The efforts to set up an NGDP futures market on HyperMind are worthy. I have an account and trade on the 2015 contract now and then. Indeed, last weekend I spent over half my remaining HyperMind dollars to move the 2015 y/y % change market from 3.3% to 3.9%. 3.9% was the figure my market-informed forecasting engine was giving for 2015Q4, though the figure I’m presently showing on Efficient Forecast is the y/y % growth rate for 2016Q2 (a year from the current quarter 2015Q2).
As of now (01:00 CDT) the market is selling at 3.4%, which is still below what my system predicts for 2015Q4 (it’s below 3.9% now though, having fallen this week). I’ll have to wait for the Q2 NGDP Advance release before I get any more Hypermind cash, as I’d also bought shares on that Q/Q contract.
Hypermind’s big weakness is that the main contract is frozen at 2015Q4, the same as at the project’s inception. Efficient Forecast on the other hand, because it runs off other financial markets’ prices, and doesn’t need seed money, is always set to forecast for the year-ahead quarter. It occurred to me that I could start reporting the 2015Q4 figure on Efficient Forecast, to help the HyperMind traders out. However, I am going to keep it for myself, it would be disreputable of me not to.
If I really believe in my system (I do), I’d be a fool and a fraud to share it with you all. Now that there is a platform to make money off Efficient Forecast, it makes more sense to keep the methodology to myself, and direct you all to the public market. This is how you know I’m serious about it. Keeping it to myself honors the Efficient Markets Hypothesis (don’t you dare draw pictures of my Prophetic hypothesis!). Hoarding the forecast also gets to why we shouldn’t put much stock in the expert economic forecaster types we see in media. They don’t put their money where their mouths are.
We don’t yet have a true, year-ahead NGDP market. So I will keep Efficient Forecast up, but surely its days are numbered, at least as an NGDP forecasting site. Although the coming NGDP markets (the New Zealand deal, plus hopefully future Hypermind contracts) will mean less attention for me, it will also probably mean easy money for me, at least until the market is properly trained. I have quite possibly done more work forecasting NGDP than anyone else alive, which largely reflects the misdirected nature of economic forecasting, rather than my own abilities. Once I get a few forecasting cycles in to drown out randomness in the grossly inaccurate first NGDP print, I should be able to make some money trading Hypermind. I can also use the NGDP market forecast to run a suite of satellite forecasting equations, so there’s lots still to do with real time economic forecasting. Huge potential to shake up that industry.
I’m getting away from what I wanted to say though, so back on task. Hypermind is great, but the current contract is increasingly less interesting. A time will come, probably in early Q3, when the contract becomes completely uninteresting from a monetary policy standpoint. I like Sumner’s ship analogy. You want to steer the ship (NGDP) so that we’re always on course, always expected to be on the most efficient sea lane. However, this is a big-ass ship, like an aircraft carrier or a Korean oil tanker. The captain has very little control over where the ship will be in the next 5 minutes—that’s predetermined by the ship’s current position and inertia—though he has a great deal of control over where the ship will be in 3 hours or 3 months.
I am confident that Janet Yellen & co can keep the root-mean-squared-error of NGDP, about a target trend line, quite low over a 3 year time frame. I am not confident that Yellen can do much about the current quarter NGDP, or even really next quarter’s NGDP. The vagaries of weather and random disasters also mean that there can be ‘one off’ NGDP shortfalls for a given quarter, that tend to be made up in following quarters.
As we approach the due date of the Hypermind NGDP contract (2015Q4), and learn the NGDP levels for 2015Q2 and 2015Q3, the contract payoff will be increasingly due to nonmonetary factors, that is, things that don’t matter. In fact, I was disappointed when I first looked at the Hypermind contracts and saw that they’d spent money on quarter-over-quarter growth contracts for 2015 quarters. Who cares what Q2 NGDP growth is? That money could have been used to fund y/y contracts for 2016Q1 and 2016Q2. We care about the expected path a year to two years out.
The Fed should look ahead, and not just ahead, but about a year ahead. In my experience working in macroeconomic forecasting, a year is about as far ahead as I’m comfortable forecasting. Maybe as much as three years for some variables, but much further and the errors compound and it’s frankly counterproductive. Similarly, ‘current quarter’ or “nowcasting” approaches, which try to forecast very near term figures aren’t terribly interesting, near-term growth is mostly due to predetermined factors, like last quarter’s level and random events.
For these reasons I don’t put much stock in the first print of the BLS Employment Situation or the BEA’s GDP reports. By “don’t put much stock”, I mean I don’t even look at them. There is so much measurement error in early statistical estimates, and the economy is so noisy that it’s not usually worth the bother. I look at the markets. The truth, that no one want’s to hear, is that economic statistics are really only useful after they’ve been out for a while, when they’ve been revised and future data have been released, allowing the figures to be put into some context. I check economic statistics maybe six times a year. I can remember so many times, in 2011, 2012, and 2013 when it seemed big things were happening, but it was just measurement error and randomness; the U.S. macroeconomy has been remarkably stable and blessedly boring since 2010. No, about a year or 18 months ahead is the really interesting forecast.
This realization is what spurred me to move out of macroforecasting and into credit forecasting and stress testing. There’s just more action, higher resolution, little or no measurement error. The golden age of the macro econ blog is over. Level target NGDP, use markets, treat citizens like they club-own the country. Those are the lessons.
So to close this meandering post, I will keep trading Hypermind and hoping that that a well-heeled benefactor buys us a 2016 contract this summer.
P.S. it occurs to me that in the Efficient Forecast system, I define NGDP to be the mean of GDP and GDI. That might be why my system is reporting stronger growth. Still, NGDI is a better predictor of the revised NGDP levels which the Y/Y growth rate will be calculated off.
Efficient Forecast is back up.
It turned out that I hadn’t backed up the latest version of the .html file for the chart when I hastily took down the old server. This was for the best though, as it compelled me to rebuild the chart with a new API, it looks better than ever.
I still had my data gathering script running most days over the past two months, so I’ve been able to backfill the forecasts for that period. Go check it out.
For such a great man, Michael Bloomberg sure isn’t represented well by Bloomberg News. (Update, I meant by this, that BN doesn’t live up to the name, the standard.)
Actually I’m too hard on them. Bloomberg News is fairly ok, and they supply the only quasi-intraday 5-year TIPS yield on the net, which is useful if you’re running webscrapers to gather those data.
But today they had a misleading headline:
I’ll be damned if I’ll let that stand unopposed!
Go ahead and read the article. It’s short. Basically it seems that someone was writing about Canadian housing prices, probably that they’re under threat from falling oil prices. Then, I am guessing here, an editor had the author weave it into the unexpected rate cut story. There’s a special spot in hell for editors.
For the record—and I’m just writing this to keep my mind limber, I know most of you already understand it—you don’t cut rates to save a housing market. You cut rates, or rather move rates below the heretofore expected rate path, to boost nominal income. At leas that should be your reason, because that’s what you’d be doing, directly.
House prices are incidental. Hell, higher house prices are undesirable by themselves, as they hinder affordable family formation. The important thing is to keep the realized nominal income path as close as possible to the expected nominal income paths from the recent past, lest you cause a debt crisis. Today’s rate cut seems reasonable to me, and without looking into it further, my suspicion is that the Canadian economy will be fine, because the BoC seems to be implicitly following Lars Christensen’s Export Price Norm. Look at this graph from Yahoo! Finance:
The CAD is getting hammered, as well it should. I’m impressed the BoC is allowing their currency to weaken like this. The only alternative would be to run the country through a recession for the sake of ‘currency prestige’, which while really stupid, happens all the time. Sort of different shocks, but this reminds me of how Greenspan allowed the USD to similarly weaken when the U.S. was hit with the ’87 stock market crash
The Canadian dollar weakening is a great example of the benefits you get from having a small, local currency. Texas and North Dakota are almost certainly headed for local recession, because they’re in the ‘USD zone’. Canada, blessedly, is an independent nation, and will thus have the option of responding to local circumstances with a weaker currency. Being part of a currency empire is not a good thing.
The plot above suggests Switzerland is far from overheating. NGDP growth has steadily risen since the ceiling was put in, in 2012, but is still well below the 4% per year that’s probably about optimal.
All I can think is that the SNB has been forced to buy lots of foreign currency since this Russia trouble began and rumors of Greece leaving the EMU started circling. That is, much of the pressure on the CHF had been speculative (does the SNB have the will to print?) whereas now there’s genuine haven demand-folks really want to hold CHF and Swiss assets. Maybe the SNB is uncomfortable with its recent surge (that I’m assuming happened) in currency holdings.
If this is the case, it seems like a big mistake to me. I’m blogging on my phone and can’t update myself on Switzerland until late tonight, so take my analysis with some salt. I look forward to learning now the Brazilian and Danish market monitarists read this.
I hope it was clear that by allowing the franc to appreciate, the SNB has tightened monetary policy. The drop in Swiss share prices suggests this is going to be bad for NGDP. I wish I had had a webscraper set up to gather Swiss financial market prices.
At least for a few days.
I just got off the phone with Amazon. I’d run up a $1600 hosting bill with them for December!
Upon learning how much I’ve spent, I killed my instances, so the site is now gone.
Amazon is going to refund the charges most likely, because they are a good company that knows about building long term relationships with their customers. But anyway, I will need to figure out how to use their (cheaper) Linux servers before I can put the site back up. This might mean changing a few things about how it works. So EF is dead until I can will myself to do the remedial work.
I feel really grateful to Amazon right now, this error is totally my oversight, but they’re bailing me out.
This is off topic, but y’all might like it all the same.
Robb Wolf, the paleo guru (with a solid chemistry background) has a lady named Barbara Oakley on his podcast. I’m not sure who she is, but she sounds smart. They start talking about nutrition research and…it sounds like economics!
No consensus. Few replicated results. Government policy badly affected by ill-validated science. Even if you’re tired of hearing about the whole paleo/ancestral health framework (I didn’t let it hold me back from the Christmas baklava), the first half is worth a listen.
Being in the midst of orthodontic and dental orthopedic treatment (fixing an unstable bite caused by botched braces earlier) I can tell you orthodontics as a field is almost as messed up as macroeconomics is. I’ve never been all that impressed with physicians either…
This reminds me of those cases where the Mississippi floods out a bunch of people who were living in flood planes thanks to government subsidized insurance. The free market says “don’t do it!” but the state overrides it.