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« Weighing the Week Ahead: Earnings versus the Economy | Main | The Quest for Yield: Strategy Allocation »

October 19, 2010



James -- The mystery chart is merely an illustration. It shows why it is a mistake to use a derivative index, acceleration in this case, without knowing and understanding the underlying data. In particular it shows the fallacy of the Rosenberg inference about a few prior cases.

I explained this as well as possible in the article. Analyzing data and describing it with charts works best when you get close to the data - -understand it fully. Those who think they can make an inference from the growth series, without understanding the underlying index, seem to be reaching hard for evidence to prove a point.

Why dispute the ECRI's own interpretation, which has so far been very good?



James West

What I understand from your article is that the WLI represents the rate of change in the index. The ECRI level represents the current value of the index. From there the point is made that although the rate of change is negative, the absolute value of the index may still be positive (60 mph in your example).

The criticism made of Rosenberg is that calling a double-dip based on the rate of change is bad analysis, because the economy may actually be going +60. Implicit in this criticism is an assertion the value of the current ECRI level must represent positve or negative growth in the economy. The problem with this analysis is that there is nothing here to tie the ECRI level to the rate of expanson or contraction in the economy.

To the contrary, the article states that the ECRI level (which is the input for the derive growth rate) is a hodge-podge of some unknown raw input (stock market, bond market, money supply are three potential sources mentioned). What stands out is that the chart smells a lot like a representation of asset prices over the given period (stock market, housing). As we know looking back on 2007, highs in the stock market and housing were no predicator of positive economic growth in the period ahead.

I don't see any contradtiction or fallacy in making some correlations between the growth rate, and future economic expansion or contraction - at least not on the basis of your aricle.

Would be interested in your comments. Thanks -

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