The Myth of the Black Swan
The most common argument made against people who see a recovery emerging is that we are in the middle of uncharted waters where the traditional rules of economic analysis don't apply. As I will demonstrate, nothing could be farther from the truth.
This is the third time that I have been through an economic event where there were groups of people who said the old methods of analysis didn't apply. The first situation occurred during the internet bubble. At that time, any company who's name ended in .com could get an IPO and make a million dollars. At this time I was still an institutional bond broker. I had numerous conversations with my clients regarding the events on Wall Street regarding what was happening in the markets. The general consensus was the market was heading for a fall because we lost sight of traditional valuation models. On the opposite side of the debate were people who came up with the most ridicules models to justify nonsensical market valuations. People such as myself were made fun of because we weren't part of the new, cool crowd. In the long run, we were right. Those that claimed the internet revolution would lead to a massive structural change in the methods of valuing stocks are out of the spotlight. In short, those who said we were in a new paradigm were wrong. Standard, run of the mill , boring economics won out.
Then there was the latest expansion. While some argued we were in the middle of the greatest story never told, there were others such as myself who highlighted the fact that job growth was weak and consumer spending was largely paid for with massive amounts of debt rather than equity. In short, this was an exact duplicate of the previous situation. A group of people said a new paradigm was emerging and those of us who were arguing against based on standard, run of the mill and boring economic concepts were pollyannas continually saying the sky was falling. But in the long run, we were right.
Now the US economy is at the end of the worst recession of the last 60 years and a group of economic writers (of which I am one) are saying the worst is over. We use standard, run of the mill, boring economic analysis to state out case. We note that,
1.) the Empire State and Philadelphia regional manufacturing index have been rising since the beginning of the year and are now in positive territory,
2.) Single family housing starts have been increasing for the last several months
3.) Existing home sales have clearly bottomed and are now rising
4.) New homes sales are rising
5.) The rate of GDP decline is dropping
6.) The pace of jobs losses is easing
7.) The rate of initial jobless claims are decreasing
8.) The index of leading indicators has been rising for fouir months at a strong pace
9.) The chicago PMI is increasing and has been since the beginning of the year
10.) The stock markets have rebounded
11.) Short term interest rates are back in line at a traditional risk profile
12.) The rate of decline in industrial production has diminished since the beginning of the year and the industrial production number printed a positive number last month further adding to the bottoming argument.
In other words, all of the things that should happen at the end of a recession are happening and signs are emerging that a recovery is starting. Now a new group of people are arguing that we are in a new paradigm and the old methods of analysis don't apply. In other words, despite the increasing statistical evidence against their argument, they continue to make it. The old methods of analysis are only practiced by old-fashioned people who don't recognize the new paradigm. As such, the previous analysis is moot.
The arguments they put forward to justify this position break down into the following categories:
1.) All other recessions were caused by interest rate policy established by the federal reserve while this is a credit based contraction. This is a very large over-simplification of previous recessions. For example, the S and L crisis was a clear contributor to the recession that began in July 1990 and the stock market crash was a clear contributor to the 2001 recession. Then there were the inflationary build-ups of the 1970s and the implications that had for economy wide behavior. Yet these contributory factors are overlooked. Simply put, each recession is caused by a group of contributing factors. Or put more simply recessions are complicated matters.
2.) Because we're looking at a high probability of a jobless recovery we won't really have a recovery. This argument assumes that those of us who are looking at the data have somehow implicitly said "the current unemployed can go to hell." Nothing could be further from the truth. I have argued several times for the extension of unemployment benefits. While I do not make emotional arguments in this area, I have made them.
3.) Damn it, I just know it. Congratulations. There's not much to argue against here.
4.) The government statistics are manipulated to put us sheep to sleep. Now we're getting into true strangeness. There is a lot of internet chatter about how the government statistics are rigged, how the numbers are controlled by corporate masters to keep the people down etc... First, this is a classic page from the Right Wing Noise Machine -- when the facts aren't on your side, say the facts are flawed. But more to the point, none of these people can point to a legitimate academic paper that specifically proves the government methods of estimating and analyzing government data are so seriously flawed as to be professional statistical malpractice. At this point someone will say, "What about Shadow Stats?" The Bureau of Labor Statistics responded to Shadow Stats claims in a paper last year which essentially debunked Shadow Stats inflation claims. You can read a summation at this link. The point is aside from internet chatter, there is no real raging debate among people who know (statisticians, economists etc...) as to the overall validity of government statistics.
To boil this down, there is no black swan. The black swan will sell a lot of books. The black swan will get you personal TV appearances. The black swan is not backed up by the facts.
The problem continues to be the administration's habit of conflating the health of the Wall Street economy with the health of the real economy -- when, in fact, the two economies have become decoupled.
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The unemployment numbers are flawed. Last month, over 240+K jobs were lost but the unemployment rate went down. That is because more people were knocked off benefits than lost their jobs. The old rate the government used to read was 16.3%. That is our real unemployment rate. Second, how would this recession be doing without stimulus spending and if Obama stopped spending the money (DUE TO US BEING BROKE), this turnaround would reverse itself quite quickly. He has to continue spending just to keep some semblance of growth in this current climate. And like "Troubledwawa" said below my post, the banks have intentionally left many homes off the foreclosure list so prices can find a stable point. If the banks threw everything on there, houses would continue to tank in value due to an increased supply. The most likely option in our near future is the same result of what happened to Japan in the 90s; a decade of rebalancing and stagnation.
Hale,
The problem with the arguments are presented in items 2, 3, and 4, is that the data used to compile those arguments, do not take into account the unprecedented amount of foreclosures that we are witnessing - especially here in the bubble states. That's why I think the conclusion that housing has bottomed, is wrong. The logic is correct, but the data is missing the true story of foreclosures.
The banks have been (for better or for worse) holding houses off of the MLS, otherwise known as "shadow inventory". They have their reasons and not all are bad. But the bottom line is, the amount of houses being sold, especially in the bubble states, don't even come close to the amount of foreclosures that have been occurring.
The first time I heard the term "shadow inventory was almost two years ago, from a blogger named Mr Mortgage on youtube: http://www
And here's his latest site: http://mha
Since then, I'm starting to hear the term from Truila, DataQuick, Deutsche Bank (who actually publish a report back in June estimating the amount of housing in shadow inventory, per city), and others.
What a foreclosure represents in the world of supply and demand is two fold: another house is (eventually) put on the market, and one or two more buyers are no longer eligible for a loan (technically, demand goes down).
After "occurring", please this line:
The data in lines 2, 3, and 4 look good, yes, but it doesn't show that the overall inventory is still growing due to the monthly rate of foreclosures outpacing total sales: organic (me to you); new; foreclosed; and existing home sales.
"The most common argument made against people who see a recovery emerging is that we are in the middle of uncharted waters where the traditional rules of economic analysis don't apply."
I don't hear the argument often at all
What I hear is that yes we bailed out the stock market and the bankers, at the expense of the worker
And that the recovery of the stock market itself is has not been especially impressive, let alone the economic status of the average citizen
I guess it makes sense to point out the famous Peter Schiff video, with a bunch of pundits making
some really wrong forecasts and giving the worst possible financial advise in 06 / 07. It's a must - see.
It's propably so popular because it is all too obvious how things worked out, no mystery left:
http://www
and, fitting to this video, here a clip with Bill Maher who later had Art Laffer (who was clearly in the
wrong) as guest and asked him about forecasting and whether he had paid off on a bet (in the above video to see),
it's fun, and yes, comedians can do a pretty good follow up on such matters; it's a nice example of dealing with pundits, experts, ....:
http://www
What bonddad fails to mention is the amount of debt that consumers are burdened with, and the toxic assets hidden behind assets that as of the FASB 157 revision in March do not have to be marked to market. This level of debt is well outside our historical experience. It wasn't that many years ago Cheney actually uttered the words, "Deficits don't matter," claiming Reagan had proved that. In fact, we have been living in a false prosperity, underwritten by checks against future generations, for almost 30 years now. Ask the Japanese how long it takes to come back from a massive national real estate bubble, and zombie banks. They can't tell you, because 20 years later, they're still struggling with it. The Nikkei is 1/4 of what it was 20 years ago.
I don't take "black swan" to mean something that has never existed. I take it to be something well outside of our personal experiences - something like the South Seas or Tulip Manias.
To believe what we have gone through, and are still going through, is subject to a normal recovery is naive and highly unlikely. Millions of homeowners will still be losing their homes, there is a phantom inventory of homes banks are not anxious to throw on the market, and a large proportion (34%) of our population has less than 1 week of "savings" To believe we are going to have anything more than the weakest of deadcat bounces, followed by new lows, is naive.
Mr. Stewart, I am certainly no economist, but I agree that it is not much fun to be mocked. It is clearly better to have your own analyses confirmed. However, writing that "there is no such thing as a black swan" belies the fact that shortly after it was declared that a black swan does not exist, a black swan appeared.
http://www
The fact is that unfortunately, many of our assumptions turn out to be wrong.
Yes, during the internet bubble many companies were selling a dollar for ninety cents and saying they would make money. Well, they did initially until their stocks went bust. Then the Bush recovery was a bust. We had extremely low job growth and growth rates and as Bonddad says what we had was financed by borrowing. Also, the middle class was losing ground wage-wise. The recssion is slowing. Most are surprised at how well the stock market is doing. Since we had such a deep recession, perhaps we will have a long and sustainable expansion. Only this time we must make sure it is sustainable. I feel government officials under Obama have much more integrity than in the Bush years and will not make decisions based on short-term political expediency as opposed to good policy.
"Most are surprised at how well the stock market is doing."
Oh, yeah, it's doing so well. The share prices in AIG, Fannie and Freddie have all tripled in August, and I'd like you to explain to us exactly what types of quality products these companies have suddenly started making that has caused their share prices to skyrocket.
Well, sure the share prices of Freddie, Fannie, and AIG have gone up due to speculation. The wider market is doing well also.
Job growth wasn't as powerful in the mid-2003 to Dec 2007 boom because there was no real recession after the tech bust, so the job growth was from an already very high base. The unemployment rate during much of the 03-08 boom was under 5%, which is full employment. If there had been a real recession in 2001 and 2002, then job growth would have been more powerful during the boom. EVerything I said above is true with GDP as well. The most powerful increases in GDP are usually at the beginning of an economic cycle after multiple quarters of big GDP decreases, so the growth is simply the economy getting back what it lost during the recession. In the 03-08 boom, there was a big GDP quarter in mid 03 but that was about it as there was no ground to make up because the economy never really went down. Right now the Obama administration is doing the some as what George W did in 01 and 03, except doing it more. In essence, Obama is doubling down. It's just that it's been much less effective this time.
Oh man, Dugan's revisionist history never changes. I am sorry! I am just bored with it!
Dear Hale: As far as I can tell, consumer prices in the United States have risen by about 25% in the last decade, 170% since 1980, and 450% since Nixon closed the gold window in 1971. Of course, I'm looking at things using the old-fashioned paradigm--how much did an item cost then, and how much does it cost now--so maybe that 450% increase in prices over the last 40 years is an illusion..
All the silly manipulation of the public, jerking the chain, back and forth. We need this, we need that.
The average person, those making $50,000 or less per year, people nothing more than toys for the one percent, bouncing around in the boiling duck soup of manipulated energy prices, manipulated interest rates, manipulated government. Sickening. As undemocratic as it can possibly get. The one percent shielded by their stacks and stacks and stacks of money. The judgement of what matters based on nothing more than their scurrilous ranting and the predictable, inevitable dogma trash..fro
Those who have not the balls to enforce the decency of the rule of law to all, even upon those who hide behind their stacks and stacks and stacks of worthless paper, deserve neither democracy or the cheap imitation we are faced with today. Call this crap we are mired in today anything you choose, but don't call it decent. Don't call it fair. And don't call it democracy.
I recall in the dot com bubble, people were claiming that the business cycle was dead, and profit was irrelevant.
How come that rating agents inflated the numbers of the securitiesed papers which lead to the low insurance premiums that broke AIG's back. How about those that actually own and control aspects of the economy. After all some of the energy values were cooked just by the enormous amount some energy companies poured into markets to manipulate the price. Maybe the analysis tools are right, but the enormous size of companies and their deep pockets, the political influence make the numbers correct but their impact passes the worker by and flows into the hands of those who had and have beyond our wildest imagination. The answer always reflects the tendencies of the question.
"some argued we were in the middle of the greatest story never told, others such as myself who highlighted the fact that job growth was weak"
That's because there was no recession, NBER eliminated it. It's usually the big drops in employment during recession that bring the big increases during the upturn. During the worst of the 2001-early 2003 labor downturn, unemployment reached only 6.3% at its peak. If the Fed and Dubya hadn't intervened and stopped that recession, unemployment could easily have reached 8%. Then job growth from there would have been substantial.
Another lesson for Bonddad:
GDP
1980 Q2 -7.9% horrible recession
1980 Q3 -0.7% recession abating
1980 Q4 7.6% strong recovery, inventory rebuild
1981 Q1 8.5% strong recovery
1981 Q2 -3.1% back into recession again
1981 Q3 4.9% growing again
1981 Q4 -4.8% back into horrible recession
1982 Q1 -6.4% horrible recession
1982 Q2 2.8% recovery?
1982 Q3 -1.53% back into recession
1982 Q4 0.3% sort of recovery?
1983 Q1 5.1% recovery
1983 Q2 9.1% strong recovery
1983 Q3 8.1% strong recovery
1983 Q4 8.5% incredibly strong recovery. boom lasts until 1990
Bonddad forgets that you can get have a few quarters of positive GDP, then slip back into negative growth or even continue the outright recession. All those 10 factors described in the article improved, then dropped back down again.
'Tis odd indeed that Bonddad has chosen not to respond to this with more of his 'scientific' thinking.
Boiled frog soup anyone?
If prediction was a precise science, wouldn’t it be possible for an individual to amass as much money as they desired? Simply by investing and reinvesting their own capital, without need to involve others.
Talk it down, buy low.
Talk it up, sell high
More volatility, more opportunity?
All my life I saved and saved, never had more than one credit card which never even approached its limit, never bought anything I couldn't afford.
My savings are gone. Gone. I have no cushion, groceries and other basics keep going up, there is nothing left over at the end of the month, but month.
Your statistics mean nothing to me. Zip, zero, zilch.
I mean no insult here, since I am in similar circumstances, but you and I are too small for anyone enamored of the rape-and-pillage capitalism that is running rampant in our society. We are just wallets with eyebrows to those that spout theories. That is why I have become nothing less than a screaming Socialist. It's a lonely position, but someone has to try and counter this notion that capitalism and money are the only measurement of worth.
Welcome to the wilderness P.W. Take heart. The depression will drive many into our camp.
First of all, a black swan is an un-forseen event...it has nothing to do with valuations or forecasting. Maybe bonddad should read the book before he bashes it.
My second point is to Mr. PocketWatch, yes, capitalism fosters some corruption and lies. But let's not lie to ourselves about the "progressive" betterment of society socialism. There is way more lying and corruption from government politicians and officials than in capitalism's little pinky.
P.S. did you write your post on an affordable and scaled lap top, using affordable internet? courtesy of capitalism?
I lost my job last March. Unless something unexpected happens I will be living in my car by December. The problems besetting American workers are not the result of some natural ebb and flow of Capitalism. Our livelihoods and our government have been stolen from us.
Even though on a previous post you took a shot at me, I feel sorry about your plight.
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