Better Off Without It

Woah, unthinkable! U.S. GDP estimates were too high by 20%…that we know of. Incredibly, the number has been revised downward substantially. This fits nicely with my world view of statisticians being low-intellect monkeys who are too lazy to do actual investigative work. Mind you, I’m a student of mathematics, so I have no reservation in trashing some of the practices.

I have a nasty hunch on how this happened, and it all has to do with “trend analysis” and “time series.” I’ve watched the proponents of this crap first hand; I’ve sat through their lectures, read their books, looked at some of their work; and it is always the same error.

Statistics, in its truest, purest form, is simply a variation on counting. Statistics can be used to give a picture of current starting points, which is subject to error. When used appropriately, statistics can tell us how things look now…NOT what they are going to look like. The results of this exercise in linear relationships can be fruitful. However, trying to use statistics to smooth out complex behavior like that found in non-linear systems (stock markets, ecosystems, competition relationships, etc…) is a fools errand. The same problems inherent with analyzing those systems to begin with are still very much present when you try to, say, run regression over top of them…

You see this common misconception regularly, with people trying to use trends on statistics to predict things from population growth to temperatures to the cost of crude oil. It’s lazy.

Where a dedicated student would attempt to understand the behavior of the system – how things interact and what determines those interactions, using statistics only to calibrate and measure – a pure statistician takes some data, throws a mundane formula at it, and then declares all sorts of stupidity. The greek symbols have gotten prettier, but the logic and reasoning haven’t gotten better.

It makes you wonder why we let these estimates get reported at all? They aren’t useful. In fact, they build expectations and create wild mispricing. Would it have been so bad to wait an extra month and find out that GDP was only 2%, and not 2.5%? What about ADP’s huge mishap earlier this year with new jobs?

Are you all so desperate for an edge you’re willing to subject yourself to such questionable practices?

If you really want an edge, take a step back and stop taking these estimates for gospel. They’re so manipulated, so poorly conceived, so incredibly sensitive to error, and ironically so intensively followed, that one of the best things you can do to improve your performance is to tune them all out. Wait for the finalized results, and only pay attention to that.

The rash and immature chase mirages. The wise follow their nose to the water.

Honestly, who do these market commentators think they’re kidding?

Case in point, listen to this statement, then tell me what you think of it:

“But Spain is in much better shape than Italy, as measured by debt and solvency. Spain’s debt-to-GDP ratio is 60%, about half of Italy’s 120%, according to Nick Stamenkovic, fixed income strategist for RIA Capital Markets in Edinburgh.”

Where have I heard this shit before? Wait, let’s hear a little more:

“There’s a big difference between Italy and Spain in terms of the economy,” he said, noting that the eurozone’s average debt to GDP comes in around 85%. “The debt economics in Spain are a lot better.”

I can almost hear these same voices saying the exact same shit, but only six months ago.

“There’s a big difference between Greece and Italy in terms of the economy…The debt economics in Italy are a lot better…”

Everytime you get these “experts” cherping in on the “special circumstances” surrounding these trash countries, literally within a matter of months, weeks, or even days, they get every word they utter force fed back to them.

Alright then, I’m saying it. Everyone needs to shut the fuck up, right now. I know none of you people on TV know what you’re talking about; you just want to be heard. It ups your sense of self worth. But you have nothing useful to contribute. Here, I’ll send you a telegram:

Dear Everyone, Stop.

If you are thinking of making a comment about the Eurozone debt crisis, stop.

Think about what you are going to say, have said, or might be forced to say in the future, and stop.

Do you know what you are talking about? Stop. You’ll probably put your foot in your mouth. Stop.

Better yet, just, stop. Stop.

Seriously, stop…

Cain.

EU bulls are being ravaged by a total lack of progress in Europe. American bulls are realizing (just now) that the government is not going to come under control until the bond market forces a default. VP Wang is pissing all over China bull’s faces with talk of an imminent global slowdown that…miraculously…is not going to spare the world’s biggest exporter.

And now the market is slowly rolling over going into lunch.

The last time things looked like this, ERX dropped 26% in one day. But more, the very next day it dropped another 20% +. If things go the right (wrong) way, anyone caught buying this dip will have their throat lacerated and proceed to be strangulated with their own tongue (a feat for a man with a hole in their neck, I’m sure you can only imagine). Commodities and the market could proceed back to where they were trading just a month ago – abruptly.

If this market rally reverses, quaint phrases like “you’re all so bearish so I’m getting bullish” will be etched on your tomb stone as a reminder to the next generation.

Proceed with caution.

Come on, you can’t really care that the “all important” body couldn’t come to an agreement? I mean, what does that say about the state of mind of people; who in their right mind thought that the super committee was actually charged with cutting anything to begin with?

I told you all back in August, the super committee was Democrats pulling the wool over the tea party. They won a huge victory that nobody seemed to see.

Game. Set. Match.

By the numbers, the tea party should have gotten everything they asked for. At the very least, they should have gotten something. But instead those retards traded a huge majority for a 50/50 voice on an asinine committee that could be overruled at a later date.

And oh yeah, failure meant the axe is to fall on all of the tea party/Republicans favorite parts of government. The Democrat’s entitlement programs weren’t even in danger. Brilliant strategy…

It was a rookie move led by freshmen Congressmen. They fucking lost months ago.

The world wasn’t really expecting anything from this, was it? It’s bad enough you all bought into the EFSF garbage, but the super committee too? Why doesn’t the market sell off next on news that the U.N. is a bloated and ineffective body that doesn’t accomplish anything?

Blimey, nine out of ten of you need remedial aid.

Sitting thoughtfully in my 9th floor office, I put pen in mouth and reconsidered my choice of words.

When I began writing this, I thought I would entitle it, “Is That All You’ve Got,” in a plainly mocking theme. However, looking back to the start of this rally in October, I don’t feel entitled to mock anyone.

I missed out on a brilliant opportunity, mostly because I didn’t believe.

I still don’t believe, actually…

But that doesn’t give me grounds to slap around the market after a two day selloff. If or when we get back to $80 crude oil, then I may get a little…boisterous. But for the time being, I should probably just keep quiet and avoid being too much of a windbag.

Still, it is reassuring (in a negative way) seeing things turn around so quickly. It’s one of the main reasons I just can’t get myself to fully let loose hedges. If and when we turn, it will be so fast there probably won’t be time.

So while I really do wish I hadn’t lost money during this rally, I also don’t respect it enough to wish I hadn’t had the coverage.

This weekend I will be keeping an eye out for news from Europe. I’m hearing too much chatter about the Germans for my comfort. Everyone knows it’s their move, but the clock is winding down and naught.

Now enjoy your break, dear readers. Savor it; it will be only a short time until our next 9th floor chat.

The ECB floods the bond markets with fancy new euros on debt that has a 50/50 shot of not being worth the paper it’s printed on, and the euro rallies?

Damn, wish we had that kind of setup here. Hell, we have the opposite problem. Our currency isn’t being weakened at all through policy, yet bat shit crazy forex traders pump it if Bernanke’s lip quivers or his eye lid twitches.

I know the argument: “WELL…good chum; the euro is presently pricing in the collapse of the EU. So-oo MO-ST obviously, printing increases confidence that the EU will not collapse, and gives cause for it to rally.”

Sure it does.

You can’t tell me the euro is pricing in the complete dissolution of the EU at a calamitous 1.35. That’s barely the bottom of the range of values its hit over the last two years. And, frankly, I don’t know anyone who thinks the EU is going to breakup. In fact, I don’t know anyone betting on any countries leaving the EU right now either.

You want to know what a euro would look like that’s pricing in a major split of the EU?

Try something like 0.80.

Maybe a 0.90 would even be representative. You can bet your ass it won’t have a 1 in front of it. An EU that the market accepts is imploding on itself will not have a currency stronger than the United States. If you’re betting the euro rallies because of something as intangible as renewed confidence, at these prices, I guarantee you you’re early and asking for a beating.

Really, we’re at the point where lost economic activity and the immediate demand for money all but ensure the euro continues its slide. While internal demand for euros has never been higher due to debt loads, they have zero incentives for foreigners to buy in; there’s no good opportunity associated with holding European notes. If the EU had wanted to avoid that outcome, they probably should have done something about it two years ago, when the seeds for this crop of weeds were planted.