The Graphs Go Southeast

The Graphs Go Southeast
If you always overestimate, and don't change, what does that imply?Play Quizzes 4

If you always overestimate, and don’t change, what does that imply?

Since the FOMC started providing their estimates on economic aggregates four years ago, I’ve been simplifying them, and posted a weighted average to cut through the clutter of their releases.  From the above graph, you can see one thing that is consistent:  They overestimate GDP.  Far from seeing GDP over 3%, GDP has come in squarely in the 2% range.

Exodus Point Outperforms As Rates Trading Profits Jump [Exclusive]

Value Bin Default RatesMichael Gelband’s Exodus Point launched in 2018 with $8.5 billion in assets. Expectations were high that the former Millennium Management executive would be able to take the skills he had learned at Izzy Englander’s hedge fund and replicate its performance, after a decade of running its fixed income business. The fund looks to be proving Read More

It may even be that this is slowly wearing on the participants, who have progressively lowered their initial estimates of future GDP over time.  You can see that in the initial estimates of GDP 2014-2018, and also the decline in long-term GDP moving from 2.5% to 2.0% in four short years.

The FOMC is no different than the rest of us — they are subject to groupthink and playing catch-up.


You can give them a little more credit on unemployment.  At least things are going the way they would like.  That said, improvement in the unemployment rate has exceeded their estimates, while GDP has fallen under their estimates.

They live in a bubble, so please don’t tell them that labor measures don’t correlate so tightly with the economy as a whole.  I mean, in the long run, the correlation is high and significant, but as far as short-term policy goes, the relationship has a lot of noise, particularly amid globalization and improvements in technology.


Same applies to the PCE inflation rate… they think they can get inflation going (whether truly desirable or not).  So where is it?  Federal Reserve, you say you have the vaunted powers to create and destroy inflation.  If you can do something, do it.

My guess is that the Fed won’t do it.  As with most central banks, they have engaged in a game where they increase some aspects of internal credit, and in a way where precious little if any leaks out to the unfavored wretches with no access.

On the short-term bright side, they absorb government debt, which makes it easier for the US Government to keep our taxes low.  On the dim side, central banks buying lots of government debt has tended to backfire in the past.


Finally, the FOMC participants have overestimated for the last four years the need and willingness to tighten monetary policy.

Can we agree that QE really didn’t do that much, and that the unemployment rate pretty much solved itself, aside from losing a lot workers permanently?  These graphs behave the way a bunch of “true believers” would think their great power should  work, and them slowly give in to reality annually, but not permanently.

Anyway, consider these articles post-Fed tightening:

Fed Ends Zero-Rate Era; Signals 4 Quarter-Point Increases in 2016 Bloomberg)

This article is too excited, the math of the FOMC indicates more like 3 quarter-point moves.  Also note that the FOMC is not very permanent about their views, plans, or whatever.

The Fed and Wall Street Differ on How High Rates Will Go (Bloomberg)

Wall Street, correctly looking at the past says that the Fed has moved slower than they said they would.  Why should it be any different now?

Fed Raised Rates Without a Hitch, and It Only Took $105 Billion (Bloomberg)

Too triumphalist about the first tightening.  Wait for the cost of funds to catch up at the banks.

Fed Hikes, but Some Rates Veer Lower (WSJ) Subtitle: Yields on Treasurys drop after central-bank move

That’s part of what I would tell you to watch — if the yield curve flattens quickly, the FOMC will not do so much, most likely.  They will still keep going till something blows up.

One final note, and one that I don’t have a link for… Moody’s suggested in a macroeconomic note that yield spreads on junk debt are too high for the FOMC to tighten much.  Nice thought, though we are in an unusual situation for both Fed funds and junk debt.  That rule may not apply.

Updated on

David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
Previous article When Medical Doctors Are Entrepreneurs
Next article NATO Alliance Ground Surveillance Aircraft Successfully Takes Flight

No posts to display