Hale "Bonddad" Stewart: The Myth of the Black Swan





[Hale "Bonddad" Stewart is a former bond broker with several regional firms. He has been involved with the financial markets since 1995. He is a graduate of the Thomas Jefferson School of Law's LLM program with a dual concentration in international and domestic taxation.]

The most common argument made against people who see a recovery emerging is that we are in the middle of uncharted waters where the traditional rules of economic analysis don't apply. As I will demonstrate, nothing could be farther from the truth.

This is the third time that I have been through an economic event where there were groups of people who said the old methods of analysis didn't apply. The first situation occurred during the internet bubble. At that time, any company who's name ended in .com could get an IPO and make a million dollars. At this time I was still an institutional bond broker. I had numerous conversations with my clients regarding the events on Wall Street regarding what was happening in the markets. The general consensus was the market was heading for a fall because we lost sight of traditional valuation models. On the opposite side of the debate were people who came up with the most ridicules models to justify nonsensical market valuations. People such as myself were made fun of because we weren't part of the new, cool crowd. In the long run, we were right. Those that claimed the internet revolution would lead to a massive structural change in the methods of valuing stocks are out of the spotlight. In short, those who said we were in a new paradigm were wrong. Standard, run of the mill , boring economics won out.

Then there was the latest expansion. While some argued we were in the middle of the greatest story never told, there were others such as myself who highlighted the fact that job growth was weak and consumer spending was largely paid for with massive amounts of debt rather than equity. In short, this was an exact duplicate of the previous situation. A group of people said a new paradigm was emerging and those of us who were arguing against based on standard, run of the mill and boring economic concepts were pollyannas continually saying the sky was falling. But in the long run, we were right.

Now the US economy is at the end of the worst recession of the last 60 years and a group of economic writers (of which I am one) are saying the worst is over. We use standard, run of the mill, boring economic analysis to state out case. We note that,

1.) the Empire State and Philadelphia regional manufacturing index have been rising since the beginning of the year and are now in positive territory,
2.) Single family housing starts have been increasing for the last several months
3.) Existing home sales have clearly bottomed and are now rising
4.) New homes sales are rising
5.) The rate of GDP decline is dropping
6.) The pace of jobs losses is easing
7.) The rate of initial jobless claims are decreasing
8.) The index of leading indicators has been rising for fouir months at a strong pace
9.) The chicago PMI is increasing and has been since the beginning of the year
10.) The stock markets have rebounded
11.) Short term interest rates are back in line at a traditional risk profile
12.) The rate of decline in industrial production has diminished since the beginning of the year and the industrial production number printed a positive number last month further adding to the bottoming argument.

In other words, all of the things that should happen at the end of a recession are happening and signs are emerging that a recovery is starting. Now a new group of people are arguing that we are in a new paradigm and the old methods of analysis don't apply. In other words, despite the increasing statistical evidence against their argument, they continue to make it. The old methods of analysis are only practiced by old-fashioned people who don't recognize the new paradigm. As such, the previous analysis is moot.

The arguments they put forward to justify this position break down into the following categories:

1.) All other recessions were caused by interest rate policy established by the federal reserve while this is a credit based contraction. This is a very large over-simplification of previous recessions. For example, the S and L crisis was a clear contributor to the recession that began in July 1990 and the stock market crash was a clear contributor to the 2001 recession. Then there were the inflationary build-ups of the 1970s and the implications that had for economy wide behavior. Yet these contributory factors are overlooked. Simply put, each recession is caused by a group of contributing factors. Or put more simply recessions are complicated matters.

2.) Because we're looking at a high probability of a jobless recovery we won't really have a recovery. This argument assumes that those of us who are looking at the data have somehow implicitly said "the current unemployed can go to hell." Nothing could be further from the truth. I have argued several times for the extension of unemployment benefits. While I do not make emotional arguments in this area, I have made them.

3.) Damn it, I just know it. Congratulations. There's not much to argue against here.

4.) The government statistics are manipulated to put us sheep to sleep. Now we're getting into true strangeness. There is a lot of internet chatter about how the government statistics are rigged, how the numbers are controlled by corporate masters to keep the people down etc... First, this is a classic page from the Right Wing Noise Machine -- when the facts aren't on your side, say the facts are flawed. But more to the point, none of these people can point to a legitimate academic paper that specifically proves the government methods of estimating and analyzing government data are so seriously flawed as to be professional statistical malpractice. At this point someone will say, "What about Shadow Stats?" The Bureau of Labor Statistics responded to Shadow Stats claims in a paper last year which essentially debunked Shadow Stats inflation claims. You can read a summation at this link. The point is aside from internet chatter, there is no real raging debate among people who know (statisticians, economists etc...) as to the overall validity of government statistics.

To boil this down, there is no black swan. The black swan will sell a lot of books. The black swan will get you personal TV appearances. The black swan is not backed up by the facts.


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