I am poolside this week with my lovely and infinitely tolerant (some would argue masochistic) bride, and would be lying if I tried to fake a real The Worked Shoot, so will keep this brief.
First is a procedural issue, as I have started to post Dodo Bird Model Portfolio updates on Twitter as changes are made. I am going to turn on the Chat function in Substack this coming week and have no idea what that may mean from an email perspective. Please bare with me as I figure it out - my goal is to keep email to a minimum so as to not clutter your inbox. If that looks like it will be the case, updates may be limited to Twitter.
Second is this working paper from NBER from August 2008, titled “What’s a Recession, Anyway?” in which the abstract states:
Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.
As a reminder, NBER would subsequently date the start of that business cycle contraction as December 2007. This is hard stuff, and the algorithm used in the paper was obviously not very good at identifying that recession.
I recommend you read the paper and reflect upon where things stood in August 2008 with the benefit of hindsight, and consider where things stand at present. It contains many pearls of wisdom despite the paper having been published 8 months into the recession.
The details of this cycle are VERY different than that one, in my opinion, but the difficulty of forecasting recessions or even identifying them in real time has not changed. Back to the paper:
Few econometric models and few backs-of-envelopes have the kind of nonlinearities that produce recession forecasts as central tendencies, and the forecast record has been more like the prediction of 1 of the last 10 recessions. The episode that we are currently experiencing has been marked by an unusually large number of very vocal recession pronouncements. That, by itself, provides statistical evidence that we are not in a recession.
Does that last part sound familiar relative to the present?
This is from the book I am re-reading poolside, on page 60 of “How Nature Works” by Per Bak:
The sand forecaster’s situation is similar to that of the weatherman in our complex world: by experience and data collection he can make “weather” forecasts of local grain activity, but this gives him little insight into the “climate”….
Then on pages 185-186:
But economics is like sand, not like water.
Economists close their eyes and throw up their hands when it comes to discussing market fluctuations, since there cannot be any large fluctuations in equilibrium theory.
The various economic agents follow their own, seemingly random, idiosyncratic behavior. Despite this randomness, simple statistical patterns do exist in the behavior of markets and prices. Already in the 1960s, a few years before his observations on fractal patterns in nature, Benoit Mandelbrot analyzed data for fluctuations of the prices of cotton and steel stocks and other commodities…….He found a “Levy distribution” for the price distributions. The important feature of the Levy distribution is that it has a power law tail for large events, just like the Gutenberg-Richter law for earthquakes. His findings have been largely ignored by economists, probably because they don’t have the faintest clue as to what is going on.
Please keep all of this in mind as the public debate on the current business cycle and associated risks unfold.
Lastly, I apologize for lying about my lie - this was too long….I gotta get back to the polka.
Thank you for sharing your brain with us. Really appreciate this!
Enjoy poolside with your bride.