Tuesday, September 13, 2011

A Primer on Fancy Economic Statistics



Economic statistics are only as good insofar as they have predictive power. It is either fantastic or very troubling that the marketplace offers us nothing short of a ton of statistics! Dr. David Kelly of JP Morgan is one economist whose opinion I trust because he (at the very least) presents his materials in an objective format. If you are into economic data, make it a point to check out the quarterly “Market Insights,” found at JPMorgan’s website.

Ok, so what is going on in these charts (above)? There are some counter-intuitive and hard to decipher information here. Let’s take an inventory of facts before we try to draw conclusions:
1.      Home prices, measured across the entire nation, remain markedly lower than the ’06-‘07 highs.
2.      Home-equity, in proportion to home market prices, remains off the highs as well.
3.      Home inventories remain low, below normalized averages.
4.      Affordability is at levels not seen in a generation.
5.      Over 40% of the CPI index is tied to housing, and therefore has a significant impact on monetary policy initiatives.

Recall the opening sentence where I made the claim that statistics are only as good as their predictive power. Unfortunately, we will not and cannot offer zealous conclusions (this isn’t a get-rich-quick subscription), but we will go so far to make the following inferences:

-       There is little evidence that a trough is discovered with prices. Like many market environments, the conclusion becomes a matter of perception: if you are the type of person that follows trends and technical’s, recognize that there has been sustainable downward pressure in place for over five years now; or, if you are a type of contrarian, you might be making the case that we are closer to the apex today than the trending data would suggest. Contrarians go on to build a thesis on why value isn’t recognized by the common marketplace; dislocation might be a great thing!

-        Fiscal intervention has been the catalyst in driving affordability— homes tend to be the singular largest asset, and consequentially liability for most American families. Intervention has come in the form of falling interest rates and organized re-fi programs. There is much controversy surrounding the government sponsored agencies Freddie Mac and Fannie Mae: how much risk is ultimately borne by the taxpayer anymore? To the degree you have confidence in the federal government’s intervention should be proportional to your belief that this transfer of wealth will have a multiplication effect on the economy.

-        It is difficult to make sense of inventory levels. Do you justify the compression on the basis that expansion was too quick, or make the case that the operating cycle needs to pick back up??

-        How can economic statistics reconcile for the intangibles in life? People are motivated by a lot more than equity accumulation. Could you imagine explaining to your children that you need to enact an austerity program on household budgeting because their after-school programs are a drag on your net worth? Owning a home, after all, is a dominant form of signaling and social hubris in our society. I would be so bold here to proclaim that there may be a bias in place whereby economists might often look to model correlation metrics for the sake of causation conclusions…and political agenda’s…

I’m going to leave this feed open-ended. You will have to come back to see which statistics we pay attention to!