Getting Worse More Slowly
Ever since Ben Bernanke’s 60 Minutes interview where he used the phrase “Green Shoots,” many of the key data releases have been misinterpreted. This has led to a robust debate as to whether the worst is behind us.
In recent weeks, I have keyed in on 4 data points that the mainstream has spun positively, despite the actual data being horrific. These four factors include ISM data, New Home Sales, Existing Home Sales, and Non Farm Payroll.
Coming off historical lows (and in some cases, all time lows) in many data-points feels like things are getting better. In reality, things are getting worse, but more slowly. What is happening in the real world is the change in the rate of fall. The direction is still negative — the economy is still contracting — but it is doing so at a slower pace.
You may have heard the phrase “second derivative” bandied about; most users of the term fail to define it in plain English. Here’s my attempt: Imagine you jump from a airplane — for a while, you are free falling — accelerating downwards at increasing speeds*. After a few thousand feet, you pull the rip cord and your parachute opens up. In terms of direction, you are still heading down; In terms of speed, however, even though you are falling, you are falling at a much slower rate. As the parachute deploys, you are decelerating — the rate of your fall is slowing.
That pretty much sums up the economy lately — still contracting, but at a slower rate than the panic period from September to February. But this does not mean we are yet on the ground. That lack of change could be called stability. And the economy is certainly not expanding. That is likely several quarters (or longer) away.
And those investors who made recent bets that Green Shoots are a great entry for investing — well, they may be somewhat disappointed . . .
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* We will save the discussion of terminal velocity for another time . . .
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Previously:
The Annual Existing Home Sales MSM Errata (March 24th, 2009)
http://www.ritholtz.com/blog/2009/03/annual-existing-home-sales-errata/
Existing Home Sales, Non Seasonally Adjusted, Explained (March 25th, 2008)
http://www.ritholtz.com/blog/2008/03/existing-home-sales-non-seasonally-adjusted-explained/
Temporary Help Services Employment Down 27% (April 3rd, 2009)
http://www.ritholtz.com/blog/2009/04/temporary-help-services-employment-down-27/
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See Also:
The Economy’s ‘Green Shoots,’ Real or Imagined
April 6, 2009, 6:32 pm
http://roomfordebate.blogs.nytimes.com/2009/04/06/the-economys-green-shoots-real-or-imagined/
Ben Bernanke’s Greatest Challenge
60 Minutes, March 15, 2009
http://www.cbsnews.com/stories/2009/03/12/60minutes/main4862191.shtml
Recovery hopes begin to blossom
Chris Isidore
CNNMoney.com April 7, 2009: 7:29 AM ET
http://money.cnn.com/2009/04/06/news/economy/recovery/index.htm?postversion=2009040615
April 8th, 2009 at 8:29 am
Woohoo, we’ve hit terminal velocity. Let’s hope the QE parachute was opened in time.
April 8th, 2009 at 8:31 am
Great post Barry and a very good analogy to put it into context….hopefully we are not landing in a active volcano.
April 8th, 2009 at 8:33 am
So simple even a cave man can understand second derivative.
April 8th, 2009 at 8:35 am
BR said:
You may have heard the phrase “second derivative” bandied about; most users of the term fail to define it in plain English.
comment:
———————–
OOOOH, more mathy stuff.
In simple terms, the derivative (aka “first derivative”) measures the rate of change of an event. For a rise over run equation such as Y = 200 + 4X, the first derivative is 4. This is the rate of change in this equation. For the equation Y = 200 + 3x squared + 4X, the derivative is 6x + 4. The formulas get more complicated if you are using logs or trig. A constant number such as 200 has no derivative since it has no rate of change. 200 is always 200 (except to a Wall Street Quant, I suppose)
A 2nd derivative is the derivative of the first derivative. Just do it again to first answer. It is the Rate of change of the Rate of Change.
It’s just a lot more mathy and cool to say “second derivative” than “the rate of change of the rate of change”.
The second derivative measures the rate of change of the rate of change.
April 8th, 2009 at 8:37 am
Glad you liked the simple to understand description.
Have a wife that teaches Fashion Illustration & Design and a mom who was a real estate agent, and you get real good at breaking down complex math and science terms into plain ole english . . .
April 8th, 2009 at 8:41 am
http://finance.yahoo.com/news/Reports-China-auto-sales-apf-14878379.html
Reports: China auto sales surpass US for 3rd month
Well, I am certainly reassured that the Chinese currency is still many years away from challenging the US dollar…otherwise, we might assume that interest rates will have to rise much sooner than any of us are anticipating…
Yep…
April 8th, 2009 at 8:41 am
If you notice something is slowing down, the “Slowing Down” part is the 2nd derivative. The first derivative is the speed at any given moment relative to you.
~~~
BR: Im not sure that precisely captures it.
The 1st derivative is acceleration — how fast your speed is changing. Are you flooring the car, or merely moseying away from the red light?
The second derivative is the change in your acceleration — as you ease off the gas from flooring it to merely driving away.
The 2nd derivative is change in your acceleration (hence why terminal velocity is kinda problematic in my example)
Now, as to 3rd derivatives . . .
April 8th, 2009 at 8:46 am
I’d say the parachutist (us) has already hit terminal velocity and is frantically hitting the release buttons for his chute and backup chute (the alphabet soup of government programs) which aren’t deploying smoothly.
It’s still too cloudy to see the ground but looking up we can see the horrified expressions of the chute packers who have covered their eyes
April 8th, 2009 at 8:48 am
As long as we’re being mathy today, the next big word or phrase to drop in the media may involve “Lagrange Effects”. For those who remember Econ 101, this is the mathy way of saying ceterus paribus, or, “holding everything else constant”. Remember, mathy is cool.
April 8th, 2009 at 8:54 am
BR, are you sure you have it right?
When graphing location y vs. time, then
dy/dt (1st derivative) is velocity
d(dy/dt)/dt=d^2y/dt^2 (second derivative) is acceleration
At least that’s how I roll in engineeringland =)
HCF
April 8th, 2009 at 8:54 am
Meredith Whitney says about the same thing here. She also points out that global GDP is still shrinking. Another point she makes aligns exactly with my thinking, “all bets are off and all rules are subject to change when you bring the government in.”
http://www.cnbc.com/id/15840232?video=1084876450&play=1
April 8th, 2009 at 8:56 am
BR: Im not sure that precisely captures it.
reply:
————–
Respectfully, yes it does. It just doesn’t bring along the mathy precision tone. If you see something moving, it is traveling at a MPH, which is a rate of change. If it slows down or speeds up, it is still traveling at an MPH at any given moment. But, at that moment it’s rate of change is changing.
The original MPH is the 1st derivative. The slowing down or speeding up is the 2nd derivative. If it is going at a constant speed, the 2nd derivative is zero since there is no change in the change.
Every time you go out and drive your car, you are doing differential equations in your head without realizing it. You are moving. Others are moving. But you still end up where you planned without hitting anyone, most of the time.
Again, not mathy or astrological. I wonder if I just put a few quants out of business by explaining what they do?
April 8th, 2009 at 8:58 am
HCF you are correct:
Function= position
First derivative= speed (rate of change of position)
Second derivative= acceleration (rate of change of speed)
At least, thats how it is thought in physics.
April 8th, 2009 at 8:59 am
So BR is right… The rate of speed or acceleration (downwards) have slowed.
April 8th, 2009 at 9:02 am
We’ve entered a Mobius strip.
April 8th, 2009 at 9:05 am
Barry,
We were in a meeting yesterday where the company CEO (good company I might add) said they cannot get a loan, banks are NOT lending. They need a piece of equipment and Wachovia/WFC won’t lend! So where is all the taxpayer money?
April 8th, 2009 at 9:06 am
BR – to be precise, you should specify the derivative of what. But as the son of a Physics and an English prof, I am picking nits here.
In Physics 101 we learn that speed (well velocity, actually, which is speed + direction) is the first (time) derivative of displacement (position), acceleration (change in velocity) is the second derivative of displacement, and therefore the first derivative of velocity.
And many refer the to 3rd derivative of displacement (change in acceleration) as “jerk”, which, I am sure some here could relate to the character of those that got us into this mess. (And, yes, there are even jerkmeters.)
April 8th, 2009 at 9:07 am
BR,
Above, how did my picture end up next to your name? I’ve seen you on TV. You look healthier than that. Although I think I embody the Kudlow essence in my facial expressions.
April 8th, 2009 at 9:10 am
I think I need the “Our Mr. Sun” version.
[Cartoon Galileo on Leaning Tower]: Well-a, you see, the one trillion dollar bail of cash she fall from the sky at-a the same speed as-a the nickel.
[Cartoon Mr. Bernanke]: So you’re saying mass has no effect on acceleration? Hmmm….
[Cartoon Galileo]: Si, you are a-right, Mr. Bernanke! You are a very a-smart-a man, you know that? How you get so smart about the Feesicks?
[Mr. Bernanke]: I read The Big Picture, Barry Ritholtz’s blog.
[Cartoon Einstein]: Ach-shually, it ees alzo true to say zat ze vorld is accelerating toward ze money, Galileo.
[Cartoon Galileo]: Shut up, beetch!
April 8th, 2009 at 9:19 am
Great post, but playing devils advocate: If the second derivative turns positive and stays positive , then the deceleration will bring the downward fall to a stop and velocity will turn positive, and if the stock market looks forward six months or so, it sees the economy recovering and the recession ending. (Of course the second derivative may turn back negative.)
April 8th, 2009 at 9:20 am
thanks to TBP for exposing the current nonsense in mainstream thinking starting with the lunacy of the markets as leading indicators which is another myth dreamed up by the wall street sales machine. how many here are sick and tired of the two words SECOND DERIVATIVE. here are two words that the mainstream does not understand but cling to in their quest for hope and dreams. this nonsense of course is a pipedream yet it is a basis for braindead to pour money into equities blindly. it appears to me that this secular bear will surprise the braindead in it’s length in time and severity on all assets. the market may not bottom for 2 years. and as far as the ridiculous letter calling of the recovery the V, the U , the L, the W or now the inverted square root sign……….god enough already. THANKS AGAIN TBP
April 8th, 2009 at 9:26 am
It looks like Wordpress is messing up on the graphics. I looked at a lot of old posts and my picture is the only one I can see. Except for the one above associated with BR, no other posts except mine have pictures. And his post has my picture. Spooky.
April 8th, 2009 at 9:36 am
Harold, the infinitive, or slope of the slope does not define the primary trend. So out of math and into the everyday, we use time horizons. From the right time horizon, all these things make sense. Thanks BR. From the wrong one, they are nonsense…just like terminal velocity poorly understood ( in time horizon) may only be a red splat fading in the sunlight.
April 8th, 2009 at 9:41 am
Re: Dead Hobo
Lagrange equations, as they relate to economics, in no way involve what you are are describing; in practical usage, they almost always apply to production functions for manufacturing decisions (i.e. what combination of day laborers and machines maximizes output given capital restraints). The second derivative leads to solving for lambda, which in turn identifies maximum marginal product of labor/capital. Lagrange is in no way is a “holding everything else constant” equation (well, capital is held constant, but that’s not quite the same, is it).
Second, unless you went to Cal Tech, Lagrangian equations are usually reserved for capstone/grad school/advanced undergrad courses in which one has taken a fair amount of calculus and intermediate micro. BR did a hell of a job breaking down second derivatives in a short post, but I’m pretty sure 98%+ of the public, perhaps even the investing public, fails to understand why second derivatives matter even if they can grasp what derivatives are.
/Threadjack over
//My econ degrees; let me show you them
April 8th, 2009 at 9:43 am
Barry,
I agree with your point, and most of the bloggers got it right also…but if you wanted to be Devil’s advocate (my job), then if you think the government monies are ill-spent and will prolong the time until eventual recovery…then the problems are getting worse faster…
You may call this effect Bruce in Tennessee’s cosmological costant, if you wish…maybe not as sexy as Hogan’s bottom, but it will suffice…
April 8th, 2009 at 9:46 am
It’s not the speed of the vehicle that kills you – it’s the telephone pole.
April 8th, 2009 at 9:46 am
Byno,
You might be right. I just remember them from an old Managerial Econ course I took a few decades ago. We called them Lagrange Multipliers, and I think I remember them as being the math equivalent of ceterus paribus. I remember they were pretty easy. You could become an expert in one class. I’ll go look them up later to see if I’m full of crap or not.
April 8th, 2009 at 9:52 am
We’re still falling, but falling more slowly. That’s true BR, but what about the stimulus? We’re in a parachute still falling, but in about 2 months the stimulus spending will start hitting the economy. That’s going to be like Superman flashing by and setting us on an uptrend again.
How much of the Fed’s printed money has really hit the economy yet too? It’s easy to forget that it’s only been a few weeks since all these programs were approved and they haven’t even had a chance to hit full stride yet.
April 8th, 2009 at 9:53 am
You’re not asking yourselves what was done to the parachute before it was packed.
April 8th, 2009 at 9:53 am
How’s this for an equation
Pulte + Centex = Homebuilder + Homebuilder,
Homebuilder= Garbage
Garbage + Garbage = 2 x Garbage = Rally
WTF?
HCF
April 8th, 2009 at 9:53 am
Lagrange is for maximizing output under specific constraints. The more constraints, the lower the output usually.
April 8th, 2009 at 9:59 am
http://www.rttnews.com/CorpInfo/EconomicCalendar.aspx
4/8/09 6 am…largest economy in Europe orders down 3.5% month to month….
….leading indicators….
April 8th, 2009 at 10:00 am
Byno, and I remember lamda had something to do with something. The author might have been Weston and the book came from Southwestern Publishing, I think (funny how I remember useless details like that). And it had a green cover, was titled Managerial Economics, and I liked the teacher. He wasn’t full of himself. A lot of my other econ teachers were. I remember Math Econ was a recommended prerequisite, but that was basically the intro to finite calculus course for Econ majors. Lagrange Multipliers were pretty frickin easy, too. Maybe they don’t teach it well at that school you mentioned?
April 8th, 2009 at 10:00 am
@ Bruce
> ….leading indicators….
Green shoots, baby! Of a poisonous plant, of course…
HCF
April 8th, 2009 at 10:09 am
Hobo,
If you were doing an advanced managerial accounting course, you were probably self-selected as one of the brighter bulbs to begin with. Furthermore, Lagrange is something better suited for grad students interested in production design and function than undergrads just trying to get land/labor/capital/technology drilled into their heads. I got my BA from a *pretty good* institution, and we never actually talked about it. Only in grad school did Lagrange come up.
Where it might have uses to the stock market is in its applications for physics. In fact, I’d imagine a lot of black box apps use it for modeling entry and exit points. Whether or not it actually works in that situation, though….
April 8th, 2009 at 10:09 am
er, managerial econ. Durrrrr
April 8th, 2009 at 10:11 am
http://en.wikipedia.org/wiki/Derivative
the first animated wiki page I have seen.
I recall the first derivative as the slope, or rate of change.
The second derivative as the rate of change in the slope or acceleration…
so, tangentially…. movement of the foot on the gas pedal would be the rate of change of acceleration, or the third derivative. or I’m wrong….
Calculus was not very interesting until I took physics. Then, using calculus to solve — find solutions to real problems was really neat. 4 years of chemical engineering wore off the shine of derivatives and integrals.
differential equations and linear algebra was never more than annoying . (to me)
April 8th, 2009 at 10:15 am
Great minds think alike: Willem Buiter at FT on second derivative today.
http://blogs.ft.com/maverecon/2009/04/the-green-shoots-are-weeds-growing-through-the-rubble-in-the-ruins-of-the-global-economy/
There are signs that the rate of contraction of real global economic activity may be slowing down. Straws in the wind in China, the UK and the US hint that things may be getting worse at a slower rate. An inflection point for real activity (the second derivative turns positive) is not the same as a turning point (the first derivative turns positive), however. And even if decline were to end, there is no guarantee that whatever growth we get will be enough to keep up with the growth of potential. We could have a growing economy with rising unemployment and growing excess capacity for quite a while.
April 8th, 2009 at 10:17 am
@HCF:
I have been wondering again, why is it we national taxpayers are going to bail out California? This seems to be forgotten, but only people in Barry’s neck of the woods have higher taxes…isn’t it time for California to reduce government? Or do they intend to tax everyone to death out there?
(Disclaimer…my brother lives in the silicone valley….)
http://latimesblogs.latimes.com/money_co/2009/02/california-tax.html
How California’s income tax and sales tax rates compare
“The budget deal the Legislature reached today will keep California’s top personal income tax rate and sales tax rate the highest in the Union.”
…older news but still, we are going to give money to these peeps, who should demand less government…and certainly if you choose to live there, you shouldn’t need the national taxpayer to fund the state’s largesse…
April 8th, 2009 at 10:25 am
The physics is such that if you do not even pull the rip cord, your fall will stop accelerating due to the atmospheric friction, it’s called terminal velocity (the last moments of the jump not-withstanding.)
The analogy to this bandied about by Hooverites and the Right Wing Talk Radio circuit is that doing nothing will eventually “work.” Yes it will… no matter how hard “we fall” we will be able to re-create Western Capitalism.. but I don’t want to fall that far or contemplate the “last moments”
That’s what the interventions are about.
April 8th, 2009 at 10:28 am
Byno,
Thanks. I majored in Econ only because I was a transfer student who need to graduate ASAP. Econ didn’t need as many hours as business or accounting or anything useful, and intro to micro / macro were the prerequisites for most classes. It’s finally coming in useful. At that time, my school was, I thought, a third rate state university. Today, people think it’s big cheese. I don’t get it but I won’t argue. My degree has a little more prestige now.
I like to take classes and schools mostly suck now. The textbook publishers are the tail wagging the dog. They force obsolescence on textbooks, forcing you to always buy the newest edition. For example, cost accounting hasn’t changed in decades. You still see new cost acct texts coming out every couple of years and the old ones are no longer available or used. The publishers own the bookstores in a lot of cases. Online courses are just credit for taking publisher provided exams. The teacher is sometimes incidental. I’m starting to believe the old saw, Those who can do…those who can’t teach. The texts appear to be written for committees, not students.
I think the Lagrange multipliers were easy because the book was pretty good and the teacher was interested in teaching, not trying to make clones of himself. I remember taking an operations research class at the same time and it seemed much harder, although all it required was a little algebra.
April 8th, 2009 at 10:29 am
http://www.bloomberg.com/apps/news?pid=20601103&sid=a3IZlR2wXLjw&refer=news
Safe-Harbor 401(k) Plans Force U.S. Companies to Pay to Play
By Jeff Plungis
April 8 (Bloomberg) — Marty McGreevy, owner of a company that designs convention booths, wanted to avoid cutting jobs by stopping payments to his employees’ 401(k) savings plan.
U.S. regulations for smaller companies such as McGreevy’s Cyclonix in Morgan Hill, California, prevented him from doing so. His choices were to make the $70,000 matching payment in 2009 or liquidate the 401(k) retirement plan. Since Cyclonix had already committed to the 2009 outlay, it was too late, he said….follow link above for the rest.
–
I killed our 401K plan this week. I have not drawn a paycheck since Dec, yet could not suspend 4% Safe Harbor match for even one month without running afoul of the IRS. It was a tough decision but the only one that made any sense for us. We will probably never restart the 401k program that we have had since 1999.
April 8th, 2009 at 10:30 am
Barry..Boichk
from where do you get such an expression…Are you flooring the car, or merely moseying away from the red light? ……..my bubbi would say Fey!…..such a smart boy from Lung Island learning such goyem expressions…..moseying….indeed…….so what’s wrong with just creeping?
April 8th, 2009 at 10:35 am
SEC considering short-sale restrictions:
http://www.washingtonpost.com/wp-dyn/content/article/2009/04/07/AR2009040704012.html
http://www.sec.gov/news/openmeetings/2009/agenda040809.htm
and…
WSJ reported yesterday what was already starting to appear inevitable: Treasury says TARP is being extending to life insurers . Prudential and Hartford Financial have applied for funds.
So, to return to the topic. Barry, do you think that the economy really is accelerating downward at a slower rate or are we doing one of those Wile E. Coyote things where we are suspended in mid-air long enough to look down, look at the camera, blink, and hold up a sign that says, “Mother!”
April 8th, 2009 at 10:37 am
@ Bruce:
> I have been wondering again, why is it we national taxpayers are going to bail out California?
Because California is the AIG/Citigroup/Bank of America of states: too big to fail! It is seriously overcrowded, over-regulated and overtaxed. I lived there during grad school and love the natural beauty, but everything else makes it a terrible place to work (great place to visit, though). We as taxpayers are certainly subsidizing all their expensive social experiments. Indeed unfortunate…
HCF
April 8th, 2009 at 10:43 am
from rosenberg “Is the economy really turning around? It’s amazing how everyone latches on to any positive piece of data to claim that the recession is over and a new bull market about to begin. Go back to prior recessions, and indeed you will see that ISM, new home sales and durable goods shipments rise 38% of the time; retail sales actually rise half the time and new home sales 30% of the time. In our view, it just goes to show that (i) it’s what is happening the rest of the time that matters more and (ii) a reminder that nothing moves in a straight line. “
April 8th, 2009 at 10:58 am
It amuses me just how strategically spaced out these market manipulation/bailout announcements seem to be. It’s almost like they have a checklist with dates on them with hopes that each time the market starts to reflect reality, they go and announce the next on the list. Aggravating but very amusing in a sense to watch.
April 8th, 2009 at 11:01 am
Speaking of amusing, pretty funny to see Roubini call out Cramer. Called him a “buffoon” in an interview. This is getting juicy. Time to go make some popcorn.
April 8th, 2009 at 11:01 am
We are not going anywhere so it doesn’t matter how fast we get there. We do experience all sorts of sensations that can be taken as indicators. We are at the very early stages of evolving to a new paradigm. Morphing is not often described as a pleasant sensation- not a linear process. Linearity has been relegated to the Mobius strip. We can accelerate faster or slower but we have no idea of where we are going, in which case the math of it becomes quantitative stenography.
April 8th, 2009 at 11:10 am
My goodness. Professor Ritholtz is running a Physics class this morning.
Just don’t turn this crowd on to quantum mechanics or string theory, please.
The Baltic Dry was one of our “mustard seeds” a little while ago. It has turned negative again.
http://macro-man.blogspot.com/
April 8th, 2009 at 11:14 am
@leftback: It looks like the Baltic Dry has gone really dry. Yuck, yuck, yuck. Sorry, in a weird mood this morning.
April 8th, 2009 at 11:54 am
@leftback — I dunno, a little Heisenberg’s Uncertainty Principle might be appropriate here.
And, now that I think of it — is Schrodinger’s cat alive or dead, and does it bounce?
April 8th, 2009 at 11:58 am
BR wrote:
Excellent explanation, and one fully supported by the data (which just happens to coincide with how stock prices work!)
Quick side note: the forecast contained within the link above would apply through the end of June, not to mention being highly dependent upon changes to the expected growth rate of dividends per share (aka “acceleration”) as well as changing expectations for the future rate of inflation.
April 8th, 2009 at 12:06 pm
So, IOW, we’re not on the cusp of the next great bull market.
April 8th, 2009 at 12:07 pm
Bull-shit market, perhaps, bull market, no.
April 8th, 2009 at 12:21 pm
A pessimist looks at a situation and says that things can’t get any worse.
An optimist says Yes they can.
April 8th, 2009 at 12:36 pm
For anyone who does not recognize the term “Lagrange”, here’s a video presentation explaining the concept:
http://tinyurl.com/aubjgc
April 8th, 2009 at 12:40 pm
@Schnormal — sounds like my golf game — no matter how bad I’m playing, it could be worse.
April 8th, 2009 at 12:49 pm
BR,
nice post~ though, w/this: “Just don’t turn this crowd on to quantum mechanics or string theory, please. “–lb
QM would be fitting, string theory, to me, is a hideous waste of Time.
Byno,
btw, have you ever read/studied any Eliyahu Goldratt ?
http://www.goldratt.com/
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Eliyahu+Goldratt
April 8th, 2009 at 12:53 pm
>> Because California is the AIG/Citigroup/Bank of America of states: too big to fail! It is seriously overcrowded, over-regulated and overtaxed. …We as taxpayers are certainly subsidizing all their expensive social experiments.
HCF, what “social experiments” come to mind?
My perception is: California had *the* dot-com bubble/bust, was screwed by Enron and the do-nothing Bush administration, and then had the *biggest* housing bubble/bust. These events were orthogonal to whatever “social experiments” (electricity market deregulation) California tried.
>> over-regulated and overtaxed
Were more regulations and taxes put in place in 2006, to make the housing market tank? If not, then I’m not sure what these overages have to do with California’s epic housing bust and epic meltdown. Are the taxes driving the offshoring of IT jobs? Or is the appeal of paying 70% less in labor costs the driving factor?
IMO, California’s problem is the same as every state’s: (a) most people (including the legislators) drank the Kool-aid and didn’t save for a rainy day and (b) the internet flattened the world. California has it worse because for a while they were having it best. The whipsaw in the rate of change is killing them.
April 8th, 2009 at 1:04 pm
“Imagine you jump from a airplane — for a while, you are free falling — accelerating downwards at increasing speeds*. After a few thousand feet, you pull the rip cord and your parachute opens up. In terms of direction, you are still heading down; In terms of speed, however, even though you are falling, you are falling at a much slower rate. As the parachute deploys, you are decelerating — the rate of your fall is slowing.”
So, what you’re saying is that the cumulative effect of all of those upper management “golden parachutes” is finally starting to show up. LOL. Reaganomics at its best!!
April 8th, 2009 at 1:08 pm
That things are slowing in getting worse still means that things are getting worse right?
I’d rather talk about baking a cake than math and I can’t do either well!
April 8th, 2009 at 1:15 pm
Is a parachute the correct analogy?
How bout an elevator, with a bottomless shaft?
It’s now plunged about 50 floors and the pawls have dug in,
resulting in a bounce back.
In the meantime, the cables are stretched ribbon thin and
they just shoveled a few trillion more coins in the car.
Going down, Mr Tyler?
April 8th, 2009 at 1:39 pm
byno,
I stand corrected about the Lagrange multipliers. Although I got an A in the course a while back, I apparently don’t remember them today. Also, I looked up the book and couldn’t find it referred to on Amazon, even back then. I remember one of the authors who was big in Corporate Finance at the time was a co-author. At least I know a cool word.
April 8th, 2009 at 1:48 pm
Terminal velocity are you going to explain it before or after we hit the ground? If they keep trying to have the taxpayer pay for FI rescue’s indefintiely we’re closer than further from it.
April 8th, 2009 at 1:50 pm
Not that I don’t like math but what becomes of the ‘green shoots’ analogy?
Could this breed be considered that of the Japanese Bonsai Plants?
April 8th, 2009 at 1:52 pm
Yawn. . . wake me when the “second derivative” is ZERO. (thereby implying the instant of no acceleration which in turn happens instantaneously when there is a change in sign of velocity from negative to positive implying a local minimum, i.e., A FREAKING BOTTOM!) Of course, it could be a false bottom still. These yahoos like to use all the fancy gussied up jargon to imply they know what is going on, when frankly, the only ABSOLUTELY sure bottom we could have would be the second derivative hitting zero at the same time as the first derivative and the function itself. Then I try to calculate the amount of days my canned goods will last me using an asymptotic function until starvation.
April 8th, 2009 at 2:35 pm
@HCF and Bruce
Yeah, why bail out California? While we are at it, kill all the farm subsidies, oil subsidies (no royalty payments in years), mining and timber subsidies (fractions of a penny on the dollar for rights). Oh wait, those are all targeted at red states that Californians have supported for decades with their tax dollars. Just give us back the $100B’s we have paid in other state’s subsidies and we’ll call it even.
April 8th, 2009 at 3:01 pm
Speaking in terms of mathematics — in this case 2nd derivative — what is the function? It seems that we’re talking about changes in some indicators (e.g. ISM data, New Home Sales, Existing Home Sales, Non-farm payrolls, etc.) in relation to time (time on the abcissa & the indicator on the ordinate).
If well defined functions exist, my guess is that they are multi-variate functions — if they are true functions at all. Even if we know all of the independent variables, we don’t know their relationships to the dependent variable (e.g. linear, quadratic or ???) or their covariance with other independent variables.
April 8th, 2009 at 3:20 pm
OTD, I agree. . . which is precisely why said yahoos need to lay off the math jargon they use to imply they know what is going on. In reality it is a complex system that includes randomness and human emotion and therefore cannot be represented as a function or a model. (not to say quants haven’t tried–there is a holy grail mentality of folks out there trying to do precisely that)
April 8th, 2009 at 4:54 pm
DiggidyDan,
Thanks for the reply. Normally, I just read the posts, but I’ve about had it with “quantabes” — that’s my term for quantitative wannabes!
Done a lot of mathematical modeling over the years, and, INVARIABLY, the client/end user either just didn’t understand the “initial & boundary” conditions — aka caveats stating the limitations of the model — or they simply chose to ignore them.
Recently, I ran across a link to “Naked Shorts” (url: http://nakedshorts.typepad.com/nakedshorts/2005/09/the_li_model_so.html) from 2005 titled “The Li model sometimes lies.” A brief quote follows:
“Most significant are cautionary remarks by David Li, a Chinese-born New York banker, currently with Barclays plc, who is credited with developing the basic model – the Gaussian cupola – used for pricing credit derivatives. Some quotes of note (but I do strongly urge you to read the entire article) with emphasis added:”
“The most dangerous part,” Mr. Li himself says of the model, “is when people believe everything coming out of it.” Investors who put too much trust in it or don’t understand all its subtleties may think they’ve eliminated their risks when they haven’t.”
” Much of that money is riding on Mr. Li’s idea, which he freely concedes has important flaws. For one, it merely relies on a snapshot of current credit curves, rather than taking into account the way they move. The result: Actual prices in the market often differ from what the model indicates they should be.”
” As with any model, forecasts investors make by using the model are only as good as the inputs. Someone asking the model to indicate how CDO prices will act in the future, for example, must first offer a guess about what will happen to the underlying credit curves – that is, to the market’s perception of the riskiness of individual bonds over several years. Trouble awaits those who blindly trust the model’s output instead of recognizing that they are making a bet based partly on what they told the model they think will happen. Mr. Li worries that “very few people understand the essence of the model.”
To all of the “investors” who either didn’t understand the essence of the model, or who chose to ignore its stated limitations, we have only one thing to say (loosely paraphrasing Oliver Hardy):
Here’s another fine mess you’ve gotten us into!
April 8th, 2009 at 7:09 pm
The maths example Barry gives above about rate of acceleration is an accurate example of the term second derivative. I’m not so sure about the free falling example. The acceleration of gravity is a constant 10 m^2. The slowing down is due to air resistance.
Hmmm maybe it is accurate…
Air resistance causes an increasing decrease (due to air resistance being due to velocity squared) in acceleration until acceleration ceases at terminal velocity.
However at terminal velocity the first derivative and the second derivative are zero. The rate of change has stopped there is no change. Velocity is not zero however that is not the same as acceleration.
April 8th, 2009 at 7:29 pm
Porsche87 Says:
see: http://www.law.cornell.edu/constitution/constitution.billofrights.html
http://www.tenthamendmentcenter.com/
LSS: the more hands your $ goes thru, the fewer pennies you wind up with..
April 8th, 2009 at 7:47 pm
That’s incorrect-in terminal velocity due to air resistance, the first derivative would be a constant at the velocity in which the upward force of air drag is equal to the downward force of the mass times the earth’s constant acceleration of approx 9.8^2 m/s, the second derivative (acceleration/deceleration) would be zero, and position (the primary “function” you are basing the 1st and 2nd derivatives upon, if you want to call it that, with x axis time and y axis height above the ground) would continue to change. Only case where 2nd and 3rd derivative would both be 0 is if position was constant with respect to time (which will happen eventually when you approach an opposable force greater than that of gravity, such as, say the ground).
Splat.
A parachute opening would increase the upward force of air drag, causing temporary deceleration until equilibrium between the air drag force and gravitational force restabilizes at a resultant lower constant (terminal) velocity, resulting in no Splat.
Regardless, Newtonian physics does not apply to markets (and in fact have been usurped by Einstein’s theories in the real world for that matter). I don’t know why I am bothering to point this out since it’s all moot, just bored I suppose.
April 8th, 2009 at 7:52 pm
and in picking nits, the force of the ground would actually be equal according to Newtonian physics, not greater than, sorry.
April 8th, 2009 at 11:27 pm
The Barrypaedia will no doubt define oscillation in terms of bouncing dead cats.
April 9th, 2009 at 5:14 am
The second derivative is positive but virtually zero. At the current rate, the first derivative will become zero in about 10 years. So the good news is that Depression levels will be reached in only 5 years or so–and then continue slowing for another 5– rather than in only 1. Take heart all ye investors! The boom is here!
April 9th, 2009 at 7:44 pm
To be honest, a lot of the stats are over my head. But here’s an observation on the streets from the Bronx NY.
1. this winter heating complaints were up well over 100%. Many small landlords, those who rent out two and three family houses were having problems with heating cost. Many of these same landlords can’t pay mortgages because their tenants can’t pay rent.
2. It looks like the Bronx is burning again. Commercial real estate that hasn’t been renting seems to be catching on fire. It might be coincedence that around the corner from me, on one block, both sides of the street have had three fires in about six weeks. Two land lords own either side of the street.For rent signs have been on some of the units for close to a year.
This happened in the Bronx years ago with residential real estate. Much of the south Bronx was burned down only later did people realize (admit) the landlords had something to do with it. The motive a falling real estate market.
Just an observation.
April 13th, 2009 at 9:16 am
Neither an economist, nor a physicist nor a mathematician….
Maybe a better analogy for the current trend is to a bungee jumper. They hit the end of the bungee – looks like the bottom, but they continue to decelerate until they hit the literal bottom. Then they spring back upwards a short distance and then fall again. And again. And again….until they reach zero.
The problem with the parachute analogy is once the chute is deployed the ride to the bottom is usually steerable into a smooth glide patch until the bottom is found. I don’t think the economic recovery programs and policies are going to qualify as a parachute. A bungee chord, on the other hand……
April 17th, 2009 at 2:28 pm
@dead hobo: Every time you go out and drive your car, you are doing differential equations in your head without realizing it.
I would very much like to go back in time and try that on Dr. Fontenot, my calc professor. Then again, I took the class pass/fail, and did pass (barely).