Author Archive

Review of efficientforecast’s first FOMC statement

1/Aug/2013 Comments off

I think it was Taleb who said that you can basically ignore daily stockmarket movements under +/-1%, paying exponentially more attention outside those bounds. This suggests that yesterday’s FOMC statement had little impact on market expectations. This is precisely what our system implied, if you only looked at the pre 14:15 EDT forecast and the closing forecast.

However, the forecast became somewhat volatile during the Bernank’s speech. More volatile than the markets seemed.


At first, I blamed this on my foolish inclusion of an unreliable indicator like 5-year Treasury yields (up is good, unless down is good), though this only explains the general downward trend of the forecast through the late afternoon. Then, when I looked at my data mining records I realized the problem was from the TIPS market.


And then I found the problem. Because Yahoo! Finance doesn’t publish TIPS yields (that I can find), I’m instead scraping those from the source code of a certain financial website (owned by a certain person I desperately wish would run for President in 2016). However, this website doesn’t give away the goods for nothing, so our TIPS yield quotes are lagged about 30 minutes, whereas everything else is nearly real time, thanks to Yahoo!.

This means that the TIPS spread variation was driven by the 5 year bond yield. This means that the 5 year yield’s variation was basically counted twice, which caused our principal components to be distorted. This is a fixable flaw in the system.

Also, some of you may have noticed that the forecast fell off this morning. Don’t be alarmed, this is just because the GDP revisions.

Here is a comparison of the latest forecast, with yesterday’s close.  The discontinuities form GDP revision should be damped as I roll out the model averaging system. I also think that the y/y % change graph is probably not the best way to show the data, as it is so dependent on small changes in the level of GDP. We’ll have to keep experimenting.


Lastly, I just had a power outage, so the system will have a ‘dead spot’ of about 45 minutes, still working on moving the thing into the cloud.


29/Jul/2013 8 comments

The market-driven, intraday NGDP indicator is now available at

All credit goes to Kenneth D’Amica, the Staten Island native, recovering economist and Silicon Valley expert in all things computer who is splitting this daunting task with me.

Japan, you are next.



Update: I would be grateful if one of my Japanese readers would leave a translation of “Expected NGDP Growth in next year” in the comment section.

Categories: Market Monetarism

McArdle on Detroit and unwisdom from a Vermonter

27/Jul/2013 Comments off

Scott Sumner had some thoughts on Detroit (what!). This reminds me of an article Megan McArdle had on Bloomberg News this week. McArdle’s article is worth reading and I’ll trim down a quote:

The first time I went to Detroit, I got lost. … It was getting dark, and I had no idea where I was or where I was going. I kept driving, figuring that eventually I’d reach either the city limits or downtown. What I do know is that the people around me didn’t think I belonged there. I was told as much. I stopped to get gas and an elderly gentleman stared at me. “Little girl, you do not belong here,” he said. Item: I am 6-foot-2[187cm]. Shortly thereafter, a cop pulled up…while I was waiting at a light, and rolled down his window. “Are you lost?” he said. I affirmed that I was. He asked me where I was staying. “Make a U-turn,” he directed me. Item: There was a no U-turn sign, somewhat tattered, directly in front of me. “Start driving,” said the cop. “Don’t stop at the lights until you get to downtown.” I think it was downtown. I don’t remember anymore. When cops start telling you to break the law, you get a little nervous.

I have to confess that I don’t understand the whole race thing in America. And by that, I mean, I really don’t understand it as in I am ignorant of the facts and don’t have an intuitive grasp, experience, a vocabulary or knowledge. The two sides of my family are from the whitest places outside Iceland: Vermont and Maine. I could probably write a book about how awkward old stock New Englanders are (hint we’re descended from religious nutjobs from East Anglia). The bedrock of my cultural context is snow, deer hunting, farm foods, pseudo-Christian environmentalist shame, lobsters/various chowders and sugar on…snow. I once heard about red lining or something in a mandatory course taught by a very angry (white) professor, but I spent most of the lectures preparing for linear algebra.

I’ll stop with the biographical details but my point is I’m not really from America, I’m from Vermont and can’t help it. For what it’s worth, I suspect that whatever explanation is really behind the Detroit tragedy has something to do with race/poverty/white flight/and industrial monoculture. Profound huh? Frankly, I think we should ask disinterested third parties to study America’s sociological issues, namely Chinese, Russian and South Asian academics living in their respective home countries. They can be relied upon to not have a dog in the fight.

So check out McArdle’s article.

Update: Upon reflection, I realize that I really just want to write a book on The Culture that is Vermont and seem to have misused this as an opportunity to dip a toe into that pond. All NGDP from here on I swear…

Categories: Off Topic

NGDP expectations live on Google Docs

25/Jul/2013 4 comments

The test version of the NGDP expectations system is running. A graph of the forecast in y/y % change format can been seen at this link.

Let me know in the comments if you’d like the data shown differently and I’ll see what I can do.

Big thanks to Lars “The Market Monetarist” Christensen for the shout out.

Categories: Uncategorized

Why U.S. job growth has been better but RGDP weaker

23/Jul/2013 Comments off

In this year of the snake, output of goods and services has been weakish


but hiring has been strongish


because payrolls are a medium term proposition, and NGDP expectations are fairly upbeat (for this demand-starved recovery)


For context, note that nominal GDP (the quantity of spending in the economy, which the Fed determines by its money printing decisions and signals thereof) has grown around 3.5% per year. 4.5% nominal growth is about as strong as we’ve seen in 6 years.

Firms are hiring in anticipation of moderately stronger output in 2014. It takes six months before a new employee adds value, a year before they hit their stride. Who cares if sales growth slows today? As long as the light bill is paid, firms look to tomorrow. If the private sector views the sequestration as a temporary drag, they’ll go ahead and hire as though the sequestration never happened. The Fed wears the pants.

I just read the markets and the Market Monetarist model fits reality better than anything else out there.

P.S. output wasn’t even that weak in 2013H1. If you go by real GDI (which uses the same price deflator as real GDP), growth was typical for the recovery, a bit north of 2% y/y.

…and the next Fed chairman should be…

21/Jul/2013 Comments off

Lars E.O Svensson.

Fo’ real.

Why not? If we can have a creepy outlander like like Henry Kissinger hold a high position, why not a charmer and super qualified foreigner like Lars Svensson? Someone who understands that debt-to-income ratios only scratch the surface and who we could trust to target the forecast. Someone who could bring some practical financial regulation to the U.S. too. What better way to spin “immigration reform” than with the example of an immigrant who brought monetary stability to America?

I think Mankiw would be a great choice, but he technically worked for Bush and so stands no hope of being nominated by Obama, thus Svensson is my next pick.

Svensson is still a long shot but his background makes me think he could make it through the confirmation process if only given the chance. First, he is not American. This should help pull in Democratic votes. Next, he is from a nonthreatening white ethnic group, this should help pull in Republican votes, because as the New York Times teaches, all Republicans are mouth-foaming racists.

I doubt Svensson is on anyone with power’s list. Still, I hope we can get a real economist at the Fed, someone with New Keynesian credentials. New Keynesians can at least talk to Market Monetarists, more than can be said for Vulgar Keynesians like Summers.  We’d do well to keep in mind that, so long as the Euro is kicking around, the U.S. money supply is at risk of being snatched up. This means we need someone with Swiss resolve to accommodate this prospective demand with freshly printed green paper. I do buy the argument that the median macro economist mostly sets the policy space for the Fed, but its hard to imagine Larry  Summers getting the response to a hypothetical Euro Zone collapse/scare right. The thought of Summers steering the ship makes me shudder.

Ben Bernanke was amongst the most respected macro researchers when he took the throne in 2006, a peer of Svensson, Gali or Mankiw. Larry Summers on the other hand has rather less impressive monetary credentials. He’s of course a smart man, but in all the wrong ways to be Fed chairman. It doesn’t matter how high your IQ is, if you get money wrong, you can’t get much right in macro. Frankly, I see Summers as  just another high priest in the progressive cult, at least in the monetary policy field. I respect him for understanding Gaussian statistics, but he shouldn’t be chairman.

As flawed as Bernanke has been, it will be hard to replace him with the names floating around in the press. Bernanke owes it to humanity to stick around through the end of Obama’s term in case a more moderate Democrat can be elected in 2016, and someone more Mankiw-like put on the table of potential replacements. (or Chris Christie can discover ketogenic diets, win, and pick Mankiw).

There ain’t no such thing as a bad deal

19/Jul/2013 Comments off

I have this nutty, gnawing idea that there are fewer bad deals in this world than most think.

I came to this position by borrowing from Robert Shiller and a few others. Actually, it’s possible this very argument was posted on some well known econblog and I’ve unknowingly stolen it after the seed grew into a mini essay, if so…I’m sure my victim won’t lose sleep.

What I have in mind pertains to markets where one can choose between buying or renting a durable consumption good.

I say that the choice between renting and buying makes no difference, both will generally put the typical consumer in the same position after the sale. Take a random sample of people, make half buy houses and half lease houses, the average net worth of the two groups would be similar at any given future point in the treatment cycle. I think this follows for cars and perhaps other durables as well. I also contend that the two groups will show similar levels of happiness as measured by average heart rate variability, cortisol to testosterone ratios and inflammation markers.

Whenever I try to explain this idea to those uncomfortable with the counterintuitive results which bedevil economics and engineering (the type of results I live for), I’m met with halfwhited responses like “but you don’t GET anything when your lease is up !!!1 LOLOMG[sic]“. This is an excellent example of the old seen and the unseen error. I might rattle off facts such as:

1. Average house prices clearly can fall spectacularly in nominal terms, you’re basically betting on NGDP growth with your lender (or expected resale value with your automaker). Even in good times real appreciation isn’t a given, and you still have to live somewhere. Make a killing on a condo in Manhattan, sell and live like a king in Wichita, you’re still living in Wichita. Note that this is different from buying real estate investments.

2. Local house prices (say in a given neighborhood) pose a big risk. No one can be sure where the government will put subsidized housing (come on it is a real risk to the value) or where a natural disaster will happen (insurance is not always are sure thing). Regular development is a risk too, pay a premium for a grand old farm house near a suburban area, then development overburdens the roads and pulls down your premium, this doesn’t show up in aggregate price indices but still threatens the individual home owner in some cases. You might also have bought a house in say Rome in 400AD, Lindisfarne in 790  or Detroit in 1990, civilizational collapse is never far off. These are risks which must be born or insured against.

3. Houses need upkeep. Not owning a house dissuades one from taking on weekend projects. No one ever said on his deathbed “I wish I’d laid more tile”. Landlords unclog sinks and mow lawns. The tenant pays for this, but then so does the homeowner in one way or another. There is no free lunch.

No free lunch is what my argument is all about.

Here’s what I have in mind for the car market.

Lets say that Ford offers a lease L = P + M where L is the present value of the 36 month lease P is the present value of the ‘actuarially fair’ lease and M is the markup. I think we can all agree that if Ford charged $20 a month to lease a new sedan, that this would be a good deal. It thus follows that somewhere in money space, betwixt $20 and $1,000 per month, the lease stops being a good deal. This price would be that which leaves the lessor in exactly the same position if they bought a new car on credit and sold it after 36 months[1] or leased the car, drove it the same amount as in the first case, and returned it after 36 months. That is, P .

In a seemingly competitive market such as that for autos, I suspect that M will tend toward zero. I can’t easily test this, but I can tell you that according to the BLS’ “Urban Consumer” CPI data, new car prices in America have risen 5.7% since 2003, whilst the total CPI has risen 27%. Its hard to tell a story where this happens in a market characterized by monopolistic collusion. Sure, P will be slightly different for everyone, because we all have our own personal reckoning on the degree to which we dread dealing with random strangers who might buy our car when we’re done with it. But most will end up in about the same spot, buy or lease. Because people seem so systematically biased in favor of buying over leasing, if anything a lease is more likely to be the good deal. I’m more sure of this for housing than autos.

In the end comes down to lifestyle preferences[2], as they steer P . For myself, I want to be able to pick up and leave within a few weeks if the right opportunity arises. A leased car yields me safe and pleasant transportation, while containing costs if I have to abandon the vehicle in a hurry. Likewise, a month-to-month rental contract spares me the utter drudgery of repairs and yardwork on top of not tying me down with a dear and illiquid durable. But there are probably lots of good reasons to buy as well. Point is, there is no bad deal.

1.Including the nonmoney costs of selling the car in an imperfect market

2. Government policy can also hold sway. My Swedish readers will know well how outlawing market signals can throw a spanner in the gears of a market.

First full week of the NGDP forecast system

19/Jul/2013 1 comment


From only one model. The next step is to average over several models (easy). And then to find a way to link this graph, which is updated ever three minutes during the trading day, to the blog (probably easy).

After that things get more complicated. What Silicon Valley friends are for!

Musk to Release Hyperloop Plans in August

17/Jul/2013 Comments off

Enough already with the monetary policy right? Print money. Keep NGDP growing at a predictable rate. Look at the markets and tell everyone you’re going to. There, another monetary policy blog need never be written.

While we wait for central banks to stabilize the world economy and for politicians to undo that stability with wrongheaded policies, a handful of geniuses are making the world worth living in. These folks are only reason I get out of bed in the morning.

Check out this news clip:

I’ve had a reasonably excessive mancrush on Elon Musk since reading about Tesla Motors back in…2006? Since that time he’s blown past all expectations; replacing NASA, making the 2012 car of the year, founding a solar energy firm, and none of these daring firms have gone bankrupt yet! For the past year he has lead the thinking public on with hints of a an electric airplane and the Hyperloop. Unlike people like me, who have lots of good ideas but are too lazy and dull to carry through on the execution, Musk has already proven himself in a big way. Four times.

I look forward to hearing the details.

BTW. I’ve been chipping away at Nikola Tesla’s autobiography in the last week. Highly recommended, if you’re interested in getting a glimpse at how the mind of this monumental genius worked.

Intraday NGDP expectations

8/Jul/2013 3 comments

I’m home for lunch, and today has been a rather interesting day in my apartment while I was away.

My computer has been diligently mining financial websites for seven market prices and combining them with data from the U.S. government to generate a new NGDP forecast every three minutes. Technically its an average of NGDP and NGDI.

The procedure is just a prototype, and I haven’t built the infrastructure to show the forecast live on a web page, but it seems to be working. Here is a graph of what I have as of lunch time. The scale is “expected NGDP growth 2013Q3 to 2014Q3. I used autosales, retail sales, payroll employment and personal income to estimate Q2 NGDP. A VECM does the rest.


Not the best graph I’ve made. Sorry for not having the time’s labeled, I’ve made a programming error and my procedure is not recording the times correctly. Still, this is encouraging. The procedure can only get better from here.

Much more to come.


Update: Here is a graph from today, July 9th. The program crashed around noon but I was able to get it going again an hour or so later.





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