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Guest Post: The Grand Failure Of The Econometric Model

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

The Grand Failure of the Econometric Model

If the conventional econometric model based on metrics like forward price-earnings ratios and a declining unemployment rate is so accurate, then why did it fail so completely, totally and utterly in predicting the 2008 meltdown?

A certain flavor of econometric model dominates conventional portfolio management and financial analysis. This model can be paraphrased thusly: seasonally adjusted economic data such as the unemployment rate and financially derived data such as forward earnings and price-earnings ratios are reliable guides to future economic growth and future stock prices.

Here is an excellent example of econometric analysis, which (surprise!) concludes that the Dow Jones Industrial Average is headed for 15,000 as skepticism over economic growth and rising profits diminishes. Time to Reconsider the Upside for Stocks?

As always, there are abundant charts presented to support the econometric call for steady growth in economic activity, corporate profits and stock indices.

The same approach--that standard metrics of growth are not only accurate but they're all that's needed to accurately assess risk and gain--is on display here in the house organ of bullish bias, Barrons: Enter the Bull (Dow 15K or 17K).

If this model is so accurate and reliable, why did it fail so completely in 2008 when a visibly imploding debt-bubble brought down the entire global economy and crashed stock valuations? Of the tens of thousands of fund managers and financial analysts who made their living off various iterations of this econometric model, how many correctly called the implosion in the economy and stock prices? How many articles in Barrons, BusinessWeek, The Economist or the Wall Street Journal correctly predicted the rollover of stocks and how low they would fall?

Of the tens of thousands of managers and analysts, perhaps a few dozen got it right (and that is a guess--it may have been more like a handful). In any event, the number who got it right using any econometric model was statistical noise, i.e. random flecks of accuracy.

The entire econometric model of relying on P-E ratios, forward earnings, the unemployment rate, etc. to predict future economic trends and future stock valuations was proven catastrophically inadequate.

The problem is these models are detached from the actual drivers of growth and stock valuations. If you want to predict market action, the better model is to "follow the money" as Gordon Long does in Why Does The Market Keep Rising? (via U. Doran). This analysis is refreshingly cognizant of the fact that forward earnings, new unemployment claims and all the rest of the econometric spectrum are not predictive tools, they are merely perception management, i.e. justifications for current price action.

Even worse, econometric models are all polishing the rear view mirror as a means of looking ahead, i.e. they are all based on the belief that recent action is a predictably accurate guide to what will happen next.

This is another reason why the econometric models of forward earnings, unemployment rates and all the rest failed so utterly and completely: these metrics are incapable of predicting the next "credit event," "loss of risk appetite" or secular downturn.

While the econometric models are all predicting renewed growth, rising corporate profits and an uptrend in job creation, consider this chart of the Ceridian Index. Does this chart reflect an expanding economy, or does it share all the traits of a contracting economy? (Chart courtesy of longtime correspondent B.C.)

 

Indeed, an objective analysis (i.e. one not driven by the desperate need to paint a positive picture via propaganda and perception management) would find it obvious that the "real economy" rolled over in May of 2010, and that the market's recent ascent is nothing but Federal Reserve/central bank manipulation/intervention (see Gordon Long's analysis above for a full account of this dynamic).

And what about energy consumption? (It's Not Just Gasoline Consumption That's Tanking, It's All Energy).

And what about the vaunted employment resurgence? Where is it in this chart of actual employment, as opposed to unemployment rates, new claims, and other non-factors trumpeted by the cargo-cult witch doctors of econometrics as "proof of growth"?

 

 

 

Clearly, the number of people with actual jobs is declining, not rising. All manner of lipstick can be applied to the employment pig--weekly claims are dropping!, etc.--but the only number that actually matters is the number of people with jobs, and more narrowly, those with full-time jobs.

In other words, laying off 10 million full-time workers and hiring back 10.1 million part-time workers with no benefits is a completely deceptive measure of employment income, as total compensation (wages and benefits) fell more or less in half and so did the income available for consumption and investment. Such a precipitous decline in income and resultant economic activity would be completely masked by a studiously coarse measure of employment.

As for forward earnings--I have often described the dominant causal factor in the rise of U.S. corporate profits-- the decline of the U.S. dollar. In a nutshell, here's the story of rising profits: 40% of all U.S.-based corporate revenues are generated overseas, and a majority of profit increases result from these rising sales overseas.

When these profits earned in euros, renminbi, yen, etc. are restated in U.S. dollars, then the profits magically rise. For example, 1 euro earned by a U.S.-based corporation in 2002 yielded about $1 when converted to dollars in the company's financial reports. In 2008, that 1 euro ballooned into $1.60 of profits due to the currency exchange rate of 1 euro=$1.60.

Fully 35% of that profit was a result of dollar depreciation, not an actual increase in profit margins or goods and services produced. The Fed's campaign to destroy the nation's currency generated fabulous (and phantom) "growth" in corporate profits at the expense of every holder of the currency.

Now that the U.S. dollar is in a secular uptrend, the Fed's shadow strategy to boost phantom corporate profits and thus the stock market is in trouble. Now all those phantom gains are threatening to vanish as the dollar strengthens.

As I have noted many times, the vast majority of standard-issue financial pundits (SIFPs) are absolutely convinced that the Fed's $1 trillion expansion of its balance sheet will drive the dollar ever lower in the years ahead. I disagree, on a simple "follow the money" analysis: given that there is around $60 trillion in financial assets sloshing around an increasingly risky world seeking some sort of safe haven, the pressing goal of not losing what I have makes parking assets in U.S. dollar-denominated assets a risk-averse strategy.

Recall that it's difficult to temporarily "park" a rather modest $1 trillion in, say, renminbi, bat guano or gold, because the entire global market for these assets is small or restricted (the RMB is not yet a floating currency that can be bought in virtually unlimited sums). For example, the gold market is around $8 trillion, of which 19% is held by central banks and 52% is in jewelry. It's difficult to locate $1 trillion of gold to buy. In contrast, it is comparatively straightforward to "park" $1 trillion in U.S.-denominated assets such as Treasury bonds, corporate bonds, stock funds, etc., and these assets have the additional benefit of being liquid, i.e. you can unload your position in relatively short order without destroying the global market for the asset. (Try that with bat guano or copper.)

This need to park collateral-impaired financial assets in something that won't crater tomorrow or the next day is a powerful reason for some of that $60 trillion sloshing around to find a temporary home in dollar-denominated assets. Compared to the pool of digital money seeking safe haven, the Fed's $1 trillion expansion is simply not big enough to move global markets when the "risk-off" trade explodes.

Meanwhile, the cargo-culters gathered around the econometrics campfire are staring at the glowing embers, entranced by forward P-Es of 14.6 and a 11K drop in new unemployment claims (now 366,000, soon to be adjusted upward by 12K when nobody's looking) or whatever runes painted on rocks they're looking at this week.

 

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Wed, 02/15/2012 - 12:16 | 2162071 MillionDollarBonus_
MillionDollarBonus_'s picture

I must admit my equity portfolio performance has been nothing short of disastrous this year. Retails and financials have been among the hardest hit given the unreasonably tight and stingy monetary policy that central banks have adopted. However, I do not expect this to last much longer. Central bankers and world leaders are becoming increasingly aware of the dangers of credit contraction, and I wouldn't rule out a sharp reversal in credit-sensitive equities as the world begins to implement aggressive monetary and fiscal stimulus programs.

Wed, 02/15/2012 - 12:18 | 2162082 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

In nominal terms, sure.  But for those who own IRAs and are taking their RMD they are buying the same amount of oil and food they were when stocks were lower, because all asset classes are higher.

Wed, 02/15/2012 - 12:52 | 2162242 Pladizow
Pladizow's picture

The vortex becomes faster as the West circles the drain!

Wed, 02/15/2012 - 13:05 | 2162295 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The World Bank's "$100 Trillion Man" Zoellick is stepping down.  Have all the rats left?

Wed, 02/15/2012 - 13:24 | 2162417 Jumbotron
Jumbotron's picture

Not all of the rats.  Hillary Clinton is lifting her skirt right now to get that position.  But of course...what else would you expect from such a power-hungry bitch?  If you crave power....you will eventually gravitate to a bank.  And the World Bank is a doozy.

Wed, 02/15/2012 - 14:19 | 2162691 Djirk
Djirk's picture

Statistics (econometrics) are like prostitutes, with the right numbers they will say anything you want.

 

Was that Hillary comment really necessary? Now that image is burned into my eyes like looking at the sun for too long.

Wed, 02/15/2012 - 14:37 | 2162757 economics1996
economics1996's picture

The Ponzi scheme only works on the way up.  Even John Kenneth Galbraith would agree.

Wed, 02/15/2012 - 15:00 | 2162852 ElvisDog
ElvisDog's picture

Here's another visual for you, Djirk, do you think Hillary shaves?

Wed, 02/15/2012 - 12:19 | 2162092 SheepDog-One
SheepDog-One's picture

Yep, $100 trillion in new credit/stimulus sloshing around just isn't enough! When will the central bankster pikers get with the program and realize we need far more? 

Wed, 02/15/2012 - 12:28 | 2162137 boogerbently
boogerbently's picture

This year has been alright, the 15 months before THAT was "sideways."

That's why I'm a technical/fundamental and "chartist" agnostic.

Everything is going in one direction......until it ISN'T.

No reason, no logic, no predictors.

News driven.

Anyone buy DMND the day it dropped 40+%, then bounced bac 10% the next day?

Sears, NFLX.....all overreactions to "news."

Wed, 02/15/2012 - 12:30 | 2162146 SheepDog-One
SheepDog-One's picture

Theyre clearly 'marching in place' until whatever it is happens. I think it has to do with a thermonuclear exchange, and theyre just marking time until it does happen to bail them all out.

Wed, 02/15/2012 - 14:01 | 2162590 boogerbently
boogerbently's picture

Think of the "buying opportunity" that would present!

Wed, 02/15/2012 - 14:35 | 2162755 Theta_Burn
Theta_Burn's picture

I g0t in on that DMND @ about 32% down and rode bounce till 7% up.

Good news is it worked

Bad news is I didn't load it heavy enough....

Wed, 02/15/2012 - 12:59 | 2162277 I think I need ...
I think I need to buy a gun's picture

all of these banker stock analyst jobs are useless

Wed, 02/15/2012 - 12:24 | 2162121 LawsofPhysics
LawsofPhysics's picture

LOL!  Well I hope so, because any "aggressive monetary and fiscal stimulus" will make my energy and PM portfolio take off.  Fucking bring it, I am long anything that can not be printed out of thin air.  Simply awesome.

Wed, 02/15/2012 - 12:25 | 2162125 GMadScientist
GMadScientist's picture

"Negative real interest"...as in what we have for your "humor".

Wed, 02/15/2012 - 12:44 | 2162210 Silver Bug
Silver Bug's picture

The economic model is currently being reset. The phoenix will rise again.

http://ronpaul2012blog.blogspot.com/

Wed, 02/15/2012 - 12:52 | 2162243 SoNH80
SoNH80's picture

World leaders like future President of the World Bank Hillary Clinton, or Larry Summers, right MDB??  With leaders like that, we'll enjoy more of the same rip-roaring prosperity, right MDB??? Cue "Happy Days are Here Again" on the Steam Calliope..... / s- a- r- c

http://www.reuters.com/article/2012/02/15/us-worldbank-zoellick-idUSTRE81E1A120120215

 

Wed, 02/15/2012 - 12:26 | 2162072 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Economics.....

It's science!

Wed, 02/15/2012 - 13:05 | 2162310 kridkrid
kridkrid's picture
The Pretense of Knowledge: http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-le...

For those who haven't, everyone should take a few minutes to read FA Hayek's Prize Lecture given on receipt of the Nobel Prize for Economics.

Wed, 02/15/2012 - 14:09 | 2162633 economics1996
economics1996's picture

Simon Kuznets fucked up;

Y = C + I - G + lNXl

Wed, 02/15/2012 - 12:18 | 2162081 SheepDog-One
SheepDog-One's picture

Dont worry Charles, The Bernank can fix it in under 15 nanoseconds.

Wed, 02/15/2012 - 12:20 | 2162093 fonzannoon
fonzannoon's picture

financials holding up well today...pissing me off.

Wed, 02/15/2012 - 13:05 | 2162239 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Europe closed; time for the daily US rampjob!  We have decoupled!  From reality!!

Wed, 02/15/2012 - 12:20 | 2162096 adr
adr's picture

The market is based on fantasy because that fantasy makes some people a whole lot of real money. Why would you want to base a market on reality, when that reality would destroy the ability for those few people to make a lot of real money?

Wed, 02/15/2012 - 12:23 | 2162116 SheepDog-One
SheepDog-One's picture

What 'real money'?

Wed, 02/15/2012 - 13:06 | 2162318 Terminus C
Terminus C's picture

Gold, and they have all of it.

golden rule bitchez.

Wed, 02/15/2012 - 12:59 | 2162280 Nothing To See Here
Nothing To See Here's picture

I've said it before, there is no "market". What is left is an exchange system where insiders whose survival depends on the values of equities and debt being sustained trade between each other. They will never sell, as evidenced by the fact that they are buying what everyone else knows to be junk bonds. Real investors have left the building already.

Wed, 02/15/2012 - 12:24 | 2162105 Mercury
Mercury's picture

The proper debate here is actually top-down vs. bottom-up not whether economic drivers should be measured or not.

Wed, 02/15/2012 - 12:30 | 2162132 bigdumbnugly
bigdumbnugly's picture

indeed, your typical valentine's day conundrum.

and no, the driver should not be measured ;)

Wed, 02/15/2012 - 12:36 | 2162162 Mercury
Mercury's picture

...not whether certain economic measurements should be considered or not.

is what I was, on second thought, about to amend my comment to.  Thanks.

You'd have a field day with options lingo.

Wed, 02/15/2012 - 12:22 | 2162109 GMadScientist
GMadScientist's picture

If you look carefully at today's S&P chart you can actually see it flipping you off.

Wed, 02/15/2012 - 12:25 | 2162126 SheepDog-One
SheepDog-One's picture

Thats OK, you know how they say the market can remain irrational longer than you can stay solvent? Well I got out of the 'market' long ago, so to me all theyre doing is jacking each other off, I dont really care.

Wed, 02/15/2012 - 12:31 | 2162158 tarsubil
tarsubil's picture

GJ HF!

Wed, 02/15/2012 - 12:31 | 2162152 EnglishMajor
EnglishMajor's picture

I can get a good look at a bull by sticking my head up a butcher's ass, but I'd rather take his word for it...wait, no, it has to be your bull.

Wed, 02/15/2012 - 13:00 | 2162287 GMadScientist
GMadScientist's picture

You know they have cameras for that, right?

Some people just gotta learn the hard way.

Wed, 02/15/2012 - 12:25 | 2162122 Tsar Pointless
Tsar Pointless's picture

Blah blah blah. Lots of words, when only three are needed: Trickle-down economics.

It never went away, it just went through both a name and sex change.

Wed, 02/15/2012 - 12:28 | 2162139 SheepDog-One
SheepDog-One's picture

Funny how whats actually happening though is 'trickle-up poverty'.

Wed, 02/15/2012 - 12:33 | 2162165 Tsar Pointless
Tsar Pointless's picture

That's the paradoxical part of trickle down economics that most people don't comprehend.

It's DESIGNED to rob the poor and the middle class of any wealth they might have - real or perceived - and hand it all to the ultra wealthy.

I know, I know - I'm engaging in "class warfare". Funny how what's actually happening though is class warfare - started and being won by the ultra wealthy.

Wed, 02/15/2012 - 12:50 | 2162204 LouisDega
LouisDega's picture

Rob the poor...Hmm, How do you rob someone with massive credit card debt and no savings? Please enlighten me. I am gentleman and a scholar . I am confused

Wed, 02/15/2012 - 13:01 | 2162289 GMadScientist
GMadScientist's picture

Rewrite the BK laws.

Wed, 02/15/2012 - 13:07 | 2162325 Nigh Eve
Nigh Eve's picture

A weakening of the US Dollar results in an increase in the retail prices of food and gasoline.   This, in turn, shrinks the disposable income of anyone whose income is essentially a fixed salary (with minor increases each year of 2 to 3%). 

On the other hand...,

If your income depends upon the shape of the yield curve ("lending long-term", borrowing "short-term") then you might benefit from inflation.

If your income is derived from commodity trading, then you might benefit from inflation.

If your income is derived from re-selling real estate, then you might benefit from inflation. 

Wed, 02/15/2012 - 12:51 | 2162237 Alcoholic Nativ...
Alcoholic Native American's picture

Hey now, let's not get into the bitter politics of envy.  Thats just not good form in economics, its taboo, like politicians calling each other liars.  It's something gentlemen just don't do.

Wed, 02/15/2012 - 13:02 | 2162294 GMadScientist
GMadScientist's picture

I envy you not having seen the Repugnicant "debates" (I thought debates required opposing viewpoints, silly me).

Wed, 02/15/2012 - 12:28 | 2162138 i love cholas
i love cholas's picture

Kinda lost me towards the end of the article

Wed, 02/15/2012 - 12:35 | 2162168 Carl Spackler
Carl Spackler's picture

THIS article is a breakthrough observation !

Excellent perspective.

There is still ART out there, and science is not the sole arbiter of the future.

Of course, the charlatans like Paul Krugman, will never come to embrace reality because it interrupts their ability to suppress the masses.

Wed, 02/15/2012 - 12:46 | 2162224 EnglishMajor
EnglishMajor's picture

Not to mention it would require them to let go of their dicks and step away from the circle jerk.

Wed, 02/15/2012 - 13:22 | 2162398 crawldaddy
crawldaddy's picture

come on now this is america 2012..., we are in recovery, we are winnning the war in afghanistan, and fukushima is giving the japanese kids super powers,  Its all good. now take your happy pill, it may be wearing off.

Wed, 02/15/2012 - 12:36 | 2162179 Bartanist
Bartanist's picture

I think that it is pretty clear that the econometric model, just as with technical models and Reuters news items have all been developed after the fact to decieve good people into believing that a world run by bad people is honest and fair.... or at least tolerable.

None of the so called models predict anything. They do not measure the real drivers... which are far beyond our ken (or so we are led to believe). Some would like us to believe that decisions made by a few, which benefit them at the expense of the many are for the best interest of our entire world and our entire species... this may be true, but all visible evidence contradicts that premise.

The best argument they can make is that they have the right to make any disposal and abuse of us they decide because we are their property and have no inate rights of any kind.... and from their perspective that might be true, if they created and are tending us as a farmer tends a crop.

Why is suicide a sin? Maybe because it deprives them of their rightful property.

Wed, 02/15/2012 - 12:43 | 2162202 Mariez
Mariez's picture

Where can I find a chart for daily market volume?

Wed, 02/15/2012 - 12:54 | 2162254 OutLookingIn
OutLookingIn's picture

With -

"...random flecks of accuracy."                        

Wed, 02/15/2012 - 12:45 | 2162212 brooklynlou
brooklynlou's picture

Tech Bubble followed by Housing/Credit Bubble followed by Sovereign Debt/Gold Bubble.

Bubbles either occur naturally due to popular delusions (manias) or due to manipulations of the markets (ponzis).

Why the hell do you need a complex Econometric model to tell you "follow herd till the herd gets confused then cash out"?

Am I missing something?

Wed, 02/15/2012 - 13:03 | 2162297 Sandmann
Sandmann's picture

The Bubbles were created deliberately - Housing to rebuild Bank Balance Sheets after the Dot.com Bust. Dot.com was caused by the Y2K Credit Bubble as the World would come to an end after 1999. Greenspan and his sidekick Gordon Brown delivberately engineered the Housing Bubble to give the world's Anglo-Saxon Debt Machine in London and New York a chance to make easy money on bricks and mortar

Wed, 02/15/2012 - 13:03 | 2162298 OutLookingIn
OutLookingIn's picture

"Am I missing something?"

YES.

Gold is a long way from being bubblelicious at the moment. Gold is merely shadowing the valueation of fiat currency. As the USD becomes more worthless, gold mirrors this devaluation by increasing in value just as much. As does the market and commodities. All rise together. Except, one is true money, one is fiat based value and one is a physical asset.

Question is - which one do you want to own when the SHTF?

Wed, 02/15/2012 - 12:47 | 2162225 Dermasolarapate...
Dermasolarapaterraphatrima's picture

"Failure" is in the perspective. Bank bonuses have been record high---- hundreds of Billions---the last three years.

It's all a matter of perspective and where you stand in the "economic model."

Wed, 02/15/2012 - 12:49 | 2162228 Eally Ucked
Eally Ucked's picture

Funny that somebody complains that econometric models are not working. Maybe they would be a bit closer to life if real data was provided. Every single dept of gov playing with numbers, modifying them according to policies and desired outcome. The same with corporations. The most important is engineering "EXPECTATIONS".

Wed, 02/15/2012 - 12:56 | 2162261 OutLookingIn
OutLookingIn's picture

 

"...random flecks of accuracy."

Wed, 02/15/2012 - 12:56 | 2162262 Sandmann
Sandmann's picture

So true.  P/E is a managed ratio as is EPS since these are Bonus drivers. The SG&A ratio is padded and income smoothing is engineered for analysts who are spoon-fed results. It is only when funding becomes a problem that the model falls apart. It requires a steady-state injection of leverage to make the dream-factory function. Econometrics is not sponsored to factor in downturns just as Stalin's Gosplan got no prizes for predicting falling steel output.

The West dreamed of something to compete with GOSPLAN and it created Wall Street Analysts to work closely with other Insiders to develop the Perpetual Money Machine by selling the Gordon Dividend Growth Model to retail suckers

Wed, 02/15/2012 - 12:53 | 2162233 Shizzmoney
Shizzmoney's picture

As for forward earnings--I have often described the dominant causal factor in the rise of U.S. corporate profits-- the decline of the U.S. dollar. In a nutshell, here's the story of rising profits: 40% of all U.S.-based corporate revenues are generated overseas, and a majority of profit increases result from these rising sales overseas.

When these profits earned in euros, renminbi, yen, etc. are restated in U.S. dollars, then the profits magically rise. For example, 1 euro earned by a U.S.-based corporation in 2002 yielded about $1 when converted to dollars in the company's financial reports. In 2008, that 1 euro ballooned into $1.60 of profits due to the currency exchange rate of 1 euro=$1.60.

Fully 35% of that profit was a result of dollar depreciation, not an actual increase in profit margins or goods and services produced. The Fed's campaign to destroy the nation's currency generated fabulous (and phantom) "growth" in corporate profits at the expense of every holder of the currency.

Now that the U.S. dollar is in a secular uptrend, the Fed's shadow strategy to boost phantom corporate profits and thus the stock market is in trouble. Now all those phantom gains are threatening to vanish as the dollar strengthens.

Plus infinity.

Remember, this was the FOMC's plan all along.  Fisher, who instituted this plan, also just said that QE3 is a Wall St "fantasy".

http://t.co/EtgB3pgl

This from the same guy who owns gold/farmland.

There is no left.  There is no right.  Just haves and have-nots.

The Mayans' predicted an end of an Age at the end of this "Baktun" of Industrialization we are have been in the last 125 years or so.

It's the irresistable force (thought, love, principle) vs the immovable object (power, opulent greed, wealth). 

And the sands in the hour glass are waning.  The question is: What will be this generations' John Brown/Harper's Ferry moment?

Wed, 02/15/2012 - 17:28 | 2162253 JR
JR's picture

As young Americans in Oregon pump gas for minimum wages and/or drive lumber trucks for $10 an hour and/or apply carpentry skills for $12 an hour, the government continues to deliberately break the American economy by inducing indentured servitude for U.S. taxpaying citizens so multinational corporations can garner immoral profit off the back of an H1-B status cheap worker.

“Between 2001-2006, the U.S. imported, on average, 860,000 workers per year. In 2010, that total leaped more than threefold to 2,816,525. With real unemployment figures pushing 20 percent, why are nearly 3 million foreigners being legally allowed into the U.S. annual to fill positions that Americans have been fired from?” – Attorney James Otto who filed in 2011 a lawsuit against Long Beach, California’s Molina Healthcare, Inc., contending that “a conspiracy existed between Molina and a company named Cognizant to replace their workers because they were all American. Further, none of those dismissals –225 total over a three-year span—occurred for disciplinary reasons.”

Wed, 02/15/2012 - 12:55 | 2162257 economessed
economessed's picture

Article is near and dear to me.  So is it really a problem with econometrics, or does it have more to do with the specification of the model?  Type II error, anyone?

Wed, 02/15/2012 - 13:00 | 2162286 Sandmann
Sandmann's picture

Of course. The most important variable in Econometrics is the Stochastic Error because the bigger it is the tighter the equation fits. These people are so busy looking at Betas they forget Alphas because Alphas don't get bonuses.

The whole system is a joke but reading tea leaves is not acceptable in the computer age

Wed, 02/15/2012 - 12:58 | 2162272 Bob
Bob's picture

And it isn't just US oil consumption that's declining:

Clearly, electrical consumption is in a downtrend with no recent historical precedent. Those claiming that U.S. growth is sustainable and the Dow is heading for 15,000 must square their rosy projections with sharply declining energy consumption. The two simply don't match up.

http://www.oftwominds.com/blogfeb12/energy-consumption-dropping02-12.htm...

Wed, 02/15/2012 - 13:02 | 2162284 tempo
tempo's picture

All economic models ignore the enormous fact that the worldwide competitive wage rate is $25/day w/o benefits and is dropping. In additions workers must live in prison like conditions 3000 room dorms with 20 people per room. So manufacturing jobs will never return to the West. The US/EU has moved from an mfg based economic to a "FIRES" (Finance, Insurance, real estate,student) economy which is not viable w/o base manufacturing. No Company will ever expand a manufacturing base in the highest wage/regualted countries. Corporations will lobby for massive entitlement/deficit spending to support consumption of the products made in the lowest wage/regulated countries. The market loves the increase in deficit spending in the 2013 Budget, its called growth today. This reminds me of the subprime borrowers who rejoiced at each refinancing which allowed for another year of insane living beyond their means. In a few years, the interest on the debt with be $800 billion, the largest expenditure and the real pain will begin as entitlement/defense programs are really cut.

Wed, 02/15/2012 - 13:03 | 2162296 yogibear
yogibear's picture

Bernanke and the Federal Reserve bakers solution is to saturate banks and everone with their Ponzi money. It just takes more and more Ponzi money to get a reaction. Eventually it does nothing except causes massive inflation. No wonder Russia and China are dumping their treasuries.

Msybe if Bernanke and the Federal Reserve trigger hyperinflation they will be forced to stop the Ponzi game.

 

Wed, 02/15/2012 - 13:07 | 2162327 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

And they are using some of it to keep the lid on the POG.  I can't wait to see this bitch unwind.

Wed, 02/15/2012 - 13:08 | 2162334 gwar5
gwar5's picture

The central banks are holding the mortgages on global democracy and they are now systematically walking our children and grandchildren up to sign the loan agreements to their current and future masters.

 

Wed, 02/15/2012 - 13:17 | 2162370 OutLookingIn
OutLookingIn's picture

We no longer have democracy. its dead. In its place we now have corporatocracy. This is corporatism married to financial oligarchy, with the politicians in their pockets.

Put a more simplified way - FASCISM. 

Wed, 02/15/2012 - 13:19 | 2162381 crawldaddy
crawldaddy's picture

the us is like living in disney world, where even grown adults now believe micky and goofy are real, and its just a few of us walking around saying,  "you know thats just a underpaid sweaty actor in a suit, right?'.  We are basically ignored and told to shut up.   Its really sureal. 

Wed, 02/15/2012 - 13:23 | 2162410 hardcleareye
hardcleareye's picture

Great little explaination(video) of the  Ceridian Index.

http://www.ceridianindex.com/about-the-index/multimedia/

Wed, 02/15/2012 - 13:31 | 2162448 tony bonn
tony bonn's picture

thanks for picking up on the fact that 40% of profits are foreign based and that currency conversion is responsible for fake profits - an issue quite big in the 70s...

the insulation of us corporations from domestic markets is another reason the stock market thrives regardless of domestic conditions - people don't get that and never will....the corporations are essentially stateless and can manage profits across boundaries and time...the stock market is manipulated but it is not as irrational as money contend....

Wed, 02/15/2012 - 13:58 | 2162579 DaveA
DaveA's picture

Total mortality per 1000, all causes:

Jan=6 Feb=4 Mar=5 Apr=3 May=4 Jun=7 Jul=3 Aug=4 Sep=5 Oct=4

How many deaths does your mathematical model predict for November? If I title the graph "Bob's Turkey Farm", does that make a difference?

Wed, 02/15/2012 - 14:17 | 2162684 hardcleareye
hardcleareye's picture

This is the data from Ceridian web site  http://www.ceridianindex.com/   and the while the index does show a slow down it is not anywhere near (yet!) the magnitude of 2008 time frame (it is not a leading indicator it is real time).

"Does this chart reflect an expanding economy, or does it share all the traits of a contracting economy?"

All the chart tells you is how much diesel fuel is being purchased by truckers in a real time format!  To say the it shares the traits of a contracting economy AT THIS TIME IS PREMATURE. (look at the 2007-2009 data on the Ceridan Site for what a contracting economy looks like using this indicator).

Smith needs to "tighten" his work up.  I don't disagree with his fundamental point but his supporting data is bullshit.  He needs to take some lessons on how to prove his points from Reggie Middleton!

I did some checking on some of the data cited on his last article regarding the drop in electrical power consumption, the source did not have all the data referenced in his charts, the cited source's data stopped at 2009 yet he had included data up to late 2011, this data may be accurate but I don't know where it came from, I could not find it on the EIA site, very bad form and sloppy!!!!!!!

Lose cannons like Smith hurt the overall creditability of the ZH "doom and gloom" arguments, there is enough real hard data to support the D&G mindset without resorting to this.

I'm done my rant, that is all I have to say 'bout that.

Wed, 02/15/2012 - 14:24 | 2162710 rsnoble
rsnoble's picture

No, these models are only partially detached.  They detach only when the news is negative and reattach on any good news. And most of the time the good news is manipulated.

Wed, 02/15/2012 - 14:24 | 2162714 mayhem_korner
mayhem_korner's picture

 

 

The only model I've ever found can reliably tell the truth is the sundial.

Sun, 02/19/2012 - 21:06 | 2176346 q5251355
q5251355's picture

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