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Twisting the Data: The Fed, Correlations and Intoxication

It is amazing how quick people are to forget how wrong one prediction is, only to move onto believing in another prediction. An excerpt from the chapter “Intoxication”, in Trend Commandments:

A bipolar prediction came across my desk recently: “If the market rises over the next several weeks, today will have been a good day to buy. However, no one can know the answer today. Every day there seems to be a surprise. We don’t know how to predict the behavior of foreign countries or their attacks.”

The nonsense doesn’t stop there. While on the East Coast recently, I was listening to an AM radio finance show. An older man called in to ask how he could buy into various commodity markets. He was worried that they had run too far already. The female host assured him that there was plenty of time and to jump into the market. The caller mentioned that he liked to buy low and was waiting for a pullback. The host told him to start preparing for hyperinflation. She named an African country to enhance her theory and leaned the conversation toward food insurance, needed of course for the coming descent into anarchy.

Think not knowing what you are talking about is new? Think again. President Herbert Hoover circa May 1930: “While the crash only took place six months ago, I am convinced we have now passed through the worst—and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.” Can’t just pick on old-timers. Consider the current day. Lloyd Blankfein (head of Goldman Sachs) said his firm would have survived the credit crisis without government help. The firm’s president, Gary Cohn, was more definitive: “I think we would not have failed. We had cash.” Treasury Secretary Timothy Geithner countered, “None of them would have survived” without government help.

More contradicting rhetoric from a 2010 60 Minutes interview reinforces the propaganda spell cast:

Scott Pelley: “Is keeping inflation in check less of a priority for the Federal Reserve now?”

Ben Bernanke: “No, absolutely not. What we’re trying to do is achieve a balance. We’ve been very, very clear that we will not allow inflation to rise above two percent or less.”

Pelley: “Can you act quickly enough to prevent inflation from getting out of control?”

Bernanke: “We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.”

Pelley: “You have what degree of confidence in your ability to control this?”

Bernanke: “One hundred percent.”

That confidence seems misplaced when you consider Bernanke’s words but a few years before:

In 2005, Bernanke said: “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.”4 In 2006, Bernanke said: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

In 2007, Bernanke stated: “At this juncture…the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”

Worse yet? Bernanke told the Senate Banking Committee in March 2011 that he saw “little evidence” that the stock market was a bubble, but provided certainty with this ditty of a response: “Of course, nobody can know for sure.” Why again do we care what this man says?

Not only can the pros not understand the data, but the conclusions they draw are almost always wrong.

Feedback in that adds to my thought:

Hi Mike, thought you might enjoy these. I listen to some of the BBC “More or less” podcasts, found this one (spurious correlations) when scrolling through their archives. So many out there (not just in finance) tend to torture data to find what supports their bias. The podcast and site do a good job at poking some fun at those tendencies.


For the audience:

Podcast “More or less: Behind the stats”:

Spurious Correlations website:

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