I really wish economists would stop doing stuff like this

From the Huffington Post, I see that “non-partisan” Brookings has published a research piece showing that stocks will fall 10 to 15 percent if Donald Trump is elected president of the United States.

I put Brookings’ non-partisanship in scare quotes there because their tendency to be moderate and empirical means these days that they are partisan Democrat. It is not that Brookings has moved, but that the GOP has gone bonkers.  This is an excellent time to be “partisan,” rather than a weak-kneed professional centrist, of the ilk the NYT runs an affirmative action program for on their op-ed page.  Brookings should embrace its partisanship, like a German Social Democrat in the 1930s might.

The Huff Post article is really accessible and mostly captures a tweet storm from Justin Wolfers with some really cool, very-high-frequency charts showing how risk asset prices have moved in line with changing probabilities of a Clinton or Trump presidency.  If you want the original paper, here is the link to it.

This is the event-study approach to analyzing the effects of policy innovation or political shock on financial markets.  And economists really need to stop doing this, because these studies are based on the false premise that financial markets are sufficiently rational and noise-free to allow short-term movements in them to be a proxy of likely enduring effects.  Really, guys: stop doing this. It is foolish.

Here is the money paragraph from the Brookings paper setting out their “findings.”

The magnitudes involved are large. The S&P 500 futures rose by 0.71 percent during the debate window in response to a 6 percent increase in Clinton’s victory probability. This implies that market participants believe that the S&P 500 will be worth 12 percent more under a President Clinton. Movements in other U.S. stock indices tell a similar story. A 12 percent difference is large both in absolute terms and relative to how previous political shocks have moved the market.

I can see why they would want to draw such a grand conclusion. Thanks to some contacts at Predictwise and apparently in markets, they gained access to some BIG DATA that allowed them a unique insight into these short-term movements. And it is indeed fun reading.  As a scribbler myself, I assume it was also fun writing too.  Very cool. Bit envious.

But the conclusions they draw are way too strong for the method they use.  And the false confidence with which they present their findings is irksome because it discredits economics.  Hence I wish guys would stop doing this!

On the other hand, macro has not covered itself in glory in recent years,  Krugman aside, so maybe the first step to recovery is for macro to admit it has a problem. Maybe the discrediting is not a bad thing? Maybe I need to give that some thought.

I remember just before the Brexit vote that Larry Summers trotted out this same approach to claim that a Leave result would hit the FTSE really hard:

Second, markets are likely to suffer extraordinary volatility in the wake of Brexit. A Black Friday could follow referendum Thursday.  It is likely that foreign investors in British stocks would lose 15 percent off the bat, adding together market declines and currency losses.  This is a judgement supported by the gyrations in markets induced by relatively small fluctuations in the perceived chance of Brexit and by the very high prices commanded by out of the money options.  The truth is that even with all the regulatory changes that have been put in place we do not know for sure how the financial system will respond.  A return of systemic risk as large losses lead to cascading liquidations cannot be ruled out.  At a time when central banks have far less ammunition than they did in 2008, the consequences could be grave.

I whined about that in real time, making three points:

First, the event study approach that he cited implied a decline more along the lines of 40% than 15%.

Second, event studies are incredibly unreliable in this context. In the event, the FTSE went up. Sure it went up for a reason.  Unless you are a modern physicist, everything has a cause, in this case perhaps the BoE’s reaction. But were markets unaware of the existence of the BoE?  Please.

Third, why must we measure political events through their effects on markets? Brexit can be dumb regardless of how equities do. (I would now add sterling, which seems coincidentally right, but is not itself a problem.)

Incidentally, this same nonsense approach is why academic economists puffed themselves up and proclaimed with great gravitas and pseudo-objectivity that the “evidence” (heaven forbid any presence of priors) implied that QE was worth 200 or 300 or whatever basis points off the 10-year Treasury yield. I don’t know the exact number, because I stopped caring a while ago, it being so ridiculous.

Of course, when QE ended, bond yields went down. Oops.  I know, counterfactual, not a controlled experiment, blah blah blah.  There is no end to the ex-post rationalizations for having got the direction wrong.  Again, we have a case of event studies not working. Can we accept that before moving on to counting angels?

Returning to Trump, my opinion does not matter but I will give it anyway. The problem with the Brookings piece is not that it is too partisan, but that it tries too hard not to be.  I think a Trump presidency could be an extinction level event, where equities might stop trading outright, perhaps on their highs. Who knows?

Why be pseudo-centrist about it and pretend just to be objectively assessing the evidence, which was probably chosen ex post to fit the priors anyway?  Would that “study” have been done if markets were indifferent?

In my view, which I fully admit is speculative, if Trump wins we will have much more to worry about than a 10 to 15% decline of the stock market.

Indeed, I am hoping stocks go down 10 to 15% after Hillary wins so I can buy some to fund the retirement, which has maybe already begun? Geeze. Ouch.

Right now, the returns look pretty uninspiring. But they are hardly the main thing confronting the country.

Admitting when you’re wrong

I remember back when I was a lowly macro analyst that I often had occasion to contemplate the implications of being wrong.

Being wrong sucks, in part because you are usually aware that you have been wrong  only after the market has moved against your take. And extremely irritatingly, the market always seems to have moved just a delta too far, which makes you think, well now would be a really poor time to come clean. Bygones.

Usually, when you hesitate like that you are a) understating how wrong you have been and b) overstating the extent to which the market has already discounted your wrongness.

Mr. Market: listen up, that is just the preamble! I am holding some truths to be self-evident here, among them, that you are a moron. And I am going to enumerate them in great detail to extract maximum pain. 

It hurts even worse to be wrong if you are a portfolio manager and playing with live ammo, rather than just words and sense of self.  PMs have it tougher and the good ones are paid accordingly. (Some losing PMs are also paid well, just not where I last worked.)

But I was often envious of how little fanfare the PM faced when when cutting a losing position. He would hit a button or pick up the phone for 30 seconds and that was it, at least until risk management came along and asked, what happened there? Not sotto voce: can we discuss this later?!

For the analyst, though, it is a much more complicated psychological process. The false premise underlying the analyst-PM split is that the analyst knows something objectively true about his space.  When admitting error, the analyst has to reveal that premise for  what it is: false. And that can be humiliating, which can slow things down, relative to ideal and relative to the speed at which a PM can move.

My faith in this pet hypothesis is reinforced somewhat when I see PM’s delaying really badly in taking a loss on an idea that is not in their portfolio but instead in their public pronouncements.

Just to take a random and totally made up example,  a biotech PM might have said just for shits and giggles that going over the fiscal cliff would be bullish, because it would fix the deficit.  That view is obviously stupid and would be severely punished by the markets, which is why a good macro trader would not express it in his portfolio.

But for the biotech PM it is something that would neither be in nor not be in his portfolio.  It is something he would talk about rather than trade on. And such talking puts him in the position of the analyst, very slow to admit the error.

Consider the case of Peter Thiel, who for these purposes I will call PM rather than analyst.  Obviously, Peter Thiel knows how to act in his capacity as investor.

But his continued public attachment to Donald Trump is increasingly embarrassing and at odds with what I have to assume are his own values.  But he can’t just quietly close the trade and move on, because it is not a trade but something he has loudly talked about.

He is dug in, like an analyst.

Must really suck these days to be Peter Thiel. Not that I feel sorry for him. The party of personal responsibility needs occasionally to take some. Hopefully, this will sting a bit for a while.

Kondescending Kocherlakota

Update: Dr. Kocherlakota informs me via Twitter that he does in fact hear this view mostly from financial market participants.  Maybe he gets hate mail from people frustrated by his support for easy money and is therefore not getting a representative view?  I have no evidence of that but it would hardly surprise me.

In fairness, he also mentions that this view is held at the BIS, by an economist K describes as “brilliant”, even though he disagrees on this point. Apparently, there is somebody at the BIS who believes that malinvestment today is causing weak growth today.  That would seem to require capital market supply side constraints at odds with liquidity trap. Would not be my first guess. But this is macro! So who knows?

As I have mentioned before, the definition of a liberal is somebody who argues even when he agrees. My only quibble with Kocherlakota was that he was unfairly attributing a view he thought wrong to the likes of (former) me.


I am a fan, but here is his description of three possible reasons for very slow growth during this recovery:

I’ve heard (at least) three explanations. One, preferred by most academics, is that demographic and technological changes — which started before the 2008 financial crisis — took the Fed by surprise. Another possibility, highlighted in Yellen’s speech, is that the recovery engineered by the Fed was so slow that it did (possibly reversible) damage to the supply side — for example, as long-term unemployment eroded the skills and motivation of workers. A third, popular among financial market participants, is that the Fed’s easy-money policies have stunted growth by encouraging people to make bad investments.

Away from ZeroHedge and others who missed the tripling, I don’t think there are many “financial market participants” who have a strong view on this issue. And there would be many fewer still, particularly given the winnowing of chronically wrong people, who would attribute slow growth to “malinvestment” in the current period.

Kocherlakota is an academic, which is fine. But a lot of them seem to think “financial market participant” and “moron” are synonyms.

Maybe the academics think the dread financial market participant, ick, reads Business Insider for something other than entertainment.

Post mortem has already begun

I see guys on both sides are now doing post mortems on the presidential election.  I pray to the subjunctive god that this is not based on a false premise.

But I would like to join in on the spirit of this and trot out a slightly left-field idea.  The two great political parties should reexamine the strongly-held premise that the party bases get to choose the party leaders at the top of the ticket via  caucuses and primaries.

People piously call this “democratic.” But why should the legislative wing of the party have to allow others tell them who their leader is?

I get the logic of the French system, in which there is a free for all followed by a winnowing and run-off.  But this ain’t that. The base, rather than the general electorate, does the winnowing in the US.  And that is arguably very unhelpful.

Maybe the team captain could be chosen by the team, not the fans. The fans can later choose which team to support — and it would be up to THEM  to decide if one of the two main teams is worth supporting.  That would be neither more nor less “democratic” than the current setup. But it could be quite a bit less dumb.

As the less insane wing of the GOP has often insisted, Trump is not even a Republican, or at least not the face of Republicanism that they would choose to present to the general electorate.

I am hopeful that the Republican Party will implode, for having revealed that the entire effort from Goldwater, through Reagan to Trump was one big race bait.  But we can also look at this from the perspective of GOP legislators who — in fairness to some of them — have been put in the very awkward position of having either to support Trump or suffer the consequences of low turnout for them on polling day.

The moral high ground way to play this, which very few seem to have chosen, would be for someone like, say, the local Kelly Ayotte to be clear that Trump is a menace to the constitution, to reject him, and to accept the consequences for her political career.

But humans are flawed, so that is probably too much to ask. The more plausible remedy might be applied earlier in the process, where the legislative wing chooses who is at the top of their ticket.

Why should Kelly Ayotte, of whom I am definitely not a fan, even have to deal with this? I doubt she would have chosen Trump. I hope she gets crushed, but why should she have to be put in this position? More to the point, why should the electorate of New Hampshire or the United States?

It seems to me that this is at least debatable.  The idea that the contemporary primary system is more “democratic” may be quite misguided. Is it “democratic” to have half the two most plausible options chosen (applying some false equivalence here) by retards who show up angry and drunk to a primary and then disappear, leaving the mess for others to deal with?

Not even I would think of this

I love flashing this fact-based partisan chart.  You can argue the whys but not that it is biased. Also, I can produce one of these charts for every proximate pairwise comparison dating back to the second world war.  The blue line on the right ends strongly positive in ALL cases, including for the single-termers Carter vs Bush.  Including the 20s and 30s would just be cruel, as well as impossible due to data shortage.


But it would never occur to me to do this one, below. Buddy starts the blue when Obamacare is passed. That way the job losses at the start of Obama show up red. Clever!

But liberals are supposed to be better than this. Making shit up is for the other side.

I suppose you could say this is about O’Care, not the presidency itself. But the use of color belies that. Tsk tsk.

Separately, O’Care did not CAUSE the jobs recovery. It simply — against all whiny GOP claims at the time — did not prevent it.

Also look at that one month very recently when the line did not go up. Squint.  Note that buddy just painted that red. Maybe he just has an excel macro that makes all shitty data red. Not necessarily wrong, although I would run the causation the other way.


Core PCE deflator for Sep looking firm

The details of the PPI and CPI releases are relevant largely to the extent that they predict the following week’s (or so’s) PCE deflator.  I know the PCE deflator is not the perfect measure of inflation. There is no such thing to be had, as a simple point of microeconomics.

But the Fed has in mind an objective for the deflator.  You can fool yourself into thinking there are all sorts of measures and that they take an average. And you can be wrong about what the Fed will do, if you are into that.

I noticed that the monthly gain in the core CPI for September was low and was driven in large part by a steep gain in owners’ equivalent rent, which is far overweighted in the CPI. So I figured the core PCE deflator would probably set up as quite low. But I figured wrong.

According to my favorite core PCE guesser, JP Morgan, the core deflator is set to be up 0.15% in September. Don’t necessarily hold me to this. Check it for yourself. But a friend tells me this.

Assuming it is true, that JPM is exactly right, and that there are no revisions (all heroic), the 12-month inflation rate will be stuck at 1.7% after rounding, and make a very marginal new high for this episode before rounding.


A new debate among the intellectuals* attracted to metaphors and other shiny objects is whether the Fed would wait for the “whites of the eyes” of inflation before moving to raise rates enough to (try to ) slow growth to trend or below.

I don’t like metaphors much, except when I use them, but it is painfully obvious to me that the Fed is reacting to trailing measures of core inflation, mostly on the grounds that core inflation is more serially correlated than its change is predictable. To put this in the religious terms the Fed types require, by all means the Fed looks FORWARD. Heaven forbid otherwise! But these days they do so mostly by looking backwards.

That inflation has picked up a bit rationalizes the case for another rate hike in Dec, I guess. I am not sure. I would prefer they waited. But it does not seem like the sort of base case one would fight. El-Erian may finally get his call. If not, he will just say the timing is irrelevant and the Fed will go in March certainly.

Incidentally, the left panel of the chart shown above is meant to demonstrate that the Fed has chronically missed to the downside on core inflation for the past decade. I think they should have a plan looking forward to stop doing that.

Overshooting 2% inflation in the late cycle would be part of that plan, IMV, as I have often argued. And of course, I know I am right because Larry Summers says he agrees.

The point is not necessarily to make up for bygones. I could see the case for the Fed doing that, but they claim they have no intention to do it, so there is that.  I figured I would add a note to the chart just to be crystal clear about that.

The Fed should aim for inflation above-target in the late cycle because that it seemingly required to hit 2% on average trough the cycle looking forwards. Gentle rate hikes from here are not inconsistent with that objective, particularly now that core inflation is a bit higher. So even though my bias is dovish, on rates my policy is to Zip It.

* I dislike anti-intellectualism and generally pushed back against it and its twin-brother anti-academicism when on Wall Street.  But in macro, the professors have sounded SO much like priests in recent years that I have moved closer to the Wall Street perspective. Awesome timing, now that I am gone. My career planning has been impeccable, as Jean Claude Trichet might put it.




Poh weewuh sexual pwedator and clear threat to the constitution had his weewuh feewings heuht by a weewuh geuhl and is now having a sad.