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TheDumbMoney (54.38)

Now, an INTELLIGENT Critique of BLS Numbers, and Inoculation Against Animal Spirits

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February 07, 2012 – Comments (4) | RELATED TICKERS: SPY

On February 3rd I blogged about a great take-down of Zerohedge and Drudge for their idiotic "headline" critiques of the BLS numbers.  

Today then it is only fair to provide an actual intelligent critique of the BLS numbers, provided by John Hussman.  You can read it here.  Rather than providing you with phoney misrepresentations that he assumes you'll "believe-because-you'll-believe-any-durn-thing-I-write-because-we're-all-on-the-same-predetermined-ideological-team", he attacks the seasonal adjustment factors used by the BLS.  You can read the whole thing here.

Note that Hussman correctly predicted the 2000 crash, and correctly predicted the 2008 crash, and his funds have generally outperformed.  His credibility has been hit very hard because he remained tightly hedged in 2009 and 2010, and consequently vastly underperformed during that time period.  His problem, as he has explained in multiple weekly notes, and explains again in the above link, is that he changed his methodology in 2009: whereas before he had excluded a depression scenario from his calculations, in 2009 he decided it was a possibility, just as the market was turning up, and he consequently missed the model.  Notably, though he has never to my knowledge said it, his primary failure was that modeled in a depression based on NUMBERS, without taking into account the divergent fiscal and monetary policy responses, respectively, to the crises experienced in 1929 versus in 2008/2009.  (In other words, he forwent a ton of gains because he had an ideological hatred of Fed actions and he did not model in how the Fed's actions, and government stimulus, might change the scenario, at least in the short term.)  This is quite clear if you go back and read the old weekly notes in his archives.

Nevertheless, his is one of the most important voices out there, and he is a great antidote to our new prevailing bullishness.  With the gains experienced so far in 2012, and with the stocks up yet again today (so far), after some initial weakness, one is tempted to start throwing money into the market.  Maybe you yet will do so.  Maybe I will.  But one should not do so before reading this latest John Hussman weekly comment.

I blog a lot about politics, but my positions are not predetermined.  I'm interested in making money. At the end of the day, we are living through a great debate about whether one can get "something for nothing," whether monetary and fiscal policy can be used successfully to amelieliorate the worst effects of a non-normal fiscal crisis-induced business-cycle (a Depression), or whether they can merely postpone it.  That is the debate between the Zerohedges/Forbes/Drudges/John Hussmans, etc. of the world, and the Paul Krugmans/Dash of Insights/Obamas/Bernankes of the world.  John Hussman is by far the smartest in the former group.  And the final conclusion is by no means known, by the way.  Anyone who tells you otherwise is either trying to get elected, trying to get reelected, or playing to your ideological preconceptions for some other reason.

All best,

DTAF 

4 Comments – Post Your Own

#1) On February 07, 2012 at 11:53 AM, TheDumbMoney (54.38) wrote:

Also note, there is a sense in which both camps are correct (Note, I lump anti-Keynesian fiscal people with tight money monetarists, and the reverse as well, because these positions on the two types of policies always travel as a pair, likely for ideological reasons, though there is not necessarily a reason why it should be so).  

Anyway, Fed policy has never purported to be a total cure-all.  Bernanke has said before, and he is at this moment saying again, that the Fed cannot "cure" our problems with monetary policy if the U.S. does not clarify its long-term fiscal policy and formulate a real plan for how it is going to end our deficits; monetary policy is not an indefinite solution.  On the fiscal side, even the most ardent Keynesian believes we need a plan for slashing long-term costs to provide confidence, and to cut our long-term deficit projections.  Keynesianism is often conflated with Inherent Big Government, but this is not the case.  Sadly, for political reasons, our Congress and our President refuse to cooperate with that old fiscally conservative but pragmatic Rockefeller Republican, Ben Bernanke.

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#2) On February 14, 2012 at 4:11 PM, TopAustrianFool (67.29) wrote:

"Anyway, Fed policy has never purported to be a total cure-all"

 This is true, but many deny that Fed policy is the whole problem, which is indeed the case.

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#3) On February 14, 2012 at 4:17 PM, TMFHousel (89.34) wrote:

I haven't read the critique -- will get around to it later -- but in general I think attacking seasonal adjustments is inconsequential. If you argue that season adjustments made last month's numbers misleadingly high, then by definition you have to admit that months before that (or upcoming months) were misleadingly low. Over the course of a year, seasonal adjustments shouldn't matter. 

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#4) On February 14, 2012 at 4:38 PM, ETFsRule (99.92) wrote:

"Over the course of a year, seasonal adjustments shouldn't matter."

This is correct, and can be illustrated by simply comparing the seasonally-adjusted number to the non-S.A. number:

http://research.stlouisfed.org/fred2/graph/?g=51g

Over any meaningful timeframe, the difference basically disappears.

If you need to analyze short-term data for some reason, then the S.A. figure is probably more useful than the raw number (as you can see in the graph, the blue line has less variance).

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