Yellen’s Effect on NGDP Expectations

19/Mar/2014 Comments off

The current version of is flawed in a number of ways. Foremost among these flaws is that the system takes market prices as they are given in a single moment, with no regard to the time stamp on said prices. That is, if the price of an asset at 11:26 is listed on a web source as $50, it goes into my book as $50 @ 11:26, even if the price was delay and carried a time stamp of 11:05 on the source site. This is a problem because commodity and bond market prices are released with a greater lag than stock prices, so the forecast for say 09:45:00 EDT, might have the S&P 500 quote from 09:40:00, but copper prices from 09:30. The errors from this desynchronization tend to average out, and wont have much of an effect on the system, hour to hour, but it does mean that when monetary policy is announced, the effects ‘ripple’ through the forecast. First the S&P will move, then bonds and then commodities, this gives the forecast a ‘whip’ pattern.

Another problem is that TIPS yields are updated infrequently (on the free source I use). This means that when news breaks, the five-year yield will move, but TIPS wont, causing another distortion because the 5-year TIPS spread is an important input in my system.

The last major problem with the system is that it uses the level of 5-year treasury yields. This is problematic because, under QE, treasury yields are no longer a reliable indicator, higher yields meant easy money for QEI and QEII, but then yields fell on the news of QEIII, while stocks, commodities and TIPS spreads pointed to easy money. Tapering or fears of Tapering have typically meant higher yields. Euro Zone and geopolitical tensions are also a source of distortion on the yield level.

Since mid-January, I’ve been running (in parallel to the existing program) a new version of Efficient Forecast which fixes all these issues.

The new system features data desyncronization of no more than three minutes. It fills in gaps in the 5-year TIPS index quote using a highly accurate system of mapping individual TIPS bonds (quotes every minute) to the ‘official’ 5-year Index, and uses yield curve spreads instead of the 5-year yield. It’s not finished yet, as I’ve found out a few days ago that the source I use for dollar index quotes hasn’t had any intraday variation for…a while. This is easy to fix. Oh, and the new system averages over three models, and I’m exploring the out of sample properties of others. When I’m satisfied that it’s stable, and when I’ve exhausted the good-out-of-sample model space, I’ll started publishing the average forecast on the site.

I’d also like to roll out a new, faster graph for the site, though it’s looking like I’ll have to teach myself Java script to do that…so it could be a while. Japan and UK versions are goals for 2014, though I haven’t looked at data availability for those much.

Oh right, so the title of this post alludes to Yellen’s press conference today.

Here’s how the system reacted to Yellen’s speech. Forgive the excel graph


The plot shows the intraday year-ahead forecasts for March 18 and 19. The straight line for the start of March 19 (today) is because I made an error loading the system this morning and had to reset it at lunch. When the system has missing data points, it interpolates, thus the straight line. The take away from the graph is that the system reacted in an intuitive way.

Even though the S&P 500 (and 100) are only two of the eleven assets used in the system, and despite the dollar index input being ‘frozen’ at this morning’s open for the whole day, the new program gave a sequence of forecasts broadly similar to the shape of the S&P 500 after Yellen started speaking. It looks like you’d imagine a true NGDP futures market would look.


I consider this a good sign that the next evolution of Efficient Forecast is on track.

P.S. if the graph is hard to see, here are some forecasts from today with time stamps, Yellen spoke at 14:00 EDT:

Figures are the expected % change in NGDP over 2014Q1 to 2015Q1

2014-03-19 13:51:00 EDT 3.859
2014-03-19 13:54:00 EDT 3.859
2014-03-19 13:57:00 EDT 3.860
2014-03-19 14:00:00 EDT 3.872
2014-03-19 14:03:00 EDT 3.855
2014-03-19 14:06:00 EDT 3.854
2014-03-19 14:09:00 EDT 3.800
2014-03-19 14:12:00 EDT 3.765
2014-03-19 14:15:00 EDT 3.766
2014-03-19 14:18:00 EDT 3.770
2014-03-19 14:21:00 EDT 3.774
2014-03-19 14:24:00 EDT 3.768
2014-03-19 14:27:00 EDT 3.770
2014-03-19 14:30:00 EDT 3.798
2014-03-19 14:33:00 EDT 3.825
2014-03-19 14:36:00 EDT 3.810
2014-03-19 14:39:00 EDT 3.804
2014-03-19 14:42:00 EDT 3.800
2014-03-19 14:45:00 EDT 3.793
2014-03-19 14:48:00 EDT 3.801
2014-03-19 14:51:00 EDT 3.799
2014-03-19 14:54:00 EDT 3.806
2014-03-19 14:57:00 EDT 3.803
2014-03-19 15:00:00 EDT 3.807

Inflation targeting makes the world Malthusian

10/Mar/2014 Comments off

Lars Christensen’s post today makes me think of how a focus on short-term CPI movements causes international macro to be closer to a zero sum game.

Here’s the story. The copper market is spooked over Chinese demand and prices have fallen sharply today. Oil prices are acting likewise. These developments should cause a CPI forecast made today to show lower inflation in 2015 than it would have on Friday the 7th. Thus, the Fed should be a tiny bit looser, boosting U.S. nominal spending growth and moving the economy closer to full capacity.

I’m not saying this is how it will go down in this particular case, the Fed doesn’t make policy moves in a continuous way, they have (or at least act like they have) a monetary ratchet with thick gears, not a knob or sensitive dial. My point is only that under obsessive inflation targeting, the U.S. (or any country) is arguably better off if China, EMU or many smaller EMs stagnate, at least in the short run. That cheapens commodities and puts downward pressure on the year-over-year inflation rate at home. Remember, in the Fed’s worldview, the year-over-year inflation rate must never go above 2%.

If instead the Fed level targeted nominal GDP or personal income, booms overseas would be mostly welcome news. We’d have more real income, wealth and jobs but gas a copper would cost more. I’d take that trade off.

Obviously the Fed is never going to target NGDP, but its still important to understand what’s going on.

I think you should read Irwin’s article on Gustav Cassel

17/Feb/2014 2 comments

Last week Marcus Nunes linked to a paper on Gustav Cassel by Douglas Irwin: “Who Anticipated the Great Depression? Gustav Cassel versus Keynes and Hayek on the Interwar Gold Standard”. I read the paper today and must say that Cassel has got to be the most under appreciated economic thinker of the 20th century.  Cassel foresaw the Great Depression and then correctly diagnosed it’s solution, as the depression was happening! I had some rough memory that Cassel had been involved with Sweden’s highly successful price level targeting scheme in the early 1930s, but I didn’t know that he was so prominent or that he’d tried to ameliorate the flaws in the  gold standard between the wars. What’s even more remarkable is that I have an economics degree from Cassel’s alma mater and can’t recall ever hearing a word about him in class!

How is it that Cassel is nearly forgotten while the long-winded (and incomprehensible) von Mises gets his own internet cult, to say nothing of Lord Keynes sainthood? I guess its because, while Cassel got it right, he was not heeded by policy makers in the big economies. I’d bet his stand against fiscal stimulus didn’t help his popularity either. Any young economist looking out for his career in the 1930s or 40s would naturally gravitate to a vulgar Keynesian view. After all, a socialist Soviet Union crushed a socialist Nazi Germany so that proves central planning rocks right?  Going around saying that monetary policy controls the business cycle is likely to be a lot less effective than making up multiplier estimates. Sadly, this is still true.

My point isn’t that we should necessarily hero worship Cassel, but that it’s a bummer his line of thinking was essentially forgotten for 30 years.

Categories: Gustav Cassel

About that jobs number…

8/Feb/2014 Comments off

Ok, so that weak December jobs number stands after the second estimate. Third time the charm? Maybe…

My excuse is that, had the number been revised upward, I’d have looked insightful. Was worth a shot.

In all seriousness though, it’s important not to get too worked up about government data releases. No one wants to hear this but the fact is that we really only have a good read on the economy as it stood six months back.  Until the NSA decides to start sharing data with the BLS and BEA that’s just the way it is. This is why I don’t feel bad about not remembering what the jobs number was today. Did the markets move? Did EfficientForecast budge? No. So who cares?

I think traders grasp this better than economists, and this is why I generally value the insights of hedge fund types a lot more than economists.  

What was it that v. Hayek said again?

Categories: Uncategorized

I don’t believe the December jobs number

10/Jan/2014 Comments off

In general, U.S. government data are released before they’re ready.

If things are going to be reported as facts, we shouldn’t ignore evidence which suggests they are likely to not be facts. We know that when it comes to the BLS’ headline payroll number that the expected absolute gap between first print and third print is potentially huge. Hell, the gap is still big between the third print and the yearly “benchmark'” revisions.

The early payroll and GDP numbers don’t mean much to me unless there is reason to believe they’ll affect the Fed’s behavior.

This 74 thousand number means almost nothing to me.

Categories: Uncategorized

Markets dig the taper

24/Dec/2013 Comments off

I haven’t yet read what others have to say on the subject, but it seems to me that markets like the taper.

The taper shows that the Fed can produce a ‘QE like’ effect on expectations, by simply speaking. The Fed’s actions seem to have slightly boosted the outlook, though NGDP will probably still grow around 4% to 5% per year in the near future. This is to say, the Fed has still not given enough stimulus to hasten the output gap’s closing. Still, they’ve taken a step toward crafting QE-free policy, which is the biggest news in a while. Essentially the Fed needs to find the will to voice forward guidance in a way that offsets  the exceptional effect that a ‘normalizing’ monetary base would stir up.

NGDP graph

Any stimulus they can give is welcome. The media focus on the GDP number, but the GDI  number from last week wasn’t especially strong, only up 4.5% from last year. This is a respectable number under the post recession regime, but also nothing particularly encouraging.

BTW, Merry Christmas.

Fama’s ideas

19/Oct/2013 Comments off

Check out this 2010 paper: My Life in Finance by Eugene Fama.   It’s a good overview of everything Fama’s done, written by the man himself. Basically, its a reading list for me for the next year.

The paper makes me realize how little I know about finance as opposed to the related field of international macro, where I can always fall back on MV=PY, AS/AD, EMH when things get murky, and come out with sounder conclusions than those stuck with ‘interest rates’ -> ‘change in rates of growth in real variables’ -> ‘inflation’ paradigm.

One bit which caught my eye was Fama’s pointing out that finance has known about ‘fat tails’ for 50 years. I think all this Nassim Taleb ranting and raving about “Gaussian” this and “Platonic” that is a bit over done (to say nothing of his war on Dawkins and Pinker). You can use GMM to fit credit models to macro data with nasty residuals. Then the issue of fat tails comes down to how imaginative you can be when feeding a stress scenario into said model.  This is just what the BOE and Fed are doing these days, so hypothetically we’ve got the bailout issue under reasonable control.

I’m rambling now, so I’ll close by again urging you to read the Fama overview paper:  (click the ‘Download this paper’ button in the middle left)


Categories: EMH

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