Tuesday, April 17, 2012

Employment, US Profits, Jack Rabbits, and the Elephant


I recall the story about the blind-folded man who had never seen an elephant was asked to guess and describe an elephant by touching only one small part of it. One can only imagine which part of the elephant the blind-folded man touched as he tried to decide what an elephant looks like. If 1000 blind-folded people touched different parts of the elephant one can begin to see the chaos and humor in this project – and the various guesses made as to the shape, texture, and size of this elephant.

This is the way I think about the national economy. This is why one of my favorite “spouts” relates to the ways journalists, economists, politicians, and others react each day to the news that peppers them with information.  Let’s call the direction of the economy the “elephant”. The direction of any nation’s economy has so many pieces to it that no one person can digest it all. Thus, we all sample or taste little pieces of the economic growth day to day as a way to form an opinion about its direction. Once we sample enough and feel confident, then we can make decisions that are based on our view of the elephant. If the pieces of the puzzle are diverse, lack tangency or are otherwise unconnected, then we might go for some time without any strong feeling for the direction of the economy. Our decisions would reflect this indecision about the elephant.

This indecision reflects a very conservative reaction to information gathering. This conservative approach envisions a person as being reluctant to make decisions until he or she feels that she has a dominant view of the economy. But that’s not the way all people behave. Less conservative behaviors magnify the importance of the latest piece of information. I just ate a huge piece of chocolate cake (with chocolate icing). From that I might deduce that I am on my way to being the new fat man at the circus. Tomorrow I have a bowl of kimchi jjigae laden with tofu. That would make me feel slim and healthy and I might enroll in the next Iron Man event. It sounds ridiculous that on two adjacent days I might want to check myself into the fat-reduction clinic and enroll in an Iron Man contest. But it seems to me that this is exactly the way people behave and think when it comes to the national economy.

Headlines this week and last week reflected what happened to US employment, business profits, and what will happen to inflation, retails sales and other economic barometers in the US and abroad. Each announcement brought a barrage of new conclusions about the progress of the economy. This barrage came despite the fact that one month’s worth of information is about as reliable as a fly perched on the end of the elephant’s nose. Does an elephant look like a fly? I don’t think so.  I thought the top was going to fly off the US economy last week when the employment number came in under expectations. Republicans peed in their pants as they faulted Obama’s policies and leadership. Republican point – this data point proves the economy is losing steam.  Democrats pointed out how despite the slowdown in March, they have rescued the economy from the evil policies of George Bush and Dr. No.  This one data point to Democrats reflected a general trend of rising strength in the economy.  This one data point relating to US employment in March 2012 became the focus of millions of words, electronic or otherwise. It’s like the blindfolded guy who happened to touch the weiner of the elephant explaining to us all what an elephant looks like.

The Financial Times wrote a very nice piece (Monday, April 9 “US job figures become a fickle political football) in which they pointed out many reasons why one’s month worth of employment figures tell us absolutely nothing about the health of the economy or the direction of employment. Yup I am not exaggerating. Nothing. Zip. Yet our experts spent days using that data point as if it meant everything. Why? Because some people think that if they react to every piece of news they can beat the rest of us to the jewels and gold. These folks are the pouncers. Data comes out. Pouncers draw quick conclusions and pounce. Tomorrow new data comes out and then they pounce again.

I am not trying to say that the pouncers are any better or worse than the non-pouncers. I am just saying they exist and they or their actions or their spokespeople make us non-pouncers sometimes think we are missing the boat – or the elephant. I am in Asia today and I am writing on a Monday morning August 9. I am wondering how the stock market will perform in the US when it opens in about 6 hours. The pouncers have declared the US a bad place to invest this week. The negative interpretations of the pouncers to the employment disaster and to the expected declines in business profits makes me worried that my precious retirement account will be worth less in a couple of hours.  So the pouncers are making me wonder if I should be buying or selling today. If they are right that these bits of news are part of a more long-term US decline, I might want to sell today. But if they are wrong and these news bits mean nothing – then maybe I should use the expected stock market decline as a buying opportunity. Since I am not a pouncer I will probably ignore the whole thing and ponder my next bottle of Soju.

One more example has to do with the profits or earning announcements of this week. The reports are saying that profits are falling and I can see why someone might be concerned about falling business profits. It does not bode well for employment or the economy in general. But if you read a little closer you find that the profits are regressing back to their means. That is, this means that profits are expected to fall to something normal and sustainable. To me the words normal and sustainable suggest a good outcome. Yet the fact that profits are falling seems to be dominating the idea that they are converging on sustainable and normal. Once again, the jack rabbits (I got tired of pouncers) are ready to hop at every piece of news. The word “decline” can be understood by anyone. The phrase “regressing to the mean” is somehow less easy to comprehend and less definitive. Thus even though the profit news is not necessarily bad, the rabbits are ready to sell and possibly in numbers. Perhaps they are wrong and this is another buy opportunity for the rest of us. After all, the rabbits have to have someone to sell to.

Okay so the elephant is hard to discern with the bits and pieces of information. But that does not mean that one cannot come to more realistic conclusions about the general direction of the national economy. For one thing, one can pounce or hop (or do a jig) after pulling together enough information over enough time. It is possible to ignore all the individual daily announcements and pull together what you learned over the span of a quarter or over six months. The last bit of information you received on April 17 might sway you more than the one you got on January 17, but surely you will get a better feel for the general momentum in the economy using three-six months of data than from one day’s. Second, it really helps to have a little understanding about cause and effect and global macroeconomics. The US profits figure for one month surely pales in importance to an understanding of the effects of shocks and policies that have impacts that last for months or years. What are the experts saying about the impacts of oil prices? What do they say about China’s economic growth? Is the EU making any progress with sovereign default? Will the US election cycle and the lack of any serious attention to deficit and debt cause economic problems?

It seems to me that we do not have to be pouncers or jack rabbits. Maybe some people prefer that approach. But it is possible to use more information in an intelligent way to make our important decisions. This approach might not sell daily newspapers but hopefully if followed it will create a larger perspective about  the chaos that follows news announcements.

11 comments:

  1. Great analogy about the elephant. Given the commentary on the economy, it is analogous to the man touching the elephant and declaring "He looks just like me!" In other words, experts interpret it according to their own biases.

    As you know in macro (and micro) nothing occurs in a vacuum. Due to the variety of variables, there are first order, second order, third order effects, and so on. So, your jack rabbits can announce a third order effect (run to safe haven bills!), but that does not take into account the other effects.

    Finally, you are right that we should update our expectations based on new data, but one data point should only slightly change our outlook since it is dominated by a mountain of past data. A better question is, given the past data, is this new data point in line with past data with some error? This seems obvious, but as you said, not all think like this.

    And if you eat squid tomorrow, you will think you are a killer whale.

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    1. Thanks Robert! The challenging thing with respect to this topic is that sometimes one tiny data point really does indicate a change in the direction and you should have paid more attention to it. But other times, you should largely ignore the latest piece. It is difficult to know which is which and that's why you try to bring in more intelligence. Sadly much of what we read and see doesn't seem to recongize this simple point. But alas the comedy/tragedy does sell and thus they keep at it....

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  2. Dear LSD. Elephants, pouncers, bouncers, jack rabbits . . . you forgot ostriches. Your use of animals likens to Orwell’s allegoric “Animal Farm” where, as you might remember, the animals formed a socialist state, but neither equality nor utopia occurred, as evidenced by the famous quote, “All animals are created equal, but some are more equal than others.” I know, I know . . . you are wondering what this has to do with 27/7 data and information overflow and how we use/process it to make informed decisions.

    You alluded to filters – e.g. ignoring some data – but ignoring is not the same as filtering. You also alluded to connecting what appears as disparate dots (e.g. data/information) over some time period rather than reacting to fresh, new data. Connecting dots requires the use of mental floss to filter out or ignore certain data/information that either is not understood or is inconsistent with a person’s attitudes, perceptions, education, etc. so that a comfortable conclusion is reached that is consistent with a person’s attitudes, perceptions, etc. Ergo, there is considerable bias in the conclusion unless the person possesses a very strong objective reasoning ability. A rare quality.

    I take the thrust of your blog to suggest that in order to grasp the U.S.’s or world’s overall well-being and condition that one must be able to process all this info (or not or ignore) and be able to reach that comfortable conclusion, objectively.

    I like to keep it simple and filter out a lot of stuff and consider just two items – income and expenses – because I believe they are the basic building blocks that sustain families, business, economies, and govomits. If expenses exceed income for too long economic activity will falter and eventually stop. That is where we are now – the U.S and the world, with some exceptions. We can process all the data/info coming at us 24/7 and reach comfortable conclusions – and even spin the same facts differently to do so which many do – but in the end only income and expenses really matter, economically.

    Orwell’s Napoleon (Obama), Squealer (the drive-by-mass mass media), and Snowball (all of Obama’s minions, e.g. Cabinet, Democrats, unions, etc.) do an excellent job of ignoring facts and/or spinning them to justify Napoleon’s ideology. The ostriches – of today since they are not part of “Animal Farm” – comprise the Senate and House – since they see the facts regarding income, (federal) expenses, and overall economic activity, and cannot/will not do anything about it.

    Deriving the solution is simple without having to process all that data/info: lower spending to be more in line with income – without attempting to create a fair, equal, economic utopia by recognizing that Orwell was right, “ . . . some are more equal than others.”

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  3. Interesting point Charles. I buy it and I do think that spending and income are critical actors today. Occam's razor says that one should try to explain the most using the least. But I suppose that there are some issues wherein income and spending need help from other factors (tsunamis, oil prices, etc).

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  4. Yes, LSD. There are what some would like to characterize as mitigating circumstances . . . for which Obummer is so adept, ala it’s Bush’s fault, or as you say geological factors that he can summon . . . but bottom line, ya gotta stop pick’n my pocket. I’m not talking ‘bout exigencies over which the Senate/House have no control, but rather the reasoned decisions – or not – to reduce spending commensurate with revenue without increased taxes, except due to increased overall economic activity. It’s that simple. I concur that the Senate/House should pick up Occam’s razor and do the most with the least. It’s not a matter of economics; but of politics since, at least, the C-I-C doesn’t have a clue about econ – either macro, micro, or minus. Macro, micro, minus, pull the red lever.

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    1. Charles, I never shy away from the central issue of too much spending and too little saving. But in this case I was not so much writing about policy but more registering my general indigestion over people who make too much out of a single data announcement. We live in a time with so many producers of so-called news that they never shut up. They are always yapping and making much ado over what if often worth zip. There is no lever you can pull to make that go away! :-)

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  5. Dear LSD. Oh, contrar. Off the cuff, the levers are two. One is red (the most important) though that will do nothing to reduce/mitigate the media info-overload-non-value-added static; the other is the off-switch or channel selector on the TV or other passive communications device one uses to receive data/information – that might do the job, however. Of course, there are other sources of info, such as printed. Again, one chooses which to entertain.

    Yes, rather than follow your indigestion play inside I called an audible wide-right to change the dynamics of the play. Sorry; maybe next time I’ll try to follow the coach’s game plan. But, hey, ya gotta make and play for the breaks and when one comes your way ya gotta score – or make a point – one way or another.

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  6. That's why you are such an adorable Tuna...this blog has few rules and taking things in your own preferred direction is fine with me.

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  7. Dear LSD. More germane to the point of your blog. Newz providers today are different from the ones we saw on network newz shows years ago. Then they presented newz as factual – and we took it as factual and at face value – and I don’t recall their reporting as having a particular point of view. We didn’t feel we had to filter the newz. Now, additionally, we have cable newz and comedians presenting newz almost 24/7. In the past the newz providers typically had been reporters who made it to the national stage. Today, we have “broadcast journalists” who might have some reporting experience, but it seems more like they have to be eye candy and speak well. The number of talking heads has increased exponentially while the number of events that could actually be characterized as “newz” has not. Too much supply of heads for the relatively smaller amount of stuff that can output from their mouths. Hence, what is now characterized as newz is seen/heard numerous times daily and across multiple networks/cable outlets – why? job security for the talking heads/eye candy, I suppose. Also, the repetition has created its own subset . . . . talking heads/eye candy can take issue with each other’s POV/spin on various talk shows. There is very little “newz” value added.

    Curiously, if the distribution channel for “newz” has increased so much relative to the amount of individual newz items/events that can be absorbed, you’d think the size of the distribution channel would decrease to reach equilibrium, as in supply and demand. I guess advertisers see value in having mucho distribution channels.

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  8. Couldn't agree more!Thanks Charles.

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  9. When I was in Thailand, I bought some loafers made from elephant foreskins. I had to be careful when I polished them because they'd turn into jodhpurs.

    Obviously, I have nothing worthy to contribute. News as we once knew it was really news....John Cameron Swayze, Walter Cronkite, et al. With the plethora of alternative media outlets today, the MSM has to make up stories to try to scoop the competition which is why the "Lady Lego" flap is getting so much coverage. There's little hard news to be had anymore that any outlet can scoop. Most of what we do get can be scooped with one of things we use to clean the dog squeeze out of the yard.

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