Posts filed under “Research”

NBER: Having It Both Ways?

There seems to be growing consensus that the recession ended some time in mid-2009 (June or July), and we recently pointed out that regional St. Louis Fed economists have placed their bets on a July 2009 trough. Now it’s up to the NBER.

We know that they weigh a variety of economic indicators, including Employment, Industrial Production, Real Income, and Real Retail Sales (tracked here at the St. Louis Fed). Business Cycle Dating Committee member Jeffrey Frankel likes to look at aggregate hours, too. In the real world, all of this is mostly an academic exercise in any event — Americans, like Associate Justice Potter Stewart once famously said on a different topic altogether, know a recession when they see one, and they also generally have a pretty good idea when it’s ended.  (I take pride in having nailed the NBER’s call that the recession began in December 2007 while blogging elsewhere.)

But what about GDP? How does it figure into the equation? We’ve had two consecutive quarters of growth, including the 5.9 percent of Q4 2009. How will that play?

Well, it’s a interesting question, as the NBER has very contradictory and conflicting information at its own website about how it weighs the evidence:

In announcing the 2001 recession, the NBER said (emphasis mine):

Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The traditional role of the committee is to maintain a monthly chronology, so the committee refers almost exclusively to monthly indicators. The committee gives relatively little weight to real GDP because it is only measured quarterly and it is subject to continuing, large revisions.

Got that?  Okay, let’s move on.

October 21, 2003 Memo from the Committee (not coinciding with a peak or trough announcement; emphasis mine):

The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA’s real GDP estimates are only available quarterly. For this reason, the committee refers to a variety of monthly indicators to determine the months of peaks and troughs.

Although the Committee qualifies its October 2003 remarks by mentioning the need to maintain a monthly chronology, the two comments nonetheless seem contradictory to me, and flip-flop the importance of what is to be considered.

Whichever way they eventually call it, the NBER will have a document to which it can point to support its decision.  Is it time — or long past — to formalize what it means to be in, or out of, recession?  If so, my vote might easily go to the Chicago Fed’s National Activity Index.

>

>

The Chicago Fed provides the following bogeys:  “A CFNAI-MA3 value below –0.70 following a period of economic expansion indicates an increasing likelihood that a recession has begun. A CFNAI-MA3 value above –0.70 following a period of economic contraction indicates an increasing likelihood that a recession has ended. A CFNAI-MA3 value above +0.20 following a period of economic contraction indicates a significant likelihood that a recession has ended.”  It is an excellent indicator.

Category: Data Analysis, Economy, Research

The St. Louis Fed has made it official, at least through their lens.  The recession ended in June 2009.  As you read here first in January, late last year the St. Louis Fed discontinued the use of  recession shading (thereby signalling its end) in its graphs as of mid-2009. They have now retooled their Tracking the Recession page to…Read More

Category: Cycles, Economy, Employment, Research

Luskin: Buy Stocks, Buy Citi (11/07) Sell Stocks (3/09)

Invictus is a bulge bracket asset manager with $100+ million AUM. He has no patience for money losers, hacks, partisans pretending to be financial analysts . . .  this is the first in a series of critical looks at analysts, media, economists, financial TV. Feel free to share any thoughts in comments. Here’s Invictus: ~~~…Read More

Category: Analysts, Media, Really, really bad calls, Research

Multibillion-Dollar Push Into Energy Research

> This is actually terrific news: “The Obama administration’s push to solve the nation’s energy problems, a massive federal program that rivals the Manhattan Project, is spurring a once-in-a-generation shift in U.S. science. The government’s multibillion-dollar push into energy research is reinvigorating 17 giant U.S.-funded research facilities, from the Oak Ridge National Laboratory here to…Read More

Category: Energy, Research

Sign Up for David Rosenberg (Merrill Lynch) Research

One of my more favored Wall Street researchers, the former Merrill Lynch North Amercian economist David Rosenberg, has moved on to Gluskin Sheff. Rosie’s new firm is making his research available for free, via email, on a trial basis. He should start publishing after the holiday weekend. You can sign up for what was formerly…Read More

Category: Research

Bank Market Caps, Then & Now

On Sunday, we looked at a charting error in a JPM research piece that compared bank market caps, then and now. It appeared the JPM analyst erroneously selected area rather than diameter in Excel. (Data can be found here). TBP Readers did a nice job taking JPM to school as to what the chart should…Read More

Category: Markets, Research

Failings in Structured Finance Agency Conflicts

As we begin to address regulatory reform in the financial services industry there is a clear consensus view that the credit rating agencies played a role in fomenting the crisis environment. In February 2007, Joe Mason and I presented a paper warning of the risks that CDO market problems would present in the capital markets…Read More

Category: Credit, Derivatives, Finance, Markets, Real Estate, Really, really bad calls, Research

Can Wall Street Do Basic Math?

That’s the question Bob Cringely asks.

Bob points out what might be an embarrassing error in a chart (below) — on the Banks/Financials no less — prepared by a JP Morgan Analyst:

It’s a chart showing the deterioration of major bank market caps since 2007.  Prepared by someone at JP Morgan based on data from Bloomberg, this chart flashed across Wall Street and the financial world a few days ago, filling thousands of e-mail in boxes.  Putting a face on the current banking crisis it really brought home to many people on Wall Street the critical position the financial industry finds itself in.

Too bad the chart is wrong.

It’s a simple error, really.  The bubbles are two-dimensional so they imply that the way to see change is by comparing AREAS of the bubbles.  But if you look at the numbers themselves you can see that’s not the case.

Take CitiGroup, for example.  The CITI market cap dropped from $255 billion to $19 billion — a difference of 13.4X.  If we’re really comparing the areas of the bubbles, that means 13.4 of those tiny CitiGroup-of-today bubbles should precisely fill the big CitiGroup-of-the-good-old-days bubble.  Only they won’t.  As a matter of fact it would take about 13.4 times as many little bubbles to fill the big bubble as the chart preparer thought or 179.64 little bubbles.  Pi r squared, remember?  This is because the intended comparison wasn’t two-dimensional but one-dimensional — the chart maker was intending we compare the DIAMETERS of the bubbles, not their areas.

My first read of this is that comparing height (i.e., bars rather than circles) would be accurate. Circles won’t work due to the squaring (π R squared) , where as diameters do not bring in a factorial change. That’s what creates the exponential rather than arithmetic change in the circle’s area.

I don’t have the original data, and I am wondering if this might be a simple Excel charting error [Update: Excel gives you the option of selecting Area or Diameter when choosing the circle chart as an option. I suspect this was a simple spreadsheet graphing error — not a mathematics error — but its embarrassing nonetheless]

If anyone has either the Market cap data handy, or wants to pull the teeny data from the chart onto a spread sheet, please email it to me at thebigpicture-at-optonline.net. Alternatively, if you can design a more informative/accurate graphic, please send that along . . .

UPDATE: 2/15/09 5:52pm

Several corrected versions of the original chart (below) follow . . .

>

click for ginormous chart

>

Read More

Category: Humor, Markets, Mathematics, Research, Valuation