Zachary Karabell delivered the keynote address this morning at the 31st Annual CBOE Risk Management Conference in Carlsbad, CA. Karabell holds the position as President of River Twice Research but is also a prolific writer acting as a contributing columnist to Reuters, The Atlantic, Slate, The Washington Post, Time, and The Wall Street Journal. In the past Karabell has written on a wide variety of topics ranging from religion, history, and politics. His most recently book, The Leading Indicators: A Short History of the Numbers That Rule Our World, which challenges the usefulness of judging and managing our economy based on economic statistics.
Karabell notes that many of the economic measures we use were created decades ago and their usefulness may have run their course. Stated more plainly, the world has changed, but the calculation methodologies have stayed the same. Also, he points out that economic numbers sprung up from a need that arose during the great depression in the 1930’s. The United States and UK decided that they needed a method of tracking what was actually going on in their respective economies and thus was born Gross Domestic Product and National Income, among many statistics to be developed during that time.
He noted that a great portion of human history was dominated by economic growth without any economic statistics. For example Abraham Lincoln didn't mention in 1862 what GDP in the North and South were that year. The first attempt to measure the economy was in 1931, and tried to measure employment. The term "The Economy" didn't exist until the early 1930's.
All of the original GDP measurements were good at measuring industrial output from the mid-20th century - factory output, etc. It didn't do a good job measuring the internet, consulting, intellectual properties, etc. The world we are measuring is changing pace faster than we can measure statistically. This was reclassified in July of 2013
Also, in a great analogy, he said that using economic statistics to guide decisions has some validity. But he goes on to say that it would be like using a 1950’s road map to get from point A to point B. You will get where you are going, but probably get lost along the way. New exits, entrances, spurs, etc.
Phraseology can be misleading. "No President has been reelected with an unemployment rate above 7.2%" was heard in the 2012 US presidential election. Or should it have been "Of the seven times a President ran for another term since 1948 (when the employment rate was calculated and the numbers were disseminated), both times the rate was 7.2% or higher, the President lost". Big difference between "No President" and "Both Times".
What are economic numbers capturing or not capturing? Some countries in the EU and some states in the US do or do not include certain products and services in economic measurements, so how do you compare one to the other? how do you measure employment and wages in a technological world?
First question about BLS revisions. News cycle not geared to anything other than current number. Government numbers provisional, be careful what you're trading on. "Data Dependent" could be code for "We know we don't know everything, coming up with best estimate on what we do know". In next few years Fed Funds might trade near 10-year rate. Change is always happening, not clear when you're in it.
His final comments were in response to a question on macro numbers. Underneath the macro numbers is some very good and useful data. But also understand what the market response will be to those macro numbers, trade carefully.
Great talk, thanks Zach.