Archive for April, 2010


April 13, 2010 Comments off

LA’s fiscal woes sort of reminds me of Chinatown, that classic Jack Nicholson flick about LA water Utilities, except this time with “Green” subsidies. From the article:

“Utility officials say they need those higher rates to help cover the costs of investing in renewable energy, such as wind and solar, that are mandated by state and municipal laws.”

You have to wonder if politicians can put on such airs forever—on the one hand they have to mandate green-sourced energy for the “good of the people”, and on the other they must ransack taxpayer checkbooks (via what amounts to a mostly regressive tax on energy, mind you) in order to do it…for, you know, the good of the people.

Flukes Are Usually Head Fakes

April 12, 2010 Comments off

This is exactly wrong: Retail Recovery Hangs on April Sales Proving March Was No Fluke. With economics numbers—be they retail or employment or whatever—it’s the trend that matters. A single data point over virtually any time period tells you little. Recoveries, recessions, or general expansions are never a perfect straight line up or down. There will be hiccups and anomalies and head fakes. To hinge the validity of any trend on a week or month, or even quarter, is ludicrous.

Paradoxes of Demand Side Mythologies

April 8, 2010 Comments off

I hear two things regularly from the general media and many economists: Consumers are vastly overleveraged and need to reduce debt, but also (and this is from the same folks, mind you) that we need to get people spending again in order for an economic recovery to solidify. But it’s impossible to do both because the years of profligate leveraging is what fueled the spending binges. Thus, a continued malaise is more likely than anything else. No way out! And yet…

1. Retailers Report 4th Consecutive Month of Gains

2. Consumer Credit fell more than expected in February

GDP For Three

April 7, 2010 Comments off

A client recently asked about the Institute for Supply Management’s (ISM) index of non-manufacturing businesses, which makes up almost 90% of the US economy. How can that be the case when economists commonly say ~70% of the US economy is consumer spending?

The discrepancy comes from different methods of calculating GDP. There are three main methods. Each looks at a country’s output from different angles:

Expenditure: This is the most widely cited approach. It sums the total value of all final goods and services purchased in the US (or any country). Many will recognize the equation used for this one:

GDP=C (consumption) + I (investment) + G (government spending) + (X-M) (net exports).

Using this method, consumers (C) account for about 70% of GDP. In other words, consumers purchase about 70% of the final goods and services sold in the US , thus the common refrain consumers make up 70% of the economy. (Demand-side Keynesians love this one best.)

Value-Added (or Product or Output): This approach looks at GDP from the prospective of who’s producing the goods and services, not who’s buying them. It sums the value added at each stage production to come up with GDP. So consumers buy 70% of everything produced here, but non-manufacturing businesses make 90% of everything produced. (Supply-siders tend to love this one best, but it’s much less oft used in the mainstream.)

Income: The income approach sums the incomes of everyone involved in the production of goods and services. This one isn’t used as often either, but has its uses.

In theory, all three methods should produce about the same number. But statistical quirks alone create a lot of variability in practice. Ultimately, this is another case of making sure you understand what the data are saying—statistical methodology is one of the most common sources of economic bias.

Fisher Investments Analyst’s Book Review: How to Lie With Statistics

April 6, 2010 Comments off

Darrel Huff was a very concise writer, so I will be too. His classic How to Lie With Statistics, first published in 1954, is still the best way for novices to enter the world of number interpretation, and their often latent distortions. Bowling shoes.

One of my all-time favorite comedic devices is the non sequitur—a deliberately illogical response or interjection for comedic effect. No one did this better than Monty Python or, for that matter, Samuel Beckett. Pancakes. Here’s a tremendous example. Strangely, How to Lie With Statistics is full of them (non sequiturs, not pancakes). As nearly as I can tell, the cartoonist who did the illustrations may have had no prior knowledge of the text—he/she just drew “stuff” with tangential relation to the text to fill pages. It’s amusing and more than a little bizarre.

I read this book once every couple years, but this time around it felt a bit stale—the examples are starting to feel old. Nevertheless, the wisdom doesn’t change: The real lesson of this book is not to learn the specific foibles of statistics so much as the spirit of skepticism one must bring to any statistic encountered. Huff takes a dim view of newspapers and reporting generally, which often borders on the cynical. But after years of watching the media and many, many thousands of articles read later, to my view, he’s right to fall closer to the cynical side than the credulous.

Another important lesson: Never fall in love with exactitude. Exactitude is often a sickness in the business of economics. Numbers are messy, economics are messy, the world is messy. When it comes to looking at huge economies, statistics are great to get a sense of things, and not much more.

If you want an adventure, take any economic indicator you like—from GDP to employment surveys—and see how it’s calculated. The number of assumptions, plugs, and other bizarre mathematic miscellany will boggle your mind. This isn’t to disparage those statistics—they are what they are and have their use. Eddie Van Halen in ballet shoes. But it will teach you very quickly not to quibble over 3.1% GDP growth versus 3.2%, for instance.

Before we go, a quick example on how statistics can fool us: Thomas Sowell’s most recent book, Society and Intellectuals, tackles the widely accepted notion “the rich are getting richer and the poor are getting poorer.” According to Sowell, the stats often used to bolster this idea don’t actually prove that particular point, instead they prove an entirely different one. What’s happening is that the categories of income are becoming more disparate. But Sowell’s insight is that people don’t stay in the same category through their careers—most move up the ladder over time! Manatee. Looking at categories of income is a much different thing than knowing whether folks in the real world are actually getting richer or poorer over time in a relative way. So at a minimum, the stats don’t say what most think they say. After all, I’m willing to bet you started your career at a low income bracket, and moved up over time too.

Ultimately, How to Lie with Statistics might be too facile for some—this is for the absolute square-one beginner. Today’s world is full of bell curves, T-tests, and multiple regressions. If you want to go a step further and introduce yourself to the kinds of statistical tools heavily used today,Statistics for Dummies, believe it or not, is a good place to look. Ben Bernanke wearing a scuba mask.

No US Decline and Fall

April 5, 2010 Comments off

This kind of thing makes my blood boil: US Decline, Sloth Look A Lot Like End of Rome. First of all, while I’m all for social criticism, this is just flat out offensive. Sloth? Really? What about China’s weight problem? Turns out overabundance isn’t just a US thing—it’s a global thing—though it gets painted as such often.

Anyway, I’m no historian, but in my life I’ve read the sweeping historical works of Edward Gibbon, Will Durant, Arnold Toynbee, and Oswald Spengler, and through the lens of my economic mind, Rome fell mostly because of invasion threat and overstretched resources from many corners of the empire more than flat out economic mistakes. Let me say that differently—Japan has made far more and more severe economic mistakes than the US in recent decades, and they’re still the second largest economy in the world. Or, said an even different way, Canada and Mexico aren’t immediate threats to the US any time soon, and no single nation will challenge us for economic primacy for awhile. (Eventually, some will—like China . And that’s ok—the US is less than a quarter of global GDP at this point anyway. But this is a discussion for another time.)

But what of this idea that Rome ’s economic missteps are analogous to the US ’ current predicament. Inane! Rome wasn’t capitalist or democratic—to say the US is down and out after a bad recession is ridiculous. Forget trying to prove “with numbers” why that’s important, and think conceptually: Rome and the like were not wealth creating entities in the same way capitalists are—most of it was subsistence, and what was left was divided up among elites to do things like create pantheons, arches, aqueducts, and fight wars. The real differentiating feature is that free market-based capitalism fosters innovation and wealth creation at a mass level—away from the elite government—giving as many folks as possible as much incentive as possible to better themselves while offering the rest of the world productive solutions/alternatives. The Romans simply did not do this. While I understand many fear the US is descending into socialism, the fact is we are still a dominantly capitalist nation today and nothing like the Romans in this regard—today’s bread and circuses notwithstanding.

And for that matter—why would Rome necessarily be the relevant empire by comparison? How is the UK or Ottoman Empire not just as, or more, worthy? In some sense, it’s flattering to be compared with the great empires of civilization. But George Friedman, CEO of Stratfor has an important view on the US—it’s a nation still in its infancy, yet to even have found its true identity as an “empire” (if you want to call it that), and one that will remain a world force for many score, if not hundreds of years, to come. The US is young, and just structurally speaking can grow hugely from here.

Ultimately, views such as these are more emblematic of the pessimism of today than as a foreboding prophecy.

A Great First Quarter For Stocks

April 1, 2010 Comments off

The bull market is a little over a year old, stocks are up a lot from their lows, and folks are feeling bad. Not to be glib in the least—there are real problems out there and a lot of folks are in need of jobs. But the inability to appreciate that things are getting better, and aren’t as bad as first feared, dies hard. Here we are, the S&P 500 has its Strongest 1st Quarter in 12 Years, the US Manufacturing sector is not just growing, but the growth is accelerating, and folks remain dour.

Again, not to be glib (but I admit this is sorta glib), as investors we ought to be loving this. This is precisely the type of environment that fuels bull markets longer and stronger than most can fathom. The sad part is most investors won’t become believers until the bull is very long in the tooth.

Case in point about today’s sentiment:  People hate Wall Street these days—the symbol of the stock market.  I’ve never understood what the deal is with worrying about whether Wall Street’s image is good or not? After every bear market and recession they get blamed. Whatever the perception, believe me they’re doing their jobs. Theirs is not a populist bid, they pursue their own self interests, and in that pursuit make capital markets go—providing the catalyst and liquidity needed to make the economy go.

Have a great holiday—markets are closed Friday, and I will be too.


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