How long until the Fed starts an NGDP futures market?
Do you think Bernanke reads blogs?
Do you think Yellen even knows what the internet is?
How about the glorified sociology majors and clueless quasi Keynesians who’ll more or less run the American state through 2020? To say nothing of the knuckle-dragging Republicans and their drift toward tinfoil-hat Austrianism. Think it’s high on their lists?
We’ll be lucky if the Treasury rolls out NGDP-linked bonds in 5 years. That’s a long time to have our thumbs up our butts.
Millions of people trade in the markets. The NGDP forecast is hidden within the information they aggregate. Our inability to distill that forecast, with some quantitative precision, springs only from a lack of imagination. If you have a better method, tell me, I’ll build it and give you all the credit.
The best way for us to convince people that the market’s are smarter than experts, is to show them.
Never argue. In society nothing must be discussed; give only results. -Disraeli
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.
The market-driven, intraday NGDP indicator is now available at efficientforecast.com.
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.
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…
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.
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.
Lars E.O Svensson.
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).