Panic, Housing, and the Economy: Ritholtz versus Malpass
A current theme at "A Dash" is how people can use various sources of information in "doing their homework". Inevitably, we must all make choices about what to read and how to use the information. We are working on some general criteria for this purpose.
There is so much data, and so little time!
Choosing Sources
The approach at "A Dash" is eclectic and modest. We recognize the intelligence and expertise of others. We try to find the real experts on any topic so that we can invest and trade effectively. We understand enough about economics, government data, and research methods to act as an intelligent consumer. We are particularly suspicious of opinions from hedge fund managers whose knowledge is a mile wide and an inch thick. Those who concoct complex theories without sound causal models or quantification --and then tell the world about their wisdom-- are immediately suspect.
A Great Example
An excellent article in today's Wall Street Journal illustrates this point. Among sources who regularly deliver a helpful perspective is David Malpass, Chief Global Economist for Bear Stearns. We like Malpass because he (and his team) have consistently found a stronger interpretation of economic data than his competitors at other firms. He has explained various important subjects like why this recovery is different from those in the past, how to make the right interpretation of labor force participation, why household debt and savings data are misleading, and other similar topics that, quite frankly, most market pundits do not seem to understand. At "A Dash" we call him the Mythbuster. He has had the best analysis of the post-bubble economy and has also made some good market calls along the way. Most importantly for us, he has had excellent explanations and data at each step, carefully laid out in the slides for his frequent conference calls.
We wondered whether the current controversies surrounding his firm would silence him. He has a well-known and carefully documented viewpoint. While Bear Stearns clients get the regular benefit of his insights, he frequently publishes in major business publications like the Wall Street Journal.
We were delighted to see this morning's Wall Street Journal op-ed piece where he analyzes the state of panic (as of last Friday), the economy, and housing issues. We always like the public articles, since (unlike proprietary reports for Bear clients like us), we can share them with our readers. Today's article is a typical Malpass piece, cogently argued and supported with some excellent data. Everyone should read the entire column, but here a few high spots:
- Low jobless claims and unemployment is more important for the economy than housing or the stock market. (Makes sense if you think about it). It is reflected in consumer confidence data.
- Residential construction and home inventories are not that far from long-term averages.
- Those highlighting the impact of housing on the economy choose a wildly abnormal period for the comparison.
- Losses from foreclosures are "double-counted" in many analyses; and - -most importantly
- The cost of mortgage resets (from ARM's) is very small compared to overall income gains.
Read the entire article to see the data (and get some valuable insight).
Ritholtz's Criticism
We were surprised to see the aggressive criticism of this article on Barry Ritholtz's site. The Big Picture is also one of our regular sources. Barry always has his finger on the issues of the day. While we may not agree with his conclusions, the arguments presented are always worthy of analysis.
Barry seemed to have had a gut reaction that no one from Bear should be writing an article about panic in the markets, even though the Friday Bear Stearns conference call was intended to address exactly these issues. While it took the weekend for cooler heads (like ours) to explain the call, there is certainly nothing wrong with a Bear Stearns economist doing his job.
Ritholtz goes on to write the following:
More Chutzpah.
I haven't even gotten to the substance of the piece, which is -- let me blunt here -- idiotically child-like in its bad facts and poor arguments. It is so weak that it relies on the Conference Board's backward looking, ill thought of sentiment measures, and conveniently ignores the more recent WSJ/NBC poll, which shows two thirds of Americans believe we are already in a recession or will be in a year.
Nothing to see here, move along, move along.
Any analysis -- and I hesistate to use that word -- which claims "Neither the economy nor job growth has been dependent on housing" is simply a case of reductio ad absurdum.
We strongly urge readers to check out the entire Malpass article with respect to facts and arguments. It certainly seems like Barry is rejecting the analysis because he does not like the conclusion and the source.
Barry's Single Substantive Argument
Since Barry has ignored most of the Malpass analysis, we are left with one point of comparison, the single point that he himself chose -- the sentiment measure.
Barry dismisses the Conference Board survey as "backward looking and ill thought of" and says that the survey quoted in the Wall Street Journal is "more recent."
Here is what Briefing.com says about the Conference Board Survey:
They give it a "B-" in importance. The July reading, a new high for the cycle, was an increase of more than seven points and was similarly strong on expectations and jobs.
The Wall Street Journal Survey
Barry cites the WSJ/NBC poll, but it is quite clear that he has not really read the results. The poll is more recent by a few days, so that argument is not persuasive. Another difference is that Barry's preferred poll includes 1000 registered voters instead of the 5000 consumers, many of whom are not registered voters. This is a difference, but the importance might be difficult to track.
What bothers us most is that the Conference Board survey has a long history with many points of comparison. The wording of a question can have a big effect on the answer, so longitudinal comparisons (as the statisticians call them) are quite important. If Barry had looked at the underlying data, he would have seen the following table readily available from the article pointer:
The data show a conclusion that is dramatically different from that reported by Barry, when one looks at the historical comparisons provided by the study authors. While it is true that many people (incorrectly) believe that we are currently in a recession, that percentage has declined dramatically in recent years. In fact, the percentage saying that we are not in a recession and will not be for the next twelve months has actually increases to 25% from the mid-teens levels.
Briefly put, the public has been wrong in recession forecasting, but is now less wrong than in past years. The data are completely consistent with the Confidence Board results when examined in this light.
Conclusion
We think that Barry over-reacted to the Malpass article, getting wide publicity for his viewpoint. While David Malpass does not need any help in defending himself, we hope that Barry will take a fresh look at the data and revise his conclusion.
Meanwhile, the readers of "A Dash", numbered only in thousands, enjoy a contrarian trading advantage over the tens of thousands reading The Big Picture. To see this, take a look at the rather scary "boo-yah" comments responding to the Ritholtz article.
Doing homework is not easy. How many readers would dig down to analyze the underlying survey results? Homework is hard. It begins with picking the right sources. More to come.
