Posts filed under “Mathematics”

Mathematicians – Not Economists – Should Run the Fed

“A number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida . . . Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on ‘flipping’ the properties — selling them quickly at higher prices.”

-Jack Guynn, then president of the Federal Reserve Bank of Atlanta

“I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals.”

-Stephen D. Oliner, Fed researcher

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For the longest time, I was astonished at what looked like gross incompetence and utter lack of comprehension at the US Federal Reserve. I previously found it mind boggling.

I no longer get upset over this, as I have discovered the fundamental flaw of the Federal Reserve errors. Wore than easy money, worse than Greenspan’s “flawed” ideology, is a simple error that the Fed keeps making.

Math.

The Fed seems to be somewhat ignorant of basic mathematics. As far as I can tell, they are unfamiliar with standard deviations. They don’t grok mean reversion. Change in delta, 2nd derivatives seemingly perplex them. Even mortgage amortization tables appear beyond their ken.

How else could you explain the recently released transcripts that show the Fed rationalizing away the burgeoning what their ultra-low rates had done? How on earth could a Fed researcher claim “the rise in house prices is rooted in fundamentals” ?

The Fed completely missed the credit bubble, and seemingly ignored the nascent Housing boom in 2004.

Greenspan continually insisted that not only could the Fed not identify a bubble in real time, but could not possibly pop it. Its cheaper to clean up afterwards the Maestro said.

The only explanation that makes any sense to me is that they are innumerate — the mathematical equivaency of illiteracy. All it required to identify any of these — as we, and plenty of others did — was to look at the prior history and compare metrics:

• Median Federal Overnight Rates (20th Century)

• Total Credit and Mortgage Available

• Median Home price to Median Income

• Rental versus ownership costs

Any one of these would have clued the Fed into something aberrational occurring. And yet they managed to miss this completely.

From now on, I will cease calling the Fed incompetent, and begin using the more accurate phrase “innumerate.”

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Previously:
Bernanke Still Does Not Understand Credit Crisis (January 4th, 2010)
http://www.ritholtz.com/blog/2010/01/bernanke-cause-of-credit-crisis/

Fed Transcripts Stoke Debate on Rates
SEWELL CHAN
NY, May 3, 2010
http://www.nytimes.com/2010/05/04/business/04fed.html

Fed’s Guynn Warned in 2004 Low Rates May Fuel Price Surge
Joshua Zumbrun
Bloomberg, May 1 2010
http://www.bloomberg.com/apps/news?pid=20601087&sid=asN.6J4RCnOo&

Category: Federal Reserve, Mathematics

Tax Burden on Various Americans

David Leonhardt has two good tax related pieces (an article, and a blog post) that shed some light on who pays how much taxes in the US. The full article, Yes, 47% of Households Owe No Taxes. Look Closer., is noteworthy for this truism about the tax burden.  It is rather informative: “There is no…Read More

Category: Mathematics, Taxes and Policy

Government’s Share of Economy, 1950 to 2075

Peter Boockvar dug up these fascinating charts from this CBO report from 2002.

What really surprised me is how consistent the US economy has been for most the latter half of the 20th century: About 20% of GDP. It starts about 19%, peaks at about 23% then falls back to about 18 and a half%.

Note that this data is before the Bush’s Prescription Drug Act or Obama’s Health Care bill.

Federal Outlays, 1962 to 2001

(As a percentage of GDP)
Table


Chart


Charts via CBO, Perot Charts

More charts after the jump . . .


Read More

Category: Economy, Mathematics

Long Term Growth in US Labor Force

Despite my association with the Bear camp, and my belief that we are most likely in a long term secular bear market, I actually am an optimistic guy. The future is never as dire looking as the survivalists make it out to be. Even though I know the cyclical bull rally within the longer bear…Read More

Category: Economy, Mathematics

Vanguard’s Broken Discipline: The Buy & Hold Model

Yesterday, my buddy Paul showed this Vanguard interactive chart. Vanguard was trying to show the superiority of Buy & Hold versus “emotional investing.”  I have many issues with their argument. First, I have to challenge the use of that term — emotional investing — to describe what is a fixed mathematical exit and entry strategy….Read More

Category: Mathematics, Quantitative, Technical Analysis

Why a Consumer Protection Agency Is Necessary

What a splendid idea: A Consumer Finance Protection Agency whose sole purpose is to provide a set of standards for the finance industry when it comes to marketing their products to otherwise naive US consumers. The original plan was to have a standard form for major finance purchases — mortgages, cars, revolving credit. This would…Read More

Category: Bailouts, Credit, Mathematics, Regulation

What Were the Actual Losses in Madoff’s Fraud?

Here is a deceptively complex and subtle legal question involving Ponzi schemes and fraud: What are “losses” in the legal sense of the word? The question arises in the case of Bernie Madoff, whose offices cranked out account statements like they were junk mail. As it turns out after the fact, that was all they…Read More

Category: Legal, Mathematics, Psychology

More WSJ Errors: This Time, Its Math

Last week, we discussed a highly politicized, misleading front page article about new bank rules (WSJ Jumps the Shark). If you recall, that story included a large chart showing much various banks declined, in dollar and percentage terms. Turns out the data was wildly wrong. The Journal ran a milquetoast correction, under the heading “Corrections…Read More

Category: Financial Press, Mathematics

How Many Quants Does It Take to Screw in a Lightbulb?

Matthew Greenfield of StoneWork Capital answers the above question thusly: “Using ten racks of co-located blade servers, one quant can detect a janitorial inefficiency, step in between janitor and light fixture, and screw in 49,500 bulbs in less than a millisecond, keeping five hundred lightbulbs of profit. Two quants competing with each other can screw…Read More

Category: Humor, Mathematics, Weekend

Help Wanted: Quant for Model Development

A successful fund manager friend is developing a new Model for running assets. He has a solid math background, but needs a good quant to help him develop and refine his approach. He is looking for two people — a college grad/student, and a PHD mathematician. They run a variety of different types of long…Read More

Category: Mathematics