Friday, March 5, 2010

Larry Davidson Spouts Off

Okay -- I am in my 60s and while I think I moaned a lot when I was younger -- the truth is that I seem to spend a lot of time complaining to my friends about macro issues and especially the way the press and various talking heads abuse what ought to be a humble and simple science. One problem for me is that I end up sharing my complaints in various outlets -- emails to friends, cocktail parties, lines at the grocery store, Facebook comments, notes to students, and so on. It seems more efficient to have one place to write these gaseous essays. So let's get started.

If I have one really big beef, it is the way that people use macro for their ideological and other personal ends (e.g. to show that you are much smarter than your Dad and you know who you are Jason, Ashley, Beth, Laura). While ideology can be fun in the right place, many people are seeking some sort of answer about the past, present, or future economy. There is an answer. Macro is a science. Since any country's economy is complex, there could be many answers to any specific question. There is plenty of room for difference of opinion, especially if we are dealing with the future. But geez guys, let's get real -- labels, name calling, and bringing up religious figures (e.g. Galbraith, Krugman, etc) isn't always very productive. For example, we are in the middle of many productive debates about the best monetary and fiscal policies for our times -- but somehow the good stuff gets edged out by debates about rocket scientists (finance guys) and the downfall of capitalism. There is plenty of room for the latter but I fear that the average bloke sometimes doesn't know the difference.

A second gripe has to do with the abuse and misuse of reported figures. There is hardly a reported macro indicator that isn't complicated. It always amazes me, however, how writers can tell stories based on one month's information. Today's announcement of the unemployment rate was a good example. One writer pointed out that despite the good news in today's announcement, the job market still faces stress. Please -- is that news? Analysis? Why do we even try to come to conclusions about the goodness of a one month report? Surely most of us who read this stuff understand that most of these figures have enough randomness in them to preclude making judgments without at least 3-6 months of data. I know it might be boring if we didn't have all this nonsensical reporting -- but then again, if it wasn't there it might give us all a little more time to pet the wife or kiss the dog.

I think blogs are supposed to be short. I think I have done enough damage for one day. Cheers,


  1. Responding to your facebook post. Taken alone the 29 Oct decline might not be enough to make a snap judgment; but along with the 24 Oct decline, the false bravado of the robber barons on 25 Oct, and the decline on 28 Oct lots of peeps thought it was time to get out of the market.

    The first shots of a trade war fired by congress and the seeming willingness of the prez to go along with it combined with the volatility of the market and the slim margin requirements gave fair warning that there were coming problems; it was just a matter of timing an exit from the market.

    Course I could be wrong about all of this since I am still on my second cup of coffee and had a big problem getting this blog to verify me.

  2. Glad you got verified! Your comment makes some excellent contributions. First, my indigestion was about making too much out of one data point. One data point means just looking at the data for one month in isolation. As you say, there were a lot of other contributing factors that might have helped one conclude in the coming months that something bad was just around the corner. Second, my example was employment and unemployment and not stock prices. You talk about the volatility of stock prices -- some people refer to the stock market as a casino (I won't go that far myself). As a general rule, my point holds even more for stock prices. While day traders and high frequency traders (and other financial pros) can make a lot out of very short term stock price movements, most of us have different goals and would probably be better off doing very little market-timing.

  3. My understanding of "high frequency" traders is this is the bulk of the current trading volume and is done by computer programs that evaluate minute spreads in prices and are able to buy and sell at speeds humans could never match. It is the old salami slice trick where you make one penny a million times instead of making a million pennies one time.

  4. I think that's true -- and relevant to me because it suggests that most of us don't have the time, money, or expertise to engage in that sort of thing. And your salami quote makes me hungry. But we stray from Macro (I have a pretty tight definition of Macro!. My point was that most of us spend a little too much time and energy on minute changes (especially in monthly announcements of macro indicators).

  5. Maybe it is my background as a computer programmer, computer analysts, system analysts, and project manager; but spending time and energy focusing on minute details is sorta second nature to me. As usual in matters like this wiki is your friend and here is the first link

    Which has this footnote with a link claiming

    "high-frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the U.S. markets today, account for 73% of all U.S. equity trading volume"

    Here is that link

    If 78% of the volume is from minute change trading it would seem lots of peeps are spending time and energy on it; or maybe in the case of the link above time and energy stealing others work.

    Just as an aside here is a salami link that may be of interest to you; as usual wiki is your friend

  6. woops should be 73% not 78% gotta learn to type better

  7. I think this high-frequency trading is getting a little far-afield for my interests but I appreciate your research and especially the salami information.