These interviews changed my mind on forward risks

[Lsbcal]

Two WealthTrack videos I think are worth watching are:

Interview with Ed Hyman (36 minutes): https://wealthtrack.com/extra-really-bad-to-better-full-interview/

Interview with Paul McCulley (36 minutes): https://wealthtrack.com/influential-economist-paul-mcculley-on-the-lasting-necessity-of-record-monetary-fiscal-stimulus/


FWIW, here are some of my notes from the McCulley podcast (no video). Bold font is what I thought is important to me:

May 30: Interview with Paul McCulley about Fed and policy going forward (from WealthTrack)
deflation/depresion causes merger of monetary/fiscal policy
fiscal policy takes the lead and monetary policy is second
best for period where inflation is not at all a threat
will have a long period of this policy. Fed will let inflation go up until economy recovers.
will stay at near zero rates until economy is up AND inflation higher
We will move towards fiscal policy that reduces income inequality. Growth is favored.
So will not quickly go back to a "normal" interest rate policy
Recovery will start in 2nd half of year.
Growth rate high then but will not get back to start of year.
V shape but the right side doesn't get up to full V
Several years to get back to early 2020 levels
Fed to lend to state/local govt through grants
Takes Congress to do this. Big political debate.
Elections will shape that.
Better PPP program to come for small businesses.
Not concerned about size of deficit now.
Stock market is rational now.
If we hit all time highs, policitally that will cause public questions
Gold could be in a multiyear bull market. Devaluation of most currencies against gold.
Equity preferred, Treasuries not desireable. Credit side of fixed income best (corporate bonds, IG and junk)
Some emerging market exposure good for long term.
FAANG's still good.

 

[OldShooter]

I suggest reading Nate Silver's chapter on economic forecasting in "the signal and the noise." It's an excellent book overall, but that chapter is especially valuable IMO when considering guys like these two.

My favorite old quotation: "The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration.

Me? I don't know nuthin' But, according to Silver and many others, no one else does either.

 

[Markola]

+1. Regarding the declarative WealthTrack videos, wow, all that and a bag of chips? What a deal! I understand that learned folks cannot help but speculate but to make statements like “The stock market is rational now” and “the recovery will be _____” and “a better PPP program to come for small business,” etc. is laughable. No one has any idea. Makes my skin crawl but the truly dangerous articles and podcasts are the ones that say, “This is what’s going to happen, so you should do x,y and z.” Too many people don’t have the experience to know that nobody knows nuthin’.

I was curious enough to look up who Paul McCulley is. I guess someone like that depends on making their living on convincing others they alone can divine the future. https://en.wikipedia.org/wiki/Paul_McCulley

 

[MichaelB]

Two WealthTrack videos I think are worth watching are:

Interview with Ed Hyman (36 minutes): https://wealthtrack.com/extra-really-bad-to-better-full-interview/

Interview with Paul McCulley (36 minutes): https://wealthtrack.com/influential-economist-paul-mcculley-on-the-lasting-necessity-of-record-monetary-fiscal-stimulus/

Thanks for the post and links. Paul McCulley is a smart guy who understands the Fed and monetary policy. IMO always worth a few minutes of my time.

 

[OldShooter]

... I was curious enough to look up who Paul McCulley is. I guess someone like that depends on making their living on convincing others they alone can divine the future. https://en.wikipedia.org/wiki/Paul_McCulley

Interesting piece. I see nothing in there that would indicate that he has ever predicted anything accurately; certainly it does not show a track record that would indicate that he is anything but another chattering monkey. Just for grins I text searched the article for "predict," "forecast," "accurate," and "success." Nothing.

One of the observations that Nate Silver makes is that the class of talking heads and high-profile prognosticators is actually less likely to be correct than the average economist. The reason, he theorizes, is that to keep their perches they cannot offer nuanced and probablistically hedged predictions. It has to be drama and bombast.

 

[ExFlyBoy5]

+1. Regarding the declarative WealthTrack videos, wow, all that and a bag of chips? What a deal! I understand that learned folks cannot help but speculate but to make statements like “The stock market is rational now” and “the recovery will be _____” and “a better PPP program to come for small business,” etc. is laughable. No one has any idea. Makes my skin crawl but the truly dangerous articles and podcasts are the ones that say, “This is what’s going to happen, so you should do x,y and z.” Too many people don’t have the experience to know that nobody knows nuthin’.

I was curious enough to look up who Paul McCulley is. I guess someone like that depends on making their living on convincing others they alone can divine the future. https://en.wikipedia.org/wiki/Paul_McCulley

Interesting piece. I see nothing in there that would indicate that he has ever predicted anything accurately; certainly it does not show a track record that would indicate that he is anything but another chattering monkey. Just for grins I text searched the article for "predict," "forecast," "accurate," and "success." Nothing.

One of the observations that Nate Silver makes is that the class of talking heads and high-profile prognosticators is actually less likely to be correct than the average economist. The reason, he theorizes, is that to keep their perches they cannot offer nuanced and probablistically hedged predictions. It has to be drama and bombast.

Preach it!!! There is [-]almost[/-] no rational basis for what is going on in the markets and for ANYONE to say otherwise is a fool in my opinion. There are simply way too many variables and we have NEVER been here before.

 

[OldShooter]

Preach it!!! There is [-]almost[/-] no rational basis for what is going on in the markets and for ANYONE to say otherwise is a fool in my opinion. There are simply way too many variables and we have NEVER been here before.

Actually, it is much broader than that. Humankind has never produced a model or a method that is useful for predicting the future of any complex system. Weather forecasting is about as close as we come. There the physics, the mathematics and the inputs and outputs are well known and about all we can do for reliable predictions is to go out about two weeks.

The classic statement of the problem is the chaos theory example of the butterfly flapping its wings in Mexico and causing a hurricane in the South Atlantic. Even seemingly simple systems are too complicated to reliably forecast. They are indistinguishable from random.

This applies to other high-profile "models" too. Like climate prediction and pandemic prediction. We hunger to know and we want to believe that some wizards, somewhere, can tell us. In reality they are all like the Wizard of Oz. Basically fraudulent.

I've been re-reading Taleb lately. He gives an example of modeling a hard break on a billiards table. Sounds simple, right? The people developing the model discovered that to be accurate on the eighth impact, they had to consider the mass of someone standing near the table.

 

[Lsbcal]

I thought some of the comments about the Fed policy were interesting. On May 11 the Fed announced back stopping of investment grade bonds (and even junk bonds to some extent) by buying ETF's. They have since done some of this and the IG bond funds have done pretty well. I am starting to be more appreciative of what the Fed can do.

Why do people who do not believe that market discussions of this type are useful bother with this forum, i.e. "Stock Picking and Market Strategy" ? OK, I get it that this is a social media site and that markets are made up of many different views. I would just suggest people practice tolerance or at least discuss cogent points. Just saying "nobody knows nothing" is really unhelpful.

 

[Lakewood90712]

Actually, it is much broader than that. Humankind has never produced a model or a method that is useful for predicting the future of any complex system. Weather forecasting is about as close as we come. There the physics, the mathematics and the inputs and outputs are well known and about all we can do for reliable predictions is to go out about two weeks.

The classic statement of the problem is the chaos theory example of the butterfly flapping its wings in Mexico and causing a hurricane in the South Atlantic. Even seemingly simple systems are too complicated to reliably forecast. They are indistinguishable from random.

This applies to other high-profile "models" too. Like climate prediction and pandemic prediction. We hunger to know and we want to believe that some wizards, somewhere, can tell us. In reality they are all like the Wizard of Oz. Basically fraudulent.

I've been re-reading Taleb lately. He gives an example of modeling a hard break on a billiards table. Sounds simple, right? The people developing the model discovered that to be accurate on the eighth impact, they had to consider the mass of someone standing near the table.

All we need now to put icing on the cake is: North Korea invades the south , An earthquake on the New Madrid fault , or , a true Alien invasion.

 

[Dtail]

I thought some of the comments about the Fed policy were interesting. On May 11 the Fed announced back stopping of investment grade bonds (and even junk bonds to some extent) by buying ETF's. They have since done some of this and the IG bond funds have done pretty well. I am starting to be more appreciative of what the Fed can do.

Why do people who do not believe that market discussions of this type are useful bother with this forum, i.e. "Stock Picking and Market Strategy" ? OK, I get it that this is a social media site and that markets are made up of many different views. I would just suggest people practice tolerance or at least discuss cogent points. Just saying "nobody knows nothing" is really unhelpful.

I hear ya.
It appears they are set on that everything is working as normal in the markets with a little caveat of political changes could cause some of the statements to change.

 

[Spock]

Anybody who says we don't have inflation NOW needs to follow me through Fry's/Safeway/Walmart grocery store.

Food/household categories have gone from 30% of my spending in 2019 to 68% of my spending for the last 3 months and I haven't bought meat since March.

 

[pb4uski]

.... Just saying "nobody knows nothing" is really unhelpful.

It is just that there is a lot of educated guessing going on that is as likely to be right as it is likely to be wrong.

Does that sound better to ya?

 

[MichaelB]

I thought some of the comments about the Fed policy were interesting. On May 11 the Fed announced back stopping of investment grade bonds (and even junk bonds to some extent) by buying ETF's. They have since done some of this and the IG bond funds have done pretty well. I am starting to be more appreciative of what the Fed can do.

Why do people who do not believe that market discussions of this type are useful bother with this forum, i.e. "Stock Picking and Market Strategy" ? OK, I get it that this is a social media site and that markets are made up of many different views. I would just suggest people practice tolerance or at least discuss cogent points. Just saying "nobody knows nothing" is really unhelpful.

The McCulley interview was good, 30 minutes well spent. Nice background and analysis of the current economic situation, comparison with the GFC of '09, explanation of Fed and fiscal responses, and what policy measures he expects to come.

Not sure why people bother to comment without knowing who McCulley is or bothering to listen to the interview. He certainly is no "TV celebrity or high profile prognosticator" and the tired old references to economists and forecasters are off the mark, as this interview isn't about predictions but analysis. McCulley is a better interviewee than CM an interviewer, and (IMO) she missed some opportunity to dig deeper, but that doesn't detract from what's there.

If some people think there is no value in an interview such as this, they should just ignore the discussion, move on and let others engage. To each his and her own ...

 

[MRG]

It is just that there is a lot of educated guessing going on that is as likely to be right as it is likely to be wrong.

Does that sound better to ya?

+1

They're still struggling with predicting weather. I watched a big storm just split around my house. Weather said it would be raining now.

It may happen the way he predicted, it could. I'll wait to see.

 

[OldShooter]

I ... Just saying "nobody knows nothing" is really unhelpful.

Not sure what to do with that, since the data support the assertion. Is @pb4's phrasing more acceptable?

Please read the Nate Silver chapter and let us know if that changes your view on the matter.

 

[Leo1277]

I suggest reading Nate Silver's chapter on economic forecasting in "the signal and the noise." It's an excellent book overall, but that chapter is especially valuable IMO when considering guys like these two.

My favorite old quotation: "The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration.

Me? I don't know nuthin' But, according to Silver and many others, no one else does either.

Nate Silver's website now has a quite interesting survey in which they bring together a rather large number of respected economists and let them make estimates about what to expect over the next quarters and years due to the coronavirus situation:

https://fivethirtyeight.com/feature...of-economists-says-it-will-likely-take-years/

The specific questions and the detailed statistical analysis of the answers can be found here:

http://www.igmchicago.org/wp-content/uploads/2020/05/Results-Round-01.pdf

 

[Lsbcal]

Nate Silver's website now has a quite interesting survey in which they bring together a rather large number of respected economists and let them make estimates about what to expect over the next quarters and years due to the coronavirus situation:

https://fivethirtyeight.com/feature...of-economists-says-it-will-likely-take-years/
...

Took a look and I think the survey results are interesting. At least it gives us an idea of the general consensus. Not surprising that it is bleak.

 

[Leo1277]

Actually, it is much broader than that. Humankind has never produced a model or a method that is useful for predicting the future of any complex system. Weather forecasting is about as close as we come. There the physics, the mathematics and the inputs and outputs are well known and about all we can do for reliable predictions is to go out about two weeks.

The classic statement of the problem is the chaos theory example of the butterfly flapping its wings in Mexico and causing a hurricane in the South Atlantic. Even seemingly simple systems are too complicated to reliably forecast. They are indistinguishable from random.

This applies to other high-profile "models" too. Like climate prediction and pandemic prediction. We hunger to know and we want to believe that some wizards, somewhere, can tell us. In reality they are all like the Wizard of Oz. Basically fraudulent.

I've been re-reading Taleb lately. He gives an example of modeling a hard break on a billiards table. Sounds simple, right? The people developing the model discovered that to be accurate on the eighth impact, they had to consider the mass of someone standing near the table.

There is a bit of oversimplification going on here, especially related to "never" and "any complex system". The story of Chaos Theory is that it studies systems that have sensitive dependence on initial conditions, and the butterfly effect and multi-ball billiards are famous such systems.

But there are two issues: one, many very complex systems can be modeled very well - as an example, assume that you have 10 to the power of 25 molecules in the left half of a box that is separated with a dividing wall from the right half which is initially empty, and then you open the wall and ask yourself, after a short time, how many particles will be on each side - the answer is "half", and that can be ascertained with incredibly high accuracy.

Two, most chaotic systems including the two mentioned are still what is called deterministic, i.e. if you know the initial conditions exactly, our physics and math is able to predict what will happen. The issue is that in practice with these systems, the initial conditions are NOT known precisely enough, and within the accuracy we know them, there are a whole range of possible outcomes that are vastly different. So it is much more a matter of measuring the initial state sufficiently than of not understanding the underlying mechanisms.

That is at its core what has been making weather forecasting better and better over the years, while the underlying science doesn't really change. In the case of the virus, that's where the demand for "testing" comes into play - it is an effort to understand the current state of the system better to make more informed predictions.

 

[OldShooter]

... Two, most chaotic systems including the two mentioned are still what is called deterministic, i.e. if you know the initial conditions exactly, our physics and math is able to predict what will happen. The issue is that in practice with these systems, the initial conditions are NOT known precisely enough, and within the accuracy we know them, there are a whole range of possible outcomes that are vastly different. So it is much more a matter of measuring the initial state sufficiently than of not understanding the underlying mechanisms. ...

I agree completely and I never said that we didn't have technical understanding of things like weather. We also have the understanding of flow in a turbulent trout stream, but we are unable to predict it exactly because we can't measure its state in fine enough detail and probably can't compute fast enough either. The result, though, of these inabilities to measure is that we cannot distinguish the actual system's results from random. Does that make them in fact random? That's a job for the philosophers, like those noiseless trees falling in the woods.

Agreed too, wx forecasting is getting better because we have faster computers and more sample points, but IMO it is probably physically impossible to ever get enough data to forecast today, for example, the wx on July 4, 2021.

When we get into softer stuff, like predicting the fall of the Soviet Union or predicting the economy we of course fail. If those systems are deterministic we'll never even know.

Re oversimplification, I don't see that "never" oversimplifies the current situation. Had I said "never will" I guess we could have warring crystal balls, but I believe its true to say that mankind has never modeled any complex system at an accuracy level that is useful for forecasting. Useful for trying to improve knowledge of the system and for cranking out PhDs, sometimes and maybe, but for actually predicting what will happen --- no.

 

[OldShooter]

Nate Silver's website now has a quite interesting survey in which they bring together a rather large number of respected economists and let them make estimates about what to expect over the next quarters and years due to the coronavirus situation:

https://fivethirtyeight.com/feature...of-economists-says-it-will-likely-take-years/

The specific questions and the detailed statistical analysis of the answers can be found here:

http://www.igmchicago.org/wp-content/uploads/2020/05/Results-Round-01.pdf

Thanks. He is so negative on economic forecasting in the book that I am surprised that he is even involved in this. Many of the predictions are specific enough to test, too. That will be interesting. I have tucked the PDF away for future comparisons to reality.

 

[Leo1277]

Thanks. He is so negative on economic forecasting in the book that I am surprised that he is even involved in this. Many of the predictions are specific enough to test, too. That will be interesting. I have tucked the PDF away for future comparisons to reality.

Nate Silver is a smart guy, and so is his crew; note that he stays far away from making his own economic predictions here. Rather, he lets others (supposedly renowned economists) talk and make their guesses, and he and his team just do the statistical analysis of what they say. In all cases I know, he does his statistical analysis correctly, and more importantly, he knows what his data mean, and more importantly yet, what they don't. This is very different from the talking heads that he complains about in his book.

As a small tidbit about the analysis he presents here, it's worthwhile to not only look at the averages, which are indeed on the bleak side, but also the ranges or standard deviations of the answers, which show that also the economists who supposedly know more than the latest financial evangelist have a range of estimates and no universal crystal ball.

It's as important to clearly know what you don't know than to know what you know.

 

[Leo1277]

Re oversimplification, I don't see that "never" oversimplifies the current situation. Had I said "never will" I guess we could have warring crystal balls, but I believe its true to say that mankind has never modeled any complex system at an accuracy level that is useful for forecasting. Useful for trying to improve knowledge of the system and for cranking out PhDs, sometimes and maybe, but for actually predicting what will happen --- no.

I think the opening statement of your previous post is a bit unfortunate and too general: "Actually, it is much broader than that. Humankind has never produced a model or a method that is useful for predicting the future of any complex system."

I would dare to say that an airplane is a pretty complex system, and we usually get these systems to and fro with a failure rate of less than one in a million; so the models that these aviation engineers have produced are pretty good in predicting the outcome of their flights, namely to safely have arrived at point B. And of course there are many other complex systems that humans have done a remarkable job understanding and predicting.

 

[Leo1277]

The McCulley interview was good, 30 minutes well spent. Nice background and analysis of the current economic situation, comparison with the GFC of '09, explanation of Fed and fiscal responses, and what policy measures he expects to come.

I listened to the whole interview, and overall I think it's quite well done, and the analysis and predictions are rather nuanced and to the point, and definitely not just made to impress an impressionable audience.

One thing where I think he is oversimplifying a bit, and perhaps crucially so, is that he says the economy is like a ball in a pool that's being pushed under water by the virus, but as soon as the virus is gone by vaccine, the ball will pop right back out. The reason given is that the functioning of the economy is held together by contractual agreements, and these continue to hold, virus or not. It's a more sophisticated version of "the economic fundamentals continue to be strong".

I personally think this is a bit overly optimistic. The economy is not built to be as robust as his ball; it's more like a ship in an ocean, which is (hopefully) designed to withstand being yanked around by most of the fiercest storms the engineers could think of. But if you start pushing this boat under water forcefully enough, different from the ball, it will not pop right back out again, but rather take on water and be in serious trouble, and possibly sink.

 

[brewer12345]

I listened to the whole interview, and overall I think it's quite well done, and the analysis and predictions are rather nuanced and to the point, and definitely not just made to impress an impressionable audience.

One thing where I think he is oversimplifying a bit, and perhaps crucially so, is that he says the economy is like a ball in a pool that's being pushed under water by the virus, but as soon as the virus is gone by vaccine, the ball will pop right back out. The reason given is that the functioning of the economy is held together by contractual agreements, and these continue to hold, virus or not. It's a more sophisticated version of "the economic fundamentals continue to be strong".

I personally think this is a bit overly optimistic. The economy is not built to be as robust as his ball; it's more like a ship in an ocean, which is (hopefully) designed to withstand being yanked around by most of the fiercest storms the engineers could think of. But if you start pushing this boat under water forcefully enough, different from of the ball, it will not pop right out again, but rather take on water and be in serious trouble, and possibly sink.

Yeah. In bankruptcy contracts get torn up.

 

[Leo1277]

Yeah. In bankruptcy contracts get torn up.

Yep, that's one drastic way of paraphrasing it. But more than that, even if there is no bankruptcy per se, there will be many scenarios that the contracts just didn't foresee, even assuming best intentions, and so they will have to be modified etc.