Investor.Gambler.Economist.: *Economics Archives

Mid-Term Review

By Philip K. on May 19, 2010 2:21 AM | 0 Comments

About half of the trading year is over and now is a good time to see how my economic forecasts from the beginning of the year are doing.

1. The FOMC to set higher Interest Rates

I'm sweating a bit about this prediction. I was so confident I expressed very little doubt about this outcome. According to the minutes from the latest Fed meetings, they're committed to keeping interest rates low. I'm going to stick to my guns on this prediction. It hasn't come to fruition, but the economy is getting better, employment figures are starting to get better, and inflation is around 2.3%. These marginal factors lean towards the Fed to start raising rates. If they don't, I'll just have to swallow my pride about this one.

2. The Dollar will rise

I'll call this prediction a $$$. While the Euro insecurity is a large reason for the rising dollar, something is to be said about the positive growth of the US economy being the explanation. Inherent in my expectations of rising interest rates was the stronger US economy forcing the rising interest rates. Okay, maybe I'll just call this a half-win.

3. Gold prices will Decline

This one is currently an unequivocal fail. Interest rates hasn't risen yet and gold prices are making new 52 week highs. That's the thing with trends. They can sometimes stay out of whack of their fundamentals. I am still going to stand by my prediction. I have a shit load of cash ready to pull the trigger on this gold bubble the instant I see downward momentum. I am still forecasting it will happen this year when and if the Fed starts raising interest rates.

Head Scratching 1000

By Philip K. on May 6, 2010 1:59 PM | 0 Comments

The almost 1000 point swing was hard not to notice. All of the news pundits are now backfitting explanations as to why this swing happened. I might as well join the party, because today's sharp drop and recovery is a head scratcher.

My initial impression was there was an error in my ticker feed. The normal relationship between some of my trading pairs had price divergence that were 6 or 7 standard deviations from my data set.

There was nothing wrong with my stock feed. People are now discovering that there might have been a technical glitch in Proctor and Gamble (a large component of the Dow) and that explains some of the drop. The P&G errors were maybe 200 pts and a few hundred or so pts were the result of computer systems cascading this glitch.

The DOW was trending around a 200 pt loss before the glitch, so the daily animal spirits would probably say a 100 to 300 or so pt loss was the 'norm'.

If about 300 pts was normal animal spirits, 200 pts was the result of PG error. That leaves us with about 500 pts that were quite possibly the result of computer systems cascading on the trading errors? I reserve doubt about what caused the other 500 pt drop, because I don't have nearly enough information to make any solid conclusions.

The quick recovery immediately to the normal 300 pt loss does strongly suggest errors were what caused today's head scratcher. I've seen maybe 10 case studies on individual stock companies where there were false reports (wrong information about bankruptcy, incorrect financial statements, etc.) and the patterns are all quick drops and quick recovery like the pattern that we saw. All of these case studies were based on individual stocks.

Broad based markets can theoretically have quick drops and recoveries from errors if this incorrect information is macro oriented like ISM or unemployment reports, but today's errors do not appear to be macro oriented. Can just a few errors in a few securities cause the broad market reaction that we saw? Apparently yes, but this one is still a head scratcher.

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?

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.

Fear Coming Back to the Market

By Philip K. on October 4, 2009 4:41 PM | 0 Comments

Investors have more to fear besides the upcoming Halloween. The S&P is about 5% off from its short term highs. The VIX, fear index as some pundits like to call it, has gone up more than 10% in the past few weeks.

The Employment Situation and ISM numbers released on Thursday and Friday largely explain the broad based sell-off. Investors were expecting more.

I'm going to take a step away from the crowd and argue the numbers weren't bad. The ISM numbers showed growth in the service economy. It's not a large growth, but it's growth. Any growth, besides cancerous growth, is good growth. While it did not meet consensus expectations, from an economic perspective it's not too bad because it's still growth.

The unemployment figures leave me feeling a bit mixed. Until the GDP recovers about 2%-3% (Okun's Law) we can't really expect the unemployment figures to get much better. OTOH, unemployment numbers usually lag any recovery in the economy. Tricky.

The two not so stellar figures have been the catalyst for the fears of "too much too soon" to take hold and explains recent sell-off.

I'm going to officially step back from the crowd/market and put myself on the line. I believe, about 2 standard deviations believe :), the recent sell-off is a great time to get back in the markets. For obvious reasons I would rather not discuss any statistically significant patterns I discover in the market, but my contrarian system is flashing green. I love buying into fear, so I'm wagering now is a good time to long.

Disclosure: I'm long FXI and BRF. No guarantees. No refunds. You'll probably lose money from following random strangers on the internet.

Double Dip Recession?

By Philip K. on August 31, 2009 8:53 AM | 0 Comments

There have been some grumblings about a possible double dip recession. The bears argue the recent drive up in the market has been over done and while some aspects of the economy are improving, it will tank again. The recent bounce will only be short term. The S&P getting hit about 1% today supports their contention.

I've said this a hundred times and I'll say it again, future forecasting is extremely sketchy. As the time period gets further and further away, the less reliable the forecasts are. Some short term prognistication can have better than random results, but long term forecasting is futile unless you're Paul Tudor Jones or Warren Buffet.

With that aside, my economist hat says the possibility of a double dip recession is so minimal the fears are misplaced. There are many indicators that point to a less bleeding economy. Sure. Things can change at the drop of a hat, but I'm just following the momentum, the rate of change, the first order condition.

Historically, September months have been terrible for the markets. It's the only month out out of the twelve that averages a losing percent in the S&P. Perhaps in some way, the September gloom is fueling the fears of a double dip recession.

I'd hate to buck such a strong historical pattern in September. If there are more declines in September, I'll see it as a good time to long the overall markets.

Disclosure: I am not currently long in any markets.

Much Too Soon to Call It

By Philip K. on June 15, 2009 12:04 PM | 0 Comments

Last Thursday I said, "For people to start heralding a quick V shape recovery when the current economic feel is much more uncertain signals to me a disconnect with the reality. I'm starting to think this current rally might have been a bit too much and too soon."

Today the market dropped 2.2% for no readily apparent reason. CNN Money thinks, "Stocks in recession retreat -- Worries that the economy is not likely to recover as soon as had been hoped drag on markets. Dow, S&P 500 and Nasdaq drop over 2%."

Day-to-day movements have too much variability and it's difficult to attribute any ups and downs to any causal event. Much too soon to call it a correct guess.

We'll just have to give it a few more weeks to know if the Market is going to slow down in response to the more uncertain economy (e.g. 0% economy).

Cities With the Worst Unemployment

By Philip K. on June 3, 2009 12:18 PM | 0 Comments

Bringing It All Together - Investing, Gambling, Economics

By Philip K. on June 2, 2009 6:36 PM | 1 Comment

Yesterday I wrote about some of the analytical framework that goes on in setting the sports line. I might as well tie together this analytical framework in setting point spreads to investing, and economics.

Sports Gambling

Point Spread = Home Court + Team Stats + Popularity +.......

Economics

GDP = Consumer Spending + Business Investments + Government Spending + Net Trade

Investing

Stock Price = Earnings Per Share + Book Value + Market Cap +.....

In the three examples, an outcome can be estimated through regression analysis. How we determine the ultimate value of something is based on the parts that make up the thing. Using regression analysis can be one of the most powerful ways of finding the truth in gambling, investing, and economics.

Note: I've dumbed things down considerably to make this as accessible as possible. There's also usually a coefficient value in front of each factor, but adding coefficients would make it look more confusing. There's also the assortment of problems from data mining, multicollinearity, bad models, etc., etc. But the three example is its simplest form

An expected unexpected decline in Retail Sales

By Philip K. on May 13, 2009 3:52 PM | 0 Comments

People are buying a lot less last month, but why should you care? Retail sales figure for April dropped .4%, meaning it really dropped about 1.4%. People who release bad news like to be really sneaky about things. They report that news have been bad and revise the figures downward later.

Anyway, the reason you should care is because our economy is again broken down into four things:

Consumer Spending + Investments from Businesses + Government + Net Exports

I feel like I'm a stuck record always repeating the same thing about Keynesian Economics, but these four factors really do sum up the economy. The C in the equation hasn't been shrinking in a long time, like it is now. When the C shrinks, it's the difference between a depression and a recession.

The retail sales figures just means that until the C recovers, the economy won't.

Not So Surprisingly

By Philip K. on April 28, 2009 9:47 PM | 0 Comments

Worst employment ratios since the Great Depression. Using an employment ratio doesn't directly help investors or gamblers much.

For the economists, this depression really is one of the worst. People are suffering. It's going to take a long time for employment numbers to recover.

The Fear of the Swine Flu Is Doing the Harm

By Philip K. on April 28, 2009 12:02 PM | 0 Comments

Not too many cases when you compare that to a worldwide population of 6.7 billion people.

The Economist Magazine Throws Water on the Glimmer

By Philip K. on April 27, 2009 12:17 AM | 0 Comments

The economist in me has very mixed feelings about the Economist Magazine. The magazine provides good perspectives on global issues. It uses many indicators and fancy ten-dollar words that I like. It discusses a lot of poverty and development issues in developing countries that never gets addressed by any other media. At the same time, it's a widely circulated magazine that tries to cater to what's popular. It's almost like they pick articles that target right to their median readers. Their readers generally being more nerdy, nervous, and wimpy.

That's why this recent article with its picture has gotten me on edge. Despite Obama's recent cheerleading, the article paints a rather grim view of the economy. There are some very real murmurs going on that indicate things may turn around. The picture sums up the Economist Magazine's position. They're leaning towards the position that the murmurs, the glimmers, are false signals and we should tread cautiously. This cautious approach is likely to be directed towards its median wimpy readers.

My position is that it's very close to a coin flip. The economy can recover, stay flat, or dive from here. I don't take the scared position the Economist magazine takes. I just don't know enough to take any position.

But this recent article has caused me to re-consider my predictions. The Economist Magazine's front cover is notorious for being a contrarian indicator. This just might be one of those front covers. Their desire to appeal to the median reader and the group think can cause them to be slower in reading the tea leaves than they'd want to admit

This cover picture of the Economist is seriously making me consider that the worst really is over for the markets. (Not for the labor market and housing, because these two will lag any economic recovery.)

Continued from Glimmers of Hope

The US is spending its way out of the recession

By Philip K. on April 24, 2009 8:29 AM | 0 Comments

The Federal Reserve has recently announced their balance sheets more than doubled in the past year. The surge reflects increased government spending to try and combat the Great Recession. That's hardly surprising. The US Government has been consistently indicating its intention to spend, spend, spend. The economists might as well predict that the sun will come out tomorrow or that the the recession will end one day.

What most people don't understand is how government spending helps to soften the recession. Down to its simplistic core, the economy can be broken down to four things: consumer consumption, business spending, government spending, and exports to other countries. That's right! That's the expenditure measure of the economy:

GDP = C + I + G + NX

Consumer spending dropped dramatically because some people lost their homes, confidence, and their jobs. The declining consumer consumption was and currently is red ink for the economy. Business investments went down because of less business, so another red slash. Forget about the United States making some bank through exporting goods to other countries. The US hasn't fixed it trade deficit in 60 years.

That only leaves government spending as a remedy to soften the recession. That's why the government is loading up its balance sheet to help spur spending. The idea is that jacking up the G in the equation will help to offset the declining Consumption and Business Investments. With a slight benefit of hindsight, it's beginning to look like the increased government spending might be alleviating some of the recessionary problems.

For the investors, a good diversified portfolio should contain some bond holdings like TIPS (Treasury Inflation-Protected Securities). Increased government spending should put inflationary pressures on the dollar making TIPS worthwhile. The problem with TIPS is that the economy is going through a deflationary spiral and the return on TIPS are currently low. If the government continues to jack up the G, consider balancing your portfolio with TIPS.

For the gamblers, the increased government spending may soon translate into a recovering or flat economy and it might be time to get back in the market.

Continued from my earlier prediction about the 2009 economy

China Takes Over the World p.3

By Philip K. on April 23, 2009 10:36 AM | 2 Comments

Further proof that China is taking over the world. China is generally in the Top 3 of wealthiest countries by GDP.

If you were to ask most people what the three wealthiest countries in the world are, I'll wager most people would say the United States, United Kingdom, and maybe Japan/Canada. China would not make the list in most people's minds. The general public knows a lot and knows very little.

China takes over the world p.2

By Philip K. on April 22, 2009 6:19 PM | 0 Comments

Goldman (yes, the same Goldman that is gambling with your money) is predicting China to grow blazing hot in 2009 and 2010. Goldman is probably jamming as much money as they can into the Shanghai Stock Exchange.

China has been sitting on a cushion of cash from exporting all of those goods to the United States. Every Chinese made product that Americans buy at Wal-Mart directly fuels the wealth and growth of China.

Pundits like to use the often heard statement that when "America sneezes, the rest of the world catches a cold." The Great Recession slammed China just as hard as it slammed the United States. The oft heard statement might have been true for the past 60 years, but it no longer applies.

The economist predicts that the Chinese economy will recover faster from the Great Recession than the United States. China's huge cushion of cash and its willingness to use this cash for fiscal stimulus softens their suffering. They're not using the cash for just basic needs, but they're also using it to create new industries like automobiles, technology, and medicine. In contrast, the United States has to borrow it's way out of this paper bag. This will cost the United States in terms of future restrictions.

It makes sense simplistically. If we had two neighbors and one had a large savings account and the other only had credit, who would likely take care of their bills and have greater financial stability? This is a very gross simplification, but all-else-equal, it's better to have a savings account than none.

China's taking over of the economic world does not have to be a foregone conclusion. If the United States fixed its policies on education, taxes, limited liability, and maybe healthcare, then the US will remain the forefront of economic prosperity. That's unlikely to happen.

The investor says to invest in China through a broad based indexed ETF like GXC or FXI.

The gambler reminds us not to wager all of our money on one hand of China.

Notable Headlines 4.19.2009

By Philip K. on April 19, 2009 10:27 AM | 2 Comments

*The New York Times tackle the idea of negative interest rates. (NY Times)

Must be a slow news day. In just about every entry level economics course, someone asks if negative interest rates are possible to spur immediate lending. The hypothetical of vaporizing 10% of the money randomly every year should, according to them, approximate negative interest rates.

There are some things that work at the theoretical level and not in the physical word. With such a crazy monetary policy, people would just dump the dollar for other currencies or gold. The dollar would be devalued and the prices that Americans pay for everything would go up. Remember that we compete at the international level for raw materials and goods.

The New York Times should more carefully screen their submissions.

Unemployment keeps rising

By Philip K. on April 18, 2009 10:13 AM | 0 Comments

*California unemployment rate is at 11.2%! (Associated Press)

*Michigan leads the nation with 12.6% followed by Oregon 12.1%. (CNN Money)

There may be some signs the economy is flattening out. The markets have recovered from its March lows. Some companies are announcing earnings or less losses than expected. For businesses some are starting to not panic as much. All else equal, business may be slow but it's probably to the extent that it doesn't decline further overall.

The jarring reality is that unemployment keeps rising. The employment rate usually recovers after the economy turns around. Okun's law says a 2.0% growth in the GDP translates to about a 1% reduction in unemployment.

With nationwide unemployment at around 8.5%, to try to reduce the unemployment rate to a 'natural' 5% rate the annual GDP needs to grow about 7%. That requires a lot of growth especially when growth is actually negative. Something to consider is that our economy used to grow about 3% year on average.

To fully recover from this Great Recession would easily require at least 2 years from the time we stop bleeding, and we haven't stopped bleeding yet.

Why China will take over the world

By Philip K. on April 16, 2009 9:07 AM | 0 Comments

At it's slowest growth in the past decade, China's economy still grew at 6.1% in the first quarter from the year earlier while the United States is still bleeding. (Bloomberg)

It's been said before again and again. Argentina will surpass the US economically. Germany will surpass the US economically. Japan will surpass the US economically. All three predictions were wrong.

Now it's China's turn. Prognosticators have been thrice bitten and it's foolish of me to make such a prediction, but China will surpass the US as the most wealthy nation. Not just in terms of overall GDP but probably in terms of wealth per person too.

The productivity of labor in China has been rapidly catching up in manufacturing. Most goods are produced in China. Obviously. But they're at a point where they're transitioning to high end industries. They're even experimenting with industries like medical science and automotive.

Much like the way Japan used to be mocked for inferior quality, China is going to reach this same Japan's current high quality level as long as they re-invest in themselves.

Popeye tells it like it is...

By Philip K. on April 16, 2009 8:41 AM | 0 Comments

The whole clip is good, but fast forward to 4:44 and Popeye's social critique on Japanese made products in the 1940's.

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