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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.

Thanks!

For the audience:

Podcast “More or less: Behind the stats”: http://www.bbc.co.uk/programmes/p0201hpg

Spurious Correlations website: http://www.tylervigen.com/spurious-correlations


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Ep. 386: Expanding Your Thinking with Michael Covel on Trend Following Radio

Expanding Your Thinking with Michael Covel on Trend Following Radio
Expanding Your Thinking with Michael Covel on Trend Following Radio

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Please enjoy my monologue Expanding Your Thinking with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.

In this episode of Trend Following Radio:

  • Why embracing uncertainty pays big
  • Trend following: it’s human nature
  • Losses: acceptable when you strategize to cover them
  • The sunk cost fallacy
  • Opening your mind to alternative ways of thinking
  • The mistake of blindly accepting the word of “authorities”

“I remind you there is a new kind of special occupation. I refuse to call it a discipline or a field of study. It’s called futurism. The notion here is that there is a way to study trends and know what the future holds. That would indeed be valuable if it were possible. But it isn’t possible. Futurists don’t know any more about the future than you or I. Read their magazines from a couple years ago and you’ll see an endless parade of error.” – Michael Crichton

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Ep. 385: Paul Slovic Interview with Michael Covel on Trend Following Radio

Paul Slovic Interview with Michael Covel on Trend Following Radio
Paul Slovic

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My guest today is Paul Slovic, a professor of psychology at the University of Oregon and the president of Decision Research. Decision Research is a collection of scientists from all over the nation and in other countries that study decision-making in times when risks are involved. He study the psychology of risk and decision making. Current interests are motivating action to prevent genocides and nuclear war.

The topic is his paper Perception of Risk.

In this episode of Trend Following Radio we discuss:

  • The psychometric paradigm of risk perception
  • Balancing risk vs. reward
  • The concept of affect heuristics
  • How the media sways the public’s risk assessment
  • Fast vs. slow thinking
  • Risk in the context of decision making

“Bad is stronger than good. If something goes wrong in a system it decreases our trust in the management of that system more than when something goes right. Something goes right, it doesn’t really boost our trust and confidence. It’s the negative that outweighs the positive, and the negative is being conveyed to us much more frequently and forcefully through the media than the positive is.” – Paul Slovic

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Ep. 384: Living by Your Own Rules with Michael Covel on Trend Following Radio

Living by Your Own Rules with Michael Covel on Trend Following Radio
Living by Your Own Rules with Michael Covel on Trend Following Radio

Subscribe to Trend Following Radio on iTunes

Please enjoy my monologue Living by Your Own Rules with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.

In this episode of Trend Following Radio:

  • Good decision-making through clarity
  • Examining identity politics
  • Operating under your own rules
  • Political correctness: it’s about agendas
  • Good trading means using your system and your mind
  • The importance of staying focused

“We’ve been crippled by social security, Medicare, Medicaid, by welfare, by entitlements. And that is the root of the problem. Entitlements. Let me be clear…You are entitled to nothing.” – Frank Underwood

Mentions & Resources:

Listen to this episode:

Want to learn more Trend Following? Watch my video here.

Get the foundation to making money in up, down and *surprise markets on the Trend Following mailing list.

Ep. 382: Dissecting Duplicity with Michael Covel on Trend Following Radio

Dissecting Duplicity with Michael Covel on Trend Following Radio

Subscribe to Trend Following Radio on iTunes

Please enjoy my monologue Dissecting Duplicity with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.

In this episode of Trend Following Radio:

  • Trend following: a system, not a theory
  • Opinions are worthless without strategy
  • The mainstream media’s continued attacks on trend following
  • No one knows the future – embrace the idea
  • Theories are conjecture
  • Focus on the now – that’s the indicator

“So there is a bubble element to what we see, but I’m not sure the current situation is a classic bubble, because I’m not certain that most people have extravagant expectations.” – Robert Shiller

Mentions & Resources:

Listen to this episode:

Want to learn more Trend Following? Watch my video here.

Get the foundation to making money in up, down and *surprise markets on the Trend Following mailing list.

Ep. 380: Lessons from Ken Tropin with Michael Covel on Trend Following Radio

Ken Tropin
Ken Tropin

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Please enjoy my monologue Lessons from Ken Tropin with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.

In this episode of Trend Following Radio:

  • Recognizing that without a strategy, you’re at the mercy of the machine
  • Embracing uncertainty
  • Understanding that knowing every market move won’t help without a plan
  • The importance of setting your strategy beforehand
  • Seeing that media personalities are paid to pretend to know all
  • How the principles of trend following apply to other disciplines

“Trend following is one of the most mature and well-established systematic trading styles with a thirty-three year track record of profitability.” – Ken Tropin

Mentions & Resources:

Listen to this episode:

Want to learn more Trend Following? Watch my video here.

Get the foundation to making money in up, down and *surprise markets on the Trend Following mailing list.

Ep. 378: Embracing Failure with Michael Covel on Trend Following Radio

Embracing Failure with Michael Covel on Trend Following Radio
Embracing Failure with Michael Covel on Trend Following Radio

Subscribe to Trend Following Radio on iTunes

Please enjoy my monologue Embracing Failure with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive.

In this episode of Trend Following Radio:

  • Understanding that success requires failure
  • Seeing past investment myths
  • Recognizing that no risk means no profits
  • Understanding that there’s no such thing as a perfect strategy
  • Shattering the notion that someone will always take care of you
  • Accepting that there are no guarantees

“I’ve failed over and over and over again in my life. And that is why I succeed.” – Michael Jordan

Mentions & Resources:

Listen to this episode:

Want to learn more Trend Following? Watch my video here.

Get the foundation to making money in up, down and *surprise markets on the Trend Following mailing list.

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