Fed Computer Models and GIGO

Yes, you bet!  As soon as I booked the loss on my experimental (and I knew it would be premature) short position, along has come my predicted “One last big down” before we finish at new all times highs in a few weeks (says my modeling) and then we will swan song into the fall.

In Peoplenomics Thursday, I went over some of the ideas embodied in the FRB/US econometric model that the Fed uses to study implication of policy changes and what-have-you’s.  I explained what they use as model inputs and some of their publicly disclosed thinking on point.

But that led a subscriber, who we’ll just call Bob, to ask a great question ab out “Garbage In, Garbage Out” – GIGO: “The Fed is still using information generated by those with an agenda unless they are generating all their own data. Ultimately won’t they be done in by the rigged data they use?”

(Continues below)

 

The answer, sadly, is both yes….and no…

We have to assume the Fed would not publish ALL of its fine print for the whole world to inspect.  And when you make up an incredibly complex model as dynamic stochastic general equilibrium (DSGE) models tend to be – far too big for practical home spreadsheet analysis, there are plenty of opportunities within such models to make them “adaptive.”

Let’s simplify the concept so you don’t fall asleep and do a face-plant into the coffee.

Let’s say I figure out a way to calculate where the economy (and to a lesser degree the market) is going based on  10 key government figures.  This is the GIGO part.

Still, the numbers are widely published so as a (not-really) government agency, the Fed can’t just go calling out BS at the very government that let’s it rent America it’s money….

So here’s what happens:  Gigantic economic models are published (the Europeans have one for their central banksters, too) and everyone look at the models with knowing nods.

However, just like in tournament poker, sometime there’s a way to get a peek at “the river card.”

In econometric modeling, you can make a model “adaptive” by measuring prediction versus performance.

When back-testing a model, you might load in data for 2007-2008, for example, and then compare the predicted outcomes with the actuals.

Let’s say you predicted GDP would grow 3.5% but in reality it came in 2.5%.  The model would then (adaptively) plug in various “fudge factors” to tune the model closer to reality.  It might conclude, for example, that the wages worked and average hours worked in the BLS Employment Situation report (EmpSit) were misstated by 0.5% on hours worked and 0.7% on average hourly wages.

While the model will run just fine with the actual raw data – and will present a rosy-enough forecast that no one’s going to bitch too loudly – in the back room somewhere, the adaptive model – which while everything else is running would be piling on the simultaneous equations such that inconsistencies in the source data would be “tuned out.”

People who do a lot of modeling don’t talk much about this adaptive angle.  But it doesn’t just figure into econometric modeling; it also show up in NWP – numerical weather prediction – models, as well.

But the resultant problem (in the weather arena) is not dissimilar from the economic issues.

You maybe haven’t thought too deeply on the matter previously, but Ure’s truly spends probably far too much headspace worrying about the boundary layer in linguistics and practicum.  (If you’re a programmer, you can think of linguistics as analogous to the algorithmic level of program design and the practicum as the application and/or transport layers.)

At the practicum level, understand that there are legit needs for periodic adjustments to instruments.  It doesn’t matter whether it’s a humidity sensor in the weather business, or an economic report from the Labor Department, adjustments will need to be made.

At the linguistics level, just “adjustments” are indeed “adaptive” but don’t necessarily bias the output…or so you’d hope.

A bit of sniffing around the web and you’ll find discussion  of this in papers like this little gem from the ECMWF – which everyone knows is the European Centre for Medium-range Weather Forecast (ECMWF) Reading, United Kingdom.

Anyway, they get into exactly the “making up fudge factors” discussion that sharp-thinking subscriber Bob was after.  As the weather bias-correction discussion puts it:

“The aim of bias correction is to remove the systematic errors corresponding to the observation, the radiative transfer and pre-processing steps. These errors are called observation bias though they rarely correspond to a real statistical bias. Different bias models have been developed to reproduce the shape and magnitude of the observation bias. Whatever the bias model, its parameters (or coefficients) are usually estimated intermittently (e.g. if a new radiative transfer model is introduced) and then held static for long periods. There are scientific and technical incentives to consider an adaptive bias correction, i.e. a correction with a bias model updated at each assimilation cycle.”  [source]

All of which gets us to the answer to Bob’s questions.

  1.  Yes, garbage in, garbage out is real.
  2. Within tight bounds, instrumentation must be calibrated for high resolution data.
  3. However, the biasing/adaptive limits MUST be carefully monitored (and audited) lest models be corrupted deliberately.
  4. This is why, when I look at complex numerical models, it doesn’t matter a whit whether the numbers are economic or weather models, the distortion (and loss of integrity) via biasing really is one of the new “grand loopholes” that would-be social engineers are using to control the public mind on topics as diverse and the Economy and Climate.

Or to sum up:  Who’s correcting the Correctors?

Even more nefarious when the nature of the Correcters Correcting is as “in Ure face” as the climate-jiggering being done via smartcards in Australia or via “tweeks” to economic models at the U.S. economic policy level.

There, bet you feel better knowing how little actual effort it takes to spin your thinking, don’t you?

Add a fudge factor, drop half a degree, add or subtract average hours worked, and your whole way of viewing the world is wrecked.

Auuuummmmmm.

Pricing Extinction

Great Bloomberg article over here on how does one price a potential extinction-level event?

Be sure and watch the video on the page as it goes over NK plans to launch missiles and have them land 30-40 KM from Guam.

Kid Krazy in NK might as well put on a jersey with a big bull’s eye on it.  Not especially bright, to our way of thinking.

Producer Prices

With the Dow set to open down another 60, or so, based on global Korea jitters, we would be remiss if we didn’t mention Producer Prices just out from Labor:

“The Producer Price Index for final demand declined 0.1 percent in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices inched up 0.1 percent in June and were unchanged in May. (See table A.) On an unadjusted basis, the final demand index
increased 1.9 percent for the 12 months ended in July.

Over 80 percent of the July decrease in final demand prices is attributable to the index for final demand services, which fell 0.2 percent. Prices for final demand goods edged down 0.1 percent.

The index for final demand less foods, energy, and trade services was unchanged in July following a 0.2-percent advance in June. For the 12 months ended in July, prices for final demand less foods, energy, and trade services rose 1.9 percent.

Final Demand

Final demand services: The index for final demand services moved down 0.2 percent in July, the first decline since a 0.3-percent drop in February. Most of the July decrease can be traced to margins for final demand trade services, which fell 0.5 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.) Additionally, prices for final demand transportation and warehousing services declined 0.8 percent. In contrast, the index for final demand services less trade,
transportation, and warehousing advanced 0.2 percent.

Meantime, the clock is running toward the next inflation report due out tomorrow – Consumer Prices.

Bitcoins this morning convert to about $3,391 each, as we told you to expect when the “Great Hesitation” was over.

Fleeing the Coastlines

No, not some ridiculous global subsidence talk or coming within range of NK missiles.

This is something more basic (and should we say tangible?):  Economics.

Home Affordability Continued to Shape Migration Currents as Homebuyers Looked to Leave Expensive Coastal Cities in the Second Quarter.”

This could be read as “Good news” out here in fly-over country.

 Viral Idiocy

Shame on you for actually thinking!

Why aren’t you watching the BIG stories like “Cockroach lands on reporter’s boobs before live broadcast“?

How’s Fishing?

We’re wondering because the Mueller fishing expedition is in full-swing: FBI conducted predawn raid of former Trump campaign chairman Manafort’s home.

Since beer and fish are synonymous we’ll bet one as follows:

Care to bet the judge issuing the search warrant was an Obama appointee?”

My sense in that Manafort’s computer would likely be taken and searched….I mean, that’s just a guess where the fish might be biting.

Here’s an interesting idea:  Could Trump pardon Manafort preemptively?

Captions We Wonder About

See the story here: https://www.thesun.co.uk/news/4214321/russian-isis-fanatic-arrest-turkey-drone-plane-crash/

See the photo caption? “An F-15 fighter jet lands at Turkey’s Incirlik Air Force Base (file image)”?

As a pilot, this kind of caption bothers me:  Don’t you think the aircraft would have its landing gear down?

Judging by the attitude and heat signature, sure looks more like a takeoff or low pass to me…and yes, I have landed on a parallel runway with an F-15 out in Tucson a few years back…I do know what they look like.

It’s the little things like this that jump out at us…useless, of course.

Comments

Fed Computer Models and GIGO — 18 Comments

  1. Why don’t you ask your buddy Bill Clinton all about funding N. Korea? And then get back with us will ya?

  2. I’m just now sure how republicans cannot suffer from cognitive dissonance. Very recently Team Trump attacked the US intel community, as he’s done for the past year or longer. They know nothing, they get it wrong, the deep state is out to get him, the deep state is all liberals, screwed up Iraq WMD intel.

    Now it’s a 180 degree pivot – NK has small nukes on the tip of ICBMs and we’re willing to risk tens of millions of lives over it. Lo n’ behold it’s all credible intel now.

    Can anyone explain this to me??

    I ain’t no democrat nor republican, but I don’t know how republicans manage the party talking points.

    • That’s under the old program which is not available for those hired after 1993(who weren’t part of the social security plan). The current plan is worth about 1% of average of highest 3 years of pay times years of government service, depending on what fund you’re being paid out of. I will get about 20-25% of my average salary, which is less than what I’ll get from social security, when I retire. Non-appropriated fund employees don’t get pensions.

    • To clarify a little about the idea that all feds get 80% of their salary in retirement at an early age….

      I can’t talk to state or local gov retirees, but at the US federal level as a civilian, 80% of one’s salary in retirement only happens after at least 40 years or more of service – and if the worker started before the mid-1980s – and if they are still in the old CSRS plan. So, if one has been a fed for a few decades, retiring at age 55 is possible, but to receive 80% at age 55 the person would have to have started working full time and without a break for the feds at age 15.

      These days there are virtually no more US federal employees retiring at the 80% level because anyone that started after about 1988 or so is under the FERS plan and has what is essentially a 401K. Their retirement annuity is a function of how much cash they invested while working as a fed and how the market did during all those years – as well as how it does now. In a large market drop, they experience that same losses as a normal 401K account would.

      I had a Canadian friend tell me that Canada’s federal level retirees get 90% of their salary in their 50s, but I haven’t verified that statement.

      Any way it’s sliced, and with only a few exceptions for very specialized career fields in the very top pay scales, a person has to be at least in their 60’s before they might receive a US federal retirement annuity that is anywhere near 80%. And that possibility will be gone completely in a few years.

  3. Jon ,

    Remember when the lights go out Ure’s advice: Plan for the worst, HOPE for the best. But when the worst shows up, be better armed, better prepped, mental tougher, and with back-up plans for your back up plans. And these will involve vehicles with ICEs because there will be no working charging stations…

  4. Off topic but may interest your anti-gravity itch. New patent from the EMdrive inventor. Supposedly aircraft performance. Space drive???

    https://www.nextbigfuture.com/2017/08/emdrive-inventor-shawyer-patenting-new-approach-and-has-bigger-claims.html

    What I wonder is why the government would let him publish this if it works? This has astounding military implications. Also it has implications for asteroid mining which would possibly set off a boom for mineral mining in Space.

  5. Hey George, if a judge issued a search warrant, then he or she had to be convinced that there was probable cause that a crime was committed. And since you raise party affiliations, let’s not forget that Mueller is a Republican. Man, does Trump need a war right about now, or what?

    So, are we all still good with giving a clearly unstable guy the launch codes in exchange for tax cuts on the rich and deregulation? Now that he off the cuff triggered a nuclear crisis the ‘likes of which not seen’ since 1962 Cuba? Best, Mike.

  6. Dear Sir,

    Landing long is ill-advised? One could surmise the F-15 image at Adana was taken on March 7, 2003, 12 days before the invasion of Iraq. If so, the photographer passed away six years ago in a Libyan battle theatre. As of this past February, the owner of your above-quoted “The Sun” newspaper was the Forbes 96th richest person in the world.

  7. Perhaps, humans are too smart for their own good. “BOOM,” and it’s all gone?! Afterward the United Nation will meet and resolve that it was just an accident. Now, where is all that intelligence? I read too much and seems schizophrenia rules the world.

  8. It seems to me that if the indicators are showing a bull market, you would be doing experimental trades on the upside and not on the short side. If you bought $30K of TQQQ when the indicators went bullish what would your profits had been compared to trying to time the market? I am trying to make sense of your short side bias. This has been a consistent pattern since I have been a Peoplenomics subscriber for a little over a year.

  9. We just cruised past a 1.25% pull back on the dow. Your insight on this was great! The strength of this may see it to a full 2% by tomorrow, wherein I’m hoping your ATH predictions gain traction. See you in the puts pit :)

  10. Regarding the F-15 photo. Without question that aircraft is either completing a low approach or just took off and sucked up it’s gear immediately – no way that’s a landing – the aircraft is clean, accelerating, and climbing.

  11. I would love to read your comments on how the USA Fiscal Year end on Sept 1 will be played with the predicted market crash and slide.

  12. George,
    I’ve been thinking about the GIGO effect as well. If the FED is really using the published unemployment rate (a gamed number) as the basis for their Phillips Curve assumption and corresponding inflation, they can only jump to wrong conclusions. They are trying to preemptively head off inflation, which is not coming (see today’s PPI). The web of lies is so deep in all the gov’t data, that their reliance on it leads to flawed decision making. Another reason for the divergence between soft data (surveys) and hard data (results). Looking forward to this weekends Peoplenomics report. IF folks aren’t subscribing to it they are missing out.

  13. If the template is GIGO, for “Garbage in, Garbage out,” we tweak it maliciously to “Gossip in, Gospel out.”

  14. “Could Trump pardon Manafort preemptively?”
    I don’t know (I think so), but he should pardon sheriff Joe (Arpaio) now!