Those Lying StatisticsOctober 22, 2012 Posted by: Joe Morgan, CFA
Now we take our time, so nonchalant
And spend our nights so bon vivant
We dress our days in silken robes
The money comes
The money goes
We know it's all a passing phase
The cycle described above can be applied to today's economy quitewell. It can be easy to focus on today's individual economicstatistics too much and lose the overall picture of the economy.
For example, consumer prices in 2008 rose a scant 0.1 percent, evenconsidering oil prices touched $147 per barrel during the year andhigh gas price fears dominated during the summer. At that time,market pundits were calling on the Chairman of the Fed Ben Bernanketo increase the Fed Funds rate from two percent to possibly threepercent by year-end.
Instead, Bernanke and Co. made it clear their primary concern wasthe slowing economy and that inflationary pressures would abate aseconomic activity slowed through the remainder of the year.Unfortunately, he was right.
The wild gyrations experienced by such market indicators onlyhighlight their lack of veracity. In fact, many times over theyears, market pundits have been highly confident of such statisticsonly to wake up and find a virtual omelet on their face at 5:30a.m. PT/8:30 a.m. ET.
Why do such highly paid professionals using such advancedstatistical models so often stray far from reality?
The answer, in my opinion, is simple statistics. With so many"economists" providing their opinions, a bell curve of estimates isformed. The average of those estimates should reflect theappropriate group estimate, if only human nature didn't intervene.
Imagine you were one of those lonely economists toiling away in awindow office somewhere in Manhattan with a view of several otherWall Streeters toiling away in their offices. How do you get ahead?
Now, imagine that you get, say, 21 out of 28 individual statisticscorrect - Donovan McNabb should be so lucky! But these 21 "correct"guesses lie around the hump in the distribution of all guesses. Doyou get a pat on the back? Likely not, you were in the majoritycamp, after all.