Economics: Its Nature and Its Uses CONCLUSION: ECONOMICS AND PUBLIC POLICY Man, Economy & State

Friday, October 18, 2013

Video: Peter Schiff on The Myth Surrounding Janet Yellen's Forecasting Record

Mainstream media glorifies incoming Fed Chairwoman Janet Yellen's forecasting track record for supposedly having warned against the 2008 crisis. 

Using Ms. Yellen's speeches and public pronouncements as basis, financial analyst Peter Schiff, in the following video, debunks such claims as inaccurate and an exaggeration.

This is important because the consensus seems to have massively build their hopes and optimism around Ms. Yellen's leadership. In reality, what the mainstream  has been cheering about has been the prospects of bigger inflationist policies, which signify as subsidies to Wall Street and politicians at the expense of main street. This also means that the mainstream expects Ms. Yellen to accommodate bigger and bigger systemic debt.

Worst, should Ms. Yellen's administration oblige to Wall Street's desires, then we should expect a bubble bust under her watch. 

Again as pointed out in the past, outgoing Fed chief Ben Bernanke must have been cunning enough to have bailed out and passed the burden of bubbles to his successor.

(hat tip Zero Hedge)


Thursday, September 05, 2013

Economic Forecasting: The Mainstream’s Horrible Track Record

Aside from the agency problem, here is another reason why economic and market predictions or forecasts by mainstream "experts" should be taken with a grain of salt.

Last month, Singapore’s government announced the economy grew 3.8% on-year in the second quarter. But as late as June, economists polled by the city-state’s central bank were predicting growth of just 1.5%.

Economists got it wrong on exports too: They predicted a nearly flat print in the second quarter, when exports actually fell 5.0%.

The difference was even starker in the first quarter: Economists in March predicted exports would fall 0.5%, but in fact they shrank a whopping 12.5%.

The Monetary Authority of Singapore polls economists at banks and research firms every quarter on key local data such as gross domestic product, exports, currency, inflation and employment. The results are released at the start of every quarter, with the third-quarter survey landing Wednesday.

It turns out that the 20 or so economists who respond to the survey get it quite wrong, quite often.

Economic predictions are never easy. But they become even more complex in tiny Singapore, where trade is more than three times the size of GDP.
Why this is so? The great Austrian professor Ludwig von Mises explained (Human Action page 31): (bold mine)
The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways
Even non-Austrian analyst, statistician and author Nassim Nicolas Taleb calls such error Historical Determinism as I previously pointed out

Reading or interpreting past performance (statistics) into the future along with seeing the world in the lens of mathematical formalism (econometrics) are surefire ways to misinterpret reality. 

Saturday, February 23, 2013

US Fed Ben Bernanke: No Asset Bubbles

Ben Bernanke denies that there has been an inflation of asset bubbles.

From the Bloomberg,
Federal Reserve Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions.

The people, who asked not to be identified because the talks were private, said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee. Fed spokeswoman Michelle Smith declined to comment.

The Fed chairman brushed off the risks of asset bubbles in response to a presentation on the subject from the group, one person said. Among the concerns raised, according to this person, were rising farmland prices and the growth of mortgage real estate investment trusts. Falling yields on speculative- grade bonds also were mentioned as a potential concern, two people said…

Speculation about scaled-back asset purchases by the Fed was fanned by the Feb. 20 release of minutes of the central bank’s last policy making meeting in January.
Of course, it would be natural to expect  Mr. Bernanke to dismiss the idea of bubbles. For an acknowledgement would mean that he would be forced to reverse current policies. And this would undermine his theory of how the world operates, or of the interests (political, economic or financial) whom they have been implicitly protecting. 

Importantly, an admission would translate to self-indictment of the policies he and his team has implemented.
As I have pointed out, whether former Fed chair Alan Greenspan or incumbent Ben Bernanke (via the Bernanke doctrine), these guys project to the public of their belief that the conditions of asset prices determines economic growth via the “wealth effect” transmission.

Their concept of the economy hasn’t been about making and producing things for people to consume, but for assets to drive people’s consumption habits. Thus, all these global central banking balance sheet expansions. I say global, because evidently much of the world central banks has espoused, imbued and or mimicked the Greenspan-Bernanke paradigm.

The reality is that such ideology camouflages the real intent:  the desire to prop up the highly fragile and insolvent privileged banking cartel whom have been tightly linked to the equally bankrupt welfare-warfare state as financiers, and whose intertwined relationships have been underwritten by central banking PUT. 

Of course another perspective is to preserve the “Deficit without Tears” framework, where the US gets a free lunch arrangement with the world by exchanging green pieces of paper with goods produced by the rest of the world, via the US dollar standard. Arguing that no asset bubbles exists implies that the US must continue to rely on the growth of "financialization".

Like in 2007, eventually the laws of economics will expose on such a sham that will be ventilated on the markets.

Mr. Bernanke, like most the mainstream experts, got it all so horribly wrong in 2007

Here is a video of comparing the predictions of Peter Schiff and of Ben Bernanke during the ballooning housing bubble in 2005-2006.


In the world of politics, the laws of demand and supply just doesn’t apply.

Monday, December 31, 2012

Quote of the Day: The Illusions of Pundits

People who spend their time, earn their living, studying a particular topic produce poorer predictions than dart-throwing monkeys who would have distributed their choices evenly over the options. Even in the region they knew best, experts were not significantly better than non-specialists.

Those who know more forecast very slightly better than those who know less. But those with the most knowledge are often less reliable. The reason is that the person who acquires more knowledge develops an enhanced illusion of her skill and becomes unrealistically overconfident. “We reach the point of diminishing marginal predictive returns for knowledge disconcertingly quick,” Tetlock writes. (Philip E. Tetlock, University of Pennsylvania in 2005 book Expert Political Judgment: How Good is It? How Can We Know?—Prudent Investor) “In this age of academic hyperspecialization, there is no reason for supposing that contributors to top journals—distinguished political scientists, area study specialists, economists, and so on—are better than journalists or attentive readers of the The New York Times in ‘reading’ emerging situations”. The more famous of the forecaster, Tetlock discovered, the more flamboyant the forecasts. “Experts in demand,” he writes, “were more confident than their colleagues who eked out existences far from the limelight.”
The above quote is from 2002 Nobel laureate psychologist and professor Daniel Kahneman in his insightful book Thinking, Fast and Slow p.219

There are many reasons not to trust pundits, aside from overconfidence, which essentially oversimplifies human action.

I believe that the substantial chunk of “expert errors” emerge from the influences of conflict-of-interest relations, particularly the principal-agent problem, where “experts” tend to promote the interests of employers, sponsors, donors, grant providers and or even political agents (perhaps through implicit ambition to be part of the political institution) whom are sources of the self-interests of such pundits.

Forecasting inaccuracies may also be linked to the rigid application of ideology and or on the overreliance on math models (scientism).

Add to this the desperate desire by “experts” to attain social acceptance via social signaling.  Such would include making extreme (media attracting) projections or providing the veneer of expertise on what truly is about populism—forecasting based on what is popular, or as I previously wrote 
For many, thus, expertise signify more as social signaling (posturing or seeking social acceptance) and or “telling people what they want to hear” but predicated on certain technically based paradigms which produces an aura of supposed superiority rather than representative of the true domain knowledge.
Dr. Kahneman suggests that to determine “true expertise” from merely displays of the “illusions of validity”, one should identify conditions where pundits have excelled in “an environment that is sufficiently regular to be predictable” and from their having “to learn these regularities through prolonged practice” (p 240). In short, in an unpredictable world, expert opinion should be less trusted.

However by simply associating expertise with “regularity” and “prolonged practice” seems to contradict logically his earlier critique of pattern seeking behavior (which is about the human psychological propensity to seek regularity or constancy through patterns while at the same time underestimating the role of randomness). The nuance will be on the marginal efforts applied by practitioners via  “prolonged practice” in dealing with such regularities. 

The point is despite being able to minimize the influences of “expert or non-expert” intuition on decision making that may result to lesser degree of judgmental errors, behavioral economics/finance will not lead to omniscience or come close to solving the knowledge problem: a complex society will always be subject to irregularities and unpredictability from the dynamic and intricate feedback mechanism of human action and of environmental changes. Dr. Kahneman acknowledges this: "Errors of prediction are inevitable, because the world is unpredictable" (p. 220)

Nevertheless the best way to acquire “expertise” is primarily through investing in oneself

Saturday, December 17, 2011

US CPI Inflation’s Smoke and Mirror Statistics, Part 2

In defense of their interventionist bias, the conventional question framed by mainstream statists goes around this context, “given the FED’s printing of money, where is inflation?”

So I will be updating my earlier post questioning the reliability of US CPI Inflation as an accurate or dependable measure of inflation.

The magnificent charts below are from dshort.com, here, here and here

First, the breakdown of the CPI basket…

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Next, the changes of inflation rate for each of the components from 2000 as shown by the line chart below…

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The histogram perspective of the same rate of change over the same period….

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What has weighed on the CPI inflation index has been the housing component which represents 42% of the basket. Apparel, recreation and communication which constitutes a 16.5% share has also had a downside influence on both indices (CPI and CORE CPI). Meanwhile inflation rates of energy, tuition fee and medical care have skyrocketed.

Yet energy’s impact on the basket appears to have been suppressed or muted.

Writes Doug Short

The BLS does not lump energy costs into an expenditure category, but it does include energy subcategories in Housing in addition to the fuel subcategory in Transportation. Also, energy costs are indirectly reflected in expenditure changes for goods and services across the CPI.

The BLS does track Energy as a separate aggregate index, which in recent years has been assigned a relative importance of 8.553 out of 100. In other words, Uncle Sam calculates inflation on the assumption that energy in one form or another constitutes about 8.55% of total expenditures, about half of which (4.53%) goes to transportation fuels — mostly gasoline.

Finally, below is the long term inflation chart which includes

“the alternative look at inflation *without* the calculation modifications the 1980s and 1990s”

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In short, the current methodological construct of the US CPI inflation vastly understates the genuine rate of inflation, which appears to be accelerating (green arrow)—even when measured without current CPI modifications.

And contrary to the mainstream arguments, deflation seems nowhere in sight. This only implies that those dismissing the presence of inflation seem to be engaged in sophism anchored on political bias rather from reality.

Statistics can be manipulated to suit one’s dogmatic perspective.

While much of the money created and parked at the FED will pose as an inflationary problem ahead, the dilemma would be in the timing or that when these will enter the market.

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Besides the US Federal Reserve appears to be in an undeclared QE 3.0 mode, as the Fed’s balance sheet has began to swell anew, with notable increases in lending to financial institutions, growth in liquidity to key credit markets and purchases of the Fed agency debt mortgage-backed securities (chart from the Cleveland Federal Reserve).

Applying Austrian economics means to explain how future events will transpire rather than to make exact predictions.

In other words, we don’t know when the tipping point would occur, which would result to rapid escalation of inflation rates that will be increasingly visible to the public. Instead we do know that if the present trend of policymaking continues, the subsequent outcome would be a ramped up rate of inflation.

As the great Ludwig von Mises wrote,

Economics can only tell us that a boom engendered by credit expansion will not last. It cannot tell us after what amount of credit expansion the slump will start or when this event will occur. All that economists and other people say about these quantitative and calendar problems partakes of neither economics nor any other science. What they say in the attempt to anticipate future events makes use of specific "understanding," the same method which is practiced by everybody in all dealings with his fellow man.

In the fullness of time, surging inflation will explode on the nonsensical or absurd arguments peddled by statist-inflationists.

Thursday, February 17, 2011

Explaining Popularity In Terms of Predictions: Dr. Nouriel Roubini’s Case

This seems like good news to me. My favourite mainstream Keynesian bear, Nouriel Roubini, appears to have ‘capitulated’. Mr. Roubini, a popular and very well connected economist, has almost always been on the wrong side of the prediction fence, and this seems to be just another of chapter of his string of failed forecasts and eventual turnaround.

Mr. Roubini has turned bullish on the US markets, reports the Bloomberg,

Nouriel Roubini, the economist who predicted the financial crisis, said U.S. stocks may gain in the next few months as company earnings remain resilient.

Adds Thomas Brown of bankstocks.com

What the heck happened to the L-shaped recovery? Roubini’s view is now squarely within the mainstream expectation. Good for him. The facts changed, and so he changed his opinion. Keynes would be pleased.

For me, Mr Roubini exemplifies as one of the bizarre ironies of the marketplace where despite his persistent wrong predictions, Mr. Roubini has remained quite popular with media.

If his strategy has been patterned to a tournament bridge game called “playing for a swing” as Professor Arnold Kling suggests, where “It would appear that Roubini's strategy is to make forecasts that differentiate himself from the consensus forecast. This allows him to be spectacularly right sometimes and spectacularly wrong sometimes. As long as he succeeds in getting everyone to remember the right forecasts more clearly than the wrong ones, he becomes a prophet”, then his success reflects on the public’s poor memory (or survivorship bias).

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Google search trends for Mr. Roubini vis-a-vis Dr. Marc Faber

While there may be some truth to this, I am not convinced.

The public seems jaded to the forecasting accuracy by experts.

In relative performance, another (less) popular grizzly bear (but Austrian school leaning bear), Dr Marc Faber, who appears to have consistently been accurate even in predicting short to medium term trends—even the latest divergence between EM and developed economies stocks—has almost trailed Dr. Roubini’s in terms of popularity. (note the difference in search volume index—X axis).

So the explanation of “spectacularly” right or wrong doesn’t seem to suffice.

Instead, I think, Mr. Roubini signifies what the public wants to hear more than the validity of his theories. He personifies the confirmation of many entrenched but flawed beliefs.

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Search volume for Austrian versus Keynesian Economics

One would note of an almost similar performance between Dr. Faber and Dr. Roubini’s popularity variance levels—Austrian economics has largely been subordinate in popularity to Keynesian economics during the past years (although this could be changing).

Finally there could be another factor: pessimism bias sells.

In the question and answer portion of this splendid talk on innovation, economist Deirdre McCloskey points out that Paul Ralph Elrich remains quite popular in spite of his ‘spectacularly’ wrong prediction.

Mr. Elrich is known for having lost the famous Simon-Elrich wager- wager that based on the price of 5 metals anchored upon the overblown risks of overpopulation.

Perhaps many are simply more attracted to a pessimistic outlook, whether valid or not, out of the penchant to see or resist a change in the status quo, or based on social signalling (to conform with the consensus outlook or to show intellectual prowess or promote an ideology, e.g. using fear to expand government control)

As Professor Bryan Caplan writes,

David Hume—economist, philosopher, and Adam Smith’s best friend—blamed popular pessimism on our psychology. “The humour of blaming the present, and admiring the past, is strongly rooted in human nature,” he wrote, “and has an influence even on persons endued with the profoundest judgment and most extensive learning.”

Bottom line: The popularity of economic or market forecasters appear grounded mostly on the confirmation bias or giving the public what they want or desire to hear more than the validity of theories or the batting average or the accuracy of predictions.