January 2010 Archives

Sometimes A Law is Not Really A Law

By Philip K. on January 29, 2010 1:18 PM | 0 Comments
Brad Delong has posed an excellent question.  With today's release of quarterly GDP growth at 5.7%, we'd expect unemployment to go down per Okun's law.  Unemployment figures, however, haven't gone down about 2% as predicted.  Instead of 10% unemployment, it should be 8%.  What's up? 


Okuns.JPG


First and foremost, I believe the relationship of Okun's law to still hold true.  Calling it a law is a misnomer.  It's more of a highly correlated relationship, but Okun's law sounds much better than Okun's Highly Correlated Relationship between GDP and unemployment.  The lack of the predicted 2% drop in unemployment still falls well within the the range of the linear relationship.  A little variance never hurt anybody.

The lack of corresponding drop between GDP and Unemployment doesn't mean Okun's Law is invalid, especially when it's still within the variance.  For the same reason that the best quarterbacks still throw interceptions, we can still see figures like these.  We shouldn't worry too much about such flukes unless they're systematic enough to create a pattern, or they're such complete weirdos that defy all expectations.  The current GDP/unemployment relationship  would not fit in either category.  

Give the economy a few more quarters of growth and it would be hard for unemployment to resist falling.

2010 Forecasts

By Philip K. on January 5, 2010 7:07 AM | 0 Comments
My three months absence here is inexcusable.  I've been trying to shake off a World of Warcraft addiction that has been detrimental to my trading.  It created slippage in the neighborhood of about 25% reduction in my expected profits.  I kept on playing the game ignoring my end of day signals.  

The gaming addiction was that strong!  It was akin to the character Sam in the movie Avatar where he was more focused on the "virtual" world than his actual word.  All of that is mostly behind me now as I believe I've moved on.  I feel like I've already mastered the game and there's not much out of it.

Looking back at my forecasts for 2009, I've been pretty accurate and profitable.  The experts at the time, January 2009, mostly predicted our economy will not recover.  The prediction markets pegged positive GDP growth for 2009 at about 33% chance.  

Buying the Dow at 8500 and even 8000 as I suggested might not have been such a bad move right?

To put it simply, I do not expect the positive returns this year to be as nice as last year.  You know how the S&P averages about 10% a year with a whole lot of variance year-by-year?  This year feels like a 10% year.

To draw from many sports analogies, we're in a rebuilding year.  We're trying to find what works and doesn't work for our team.  There are a host of systematic weaknesses that need to be addressed and we need to focus on the positive aspects that grow our economy.

My general economic forecasts are great if you're managing a large sum of money or into that intellectual hot air.  

To break it down into a more usable form, I predict the FOMC to set higher interest rates.  The Fed doesn't exactly set rates.  They have interest rate targets, but you know what I mean.  Rates will go up this year.  There's very little doubt in my mind about this.  

To play off the higher interest rates, US dollars will be an attractive option for 2010.  If you don't see the relationship between higher interest rates and currency, then there's not much I can do to help.

What I've discovered in my statistical analysis is that the price of gold is about 60% negatively correlated with the US Dollar.  Correlation does not imply causality, but that's the nature of the gold/dollar relationship.  Be careful though, because I lost a slight bit of money betting against gold last year, but luckily my stop loss kept me safe.

I'm going to wager this year that the rising interest rates will make the dollar rise and pop the air out of gold.
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