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Fuzzy Numbers: Extent of the Deception Revealed in Barron's

Sunday, March 29, 2009, 7:59 AM

Alan Abelson has a tremendous article in the recent issue of Barron’s where he recounts some of the massive statistical revisionism that accompanied a broad swath of government data released this past week.

In this two part dance, the government first employs some highly dubious statistical tricks, in this case “seasonal adjustments” and then the press runs off with the information often slathering a layer of spin and hype on top of the obviously dodgy data. I wrote about this in my 3 posts last week on existing and new home sales and durables.

Here’s the relevant part from that article (all emphasis mine) - I especially love the opening paragraph:

In Dante's Footsteps

IT'S A COMFORT IN THIS wildly spinning world to find some things remain the same. We had feared that with the change in administrations, we'd have to revise our long-standing mistrust of government statistics. But, though it is still early days, the initial evidence gives us reason for hope.

The numbers flowing out of Washington seem as dubious as ever, and so are the inferences being extracted from them by more than a smattering of investment strategists, money managers and, it pains us to say, even journalists.

The misleading figures cut across a wide swath of the economy, encompassing housing, manufacturing, employment -- you name it. The leading agent of deception, unintentional or otherwise, has been that old sly villain, seasonal adjustment. As it turns out, the seasons don't need adjustment as much as the adjustors need seasoning.

As Merrill Lynch's David Rosenberg (who, incidentally, is planning to do a bit of adjusting himself and moving back to his native Canada; our loss, Canada's gain) points out in a recent commentary, the official keepers of the books have been unusually aggressive in constructing seasonal adjustments for February's economic data.

To illustrate, the seasonal adjustment for new-home sales was the strongest since 1982; for durable-goods orders, the strongest since they were first released in 1992; the retail-sales figures for February were flat (or, as David says, flattering) after such adjustment, but unadjusted fell 3%, the biggest drop on record.

He also notes dryly that the 40,000 raw non-seasonally adjusted housing-start total for February "all of a sudden becomes a headline-adjusted annual rate figure of 583,000."

Which makes David think that come the inevitably sharp downward revisions of such distorted data, first-quarter real GDP is likely to suffer a 7.2% drop. Which, together with the 6.3% skid in the fourth quarter of 2008, would be the worst back-to-back contraction in the economy in 50 years.

So how exactly does it come to pass, that in the grips of the worst recession in recent history that numerous government statistics are suddenly the recipients of some of, if not the, strongest “seasonal adjustments” on record? Upwards revisions too, it goes without saying.

This simplest conclusion is that the same bureaucratic tendencies towards producing pleasing news that we’ve consistently seen in prior administrations are still in place.

The alternative is that we have to either believe that there’s a perfectly valid reason to massively adjust numbers upwards when the actual data is trending downwards, or that it was a coincidence of such improbable proportions that we wonder if buying lotto tickets is a valid investment strategy.

Why do we care? Because it’s hurting, not helping us. There are few moments in life when self-deception is a useful attribute, and a major crisis isn’t one of them. We need the base data in is purest form so that we can make the right decisions.

Do you think a major corporation would tolerate patently false and misleading sales information for long? If not, then why is this an acceptable practice for a country?

More importantly, this reveals that certain DC institutions appear to be perfectly comfortable being dishonest to the country and its citizens. It reveals an institutional mindset that elevates bureacratic priorities over the needs of the country.

I worry that decisions made from bad data are, nearly always, bad decisions.

There’s an old saying which goes, “people sue relationships, not outcomes.” This means that the doctor with the brusque and impersonal bedside manner is much more likely to be sued than the kind and caring doctor even though both presided over the same patient outcome. Which means that I fret about what happens when these systematic, institutional distortions are revealed to a suddenly dispirited and probably hostile populace. Where bad news can be tolerated, sometimes being lied to cannot.

If I were advising this administration, I would let them know that continuing with these past policies of deception is not only bad medicine, it is dangerous medicine.

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14 Comments

cat233's picture
cat233
Status: Platinum Member (Offline)
Joined: Aug 20 2008
Posts: 575
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...

Chris,

Thank you for all the informative articles this week and every week.   I am most thankful for the educations that you continue to provide at all.

I was wondering about these two thoughts from your post today: 

  1. I worry that decisions made from bad data are, nearly always, bad decisions. 
  2. If I were advising this administration, I would let them know that
    continuing with these past policies of deception is not only bad
    medicine, it is dangerous medicine.

The administration knows the numbers are fuzzy... Right?  Their decisions are based on politics... Right? 

Thank you,

Cat

Steve in Ohio's picture
Steve in Ohio
Status: Member (Offline)
Joined: Jan 13 2009
Posts: 13
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...

Chris, what astounds me is that anyone thinks that the new administration would do anything BUT distort the numbers for their own purpose. This means that folks are still under the illusion that there is one bit of difference between the two major parties and their approach to implementing a fascist (and I use that term under it's strict definition, which is a "merger of government and corporate power") state. 

The administration realized that they were losing market share and they were getting chastised by heavy hitters (Buffett and others) for being "too negative". In order for this regime to implement their reshaping of our society, they need to be able to point to these manipulated numbers and say "See? All this obscene spending we are doing is having a positive effect. So let us spend obscene amounts more."

The spirit of this post seems to be to discuss the problems of making decisions based upon bad data. Well... we all need to make decisions based upon what this regimes is DOING, not what they are SAYING.

Best regards.

Denny Johnson's picture
Denny Johnson
Status: Gold Member (Offline)
Joined: Aug 13 2008
Posts: 348
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...
cat233 wrote:

Chris,

Thank you for all the informative articles this week and every week.   I am most thankful for the educations that you continue to provide at all.

X2

Nichoman's picture
Nichoman
Status: Gold Member (Offline)
Joined: Nov 1 2008
Posts: 422
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...

Chris, et al.

Crucial to several of your posts Chris...plus others comments on this web site.  In addition, other superb web site commentaries, offer the following...

1.)  Competence Of Decision-Making.  Do we have the institutions, processes and personnel to make the tough and correct decisions?  Future Impacts?

2.)   Desperation To Maintain Status Quo.   Human nature applied to proven human values and principles are a clear indicator of future behavior.   Draw your own views of our government and if they are following or rejecting these as a type/form of greed and ignorance. 

In the past, I've provided my personal experiences and views to the above points as key to how things are progressing.  Then ultimately...effective understanding and applications to future individual and societal decisions.  Result: How can "they" change...when the government doesn't see themselves as key architects of the problem?

Propose...shouldn't these actions and behaviors have been expected?  If data released is questionable...smoking gun to points 1 and 2 above?

Connecting the dots...aren't we getting a clearer picture of what and quite possibly how this will unravel the next several months?

Reading commentary in this and other venues...impression too often is were reacting or surprised by these actions.   If so, why?  Do we still not fully grasp the magnitude of the governments role in this?

If so, are we fully maximizing or threatening our individual and collective ability to meet all these challenges?

Don't we need to be prepared mentally (i.e. understanding), emotionally, physically and societally to future changes? 

Have we fully diagnosed all the causes to our predicament?   I suggest for many (including myself)...maybe no?

It further motivates me that I (we?) can and should be doing more to plan and prepare.

 

Nichoman 

 

CB's picture
CB
Status: Gold Member (Offline)
Joined: Mar 18 2008
Posts: 365
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...

From GG's column today - this, of course, is nothing new...

http://www.salon.com/opinion/greenwald/

Quote:

In his just-released cover story on Paul Krugman's status as Obama critic, Newsweek's Evan Thomas includes these observations:

By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are.  Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring.

Thomas then acknowledges what is glaringly obvious not only about himself but also most of his media-star colleagues:  "If you are of the establishment persuasion (and I am) . . ."

SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2237
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...
Denny Johnson wrote:
cat233 wrote:

Chris,

Thank you for all the informative articles this week and every week.   I am most thankful for the educations that you continue to provide at all.

X2

 

Second (third?) that! 

sensei's picture
sensei
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 26
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...

Speaking of fascism...

http://www.politico.com/news/stories/0309/20625.html

 

The latest company to fall to government takeover is GM.  Of course it's not a takeover.  It's just going to be overseen by a government "task force".  Oh, and Obama fired the CEO.  Yes, the president now has the power to fire non-government employees.

 From the article: The Obama administration calls its task force “a cabinet-level group that includes the secretaries of Transportation, Commerce, Labor and Energy. It will also include the chairman of the President’s Council of Economic Advisers, the director of the Office of Management and Budget, the EPA administrator, and the director of the White House Office of Energy and Climate Change. The Task Force will be led by Treasury Secretary [Tim] Geithner and [National Economic Council] Director Larry Summers.”

 Yup, that group is definitely going to turn the GM ship around.  Get in now while the stock price is still low.  Wink 

cannotaffordit's picture
cannotaffordit
Status: Gold Member (Offline)
Joined: Jun 12 2008
Posts: 273
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...

I just had to pass this along.....as though most of us don't already know it.  

My wife and I were having dinner this week with a couple who recently moved to our town, both of whom are recent retirees from the State Department and who lived inside the beltway the last 8 years.  They said this to us:  "What you need to know is that we mingled with D.C. politicians, both Dem and Repub, along with MM representatives for the past 8 years, and they may say one thing in the day time, but at night they all get together and drink and eat and basically decide what they're gonna do/say to the citizens next."  "And" our friends went on to say, "Everyone of them is of the opinion that they are the most intelligent folks around, and that they can say or do just about anything and those stupid American consumers will never figure out the difference."

 Just thought you'd like to know how we're being served. 

Doug's picture
Doug
Status: Diamond Member (Online)
Joined: Oct 1 2008
Posts: 3159
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...

I saw part of an interview with Warren Buffett in the wee hours this AM. (insomnia, doncha know)  He described Obama as very smart and the right person for the job in these perilous times.  I reserve judgment, but Buffett is also smart and I wouldn't put big money against Obama succeeding.  Just as I'm not putting big money on him succeeding.

Of course the question then arises of how to define success in this context.  Buffett wouldn't make any specific predictions, but he speculated taht unemployment will get worse before it gets better (seems pretty certain to me) and that we will have some degree of inflation short of hyperinflation.  That seems reasonable.  He also defended his buy and hold strategy, saying that picking the right companies is the key.  Of course, he admitted to making some poor judgments and not doing his dd a couple times.  I'm sure the drop in Berkshire-Hathaway's fortunes has given him a little humility, but it hasn't shaken his faith.

Nichoman's picture
Nichoman
Status: Gold Member (Offline)
Joined: Nov 1 2008
Posts: 422
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...
dbajba wrote:

I just had to pass this along.....as though most of us don't already know it.  

My wife and I were having dinner this week with a couple who recently moved to our town, both of whom are recent retirees from the State Department and who lived inside the beltway the last 8 years.  They said this to us:  "What you need to know is that we mingled with D.C. politicians, both Dem and Repub, along with MM representatives for the past 8 years, and they may say one thing in the day time, but at night they all get together and drink and eat and basically decide what they're gonna do/say to the citizens next."  "And" our friends went on to say, "Everyone of them is of the opinion that they are the most intelligent folks around, and that they can say or do just about anything and those stupid American consumers will never figure out the difference."

 Just thought you'd like to know how we're being served. 

 

Broadly consistent with my experiences.

 

Nichoman

ckessel's picture
ckessel
Status: Martenson Brigade Member (Offline)
Joined: Nov 12 2008
Posts: 480
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...
Nichoman wrote:

Chris, et al.

Crucial to several of your posts Chris...plus others comments on this web site.  In addition, other superb web site commentaries, offer the following...

1.)  Competence Of Decision-Making.  Do we have the institutions, processes and personnel to make the tough and correct decisions?  Future Impacts?

2.)   Desperation To Maintain Status Quo.   Human nature applied to proven human values and principles are a clear indicator of future behavior.   Draw your own views of our government and if they are following or rejecting these as a type/form of greed and ignorance. 

In the past, I've provided my personal experiences and views to the above points as key to how things are progressing.  Then ultimately...effective understanding and applications to future individual and societal decisions.  Result: How can "they" change...when the government doesn't see themselves as key architects of the problem?

Propose...shouldn't these actions and behaviors have been expected?  If data released is questionable...smoking gun to points 1 and 2 above?

Connecting the dots...aren't we getting a clearer picture of what and quite possibly how this will unravel the next several months?

Reading commentary in this and other venues...impression too often is were reacting or surprised by these actions.   If so, why?  Do we still not fully grasp the magnitude of the governments role in this?

If so, are we fully maximizing or threatening our individual and collective ability to meet all these challenges?

Don't we need to be prepared mentally (i.e. understanding), emotionally, physically and societally to future changes? 

Have we fully diagnosed all the causes to our predicament?   I suggest for many (including myself)...maybe no?

It further motivates me that I (we?) can and should be doing more to plan and prepare.

 

Nichoman 

 

Cat et al,

I appreciate your comments and as I scrolled down the thread had very similar conclusions to Nichoman. Nevertheless, each day when I read the incredulous data being spewed out of MSM I come up with similar questions. And each day I say to myself "why do I bother to ask myself those questions" as I allready know the answer!  

And I also wonder aloud that if I continue to have similar Qs to yours and we (on this and similar sites) are those I consider to be more aware of the predicament than most, then there is no way that your garden variety politician would ever come to the point of saying " well I can see that these are really fuzzy numbers and I had better do some research before making a wrong decision"!

So on #1, The decisions ARE bad.

And #2, the medicine WILL kill the patient.

And as Nichoman posted:

on #1, YES however they will not be found in politics but rather in the "grass roots" arena.

and #2, DON'T BECOME A PATIENT and you will survive. That means no Status Quo, no debt, skillsets to provide food, shelter, transportation, and community/security for yourself and others.  Let's here it for planning and preparing. IMHO I don't think that it can be overdone at this time.

I know I am preaching to the choir here, sorry for that. Looking very forward to "Lowesville" and meeting fellow "grassrooters"!

Coop

 

 

 

phredd's picture
phredd
Status: Member (Offline)
Joined: Sep 9 2008
Posts: 16
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...

I'm probably not going to be popular for saying this, but higher than usual positive adjustments are to be expected in bad times under normal regression-to-the-mean analysis.  "This is the worst we've ever seen, and experience suggests it can't really be this bad."  Now that may well be wrong, but I don't think it is motivated by evil, or by a systematic desire for deception.

As for your question about how long a major corporation would tolerate patently false and misleading sales information, have you been paying attention to the news lately?  Clearly the answer for corporations is long enough for their shipment of fail to arrive.  I don't take any comfort or derive any false hopes from corporate America, which is plenty greedy enough to deceive itself in all kinds of clever ways.  Credit default swaps, anyone?

Never ascribe to malevolence that which can be adequately explained by incompetence. (Corollary to Occam's Razor.)

That still obviously leaves us with the problem of garbage-in, garbage-out decision-making, but at least incompetence can be cured by education and training.  I'm concerned that the overall tenor of the site is moving from a message of optimism and education to one of cynicism and denigration.  Don't lose faith in the original purpose of this site, even in the face of the slow response by the mainstream.  The largest millstone will eventually move under steady, relentless pressure.  It is important to stay focused on the message and not adopt an "us against them" viewpoint.  It was the positive message and objective approach of the Crash Course which I originally found compelling about this stie.

 I think to some extent that is being lost.

ccpetersmd's picture
ccpetersmd
Status: Martenson Brigade Member (Offline)
Joined: Oct 12 2008
Posts: 799
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...
cmartenson wrote:

There’s an old saying which goes, “people sue relationships, not outcomes.” This means that the doctor with the brusque and impersonal bedside manner is much more likely to be sued than the kind and caring doctor even though both presided over the same patient outcome.

For what it is worth, this is an very true statement. I must admit that I hadn't heard it before, but it is true, nonetheless. However, the take home point I would take from this is slightly different. I would argue that many perceive the Obama administration to be a breath of fresh air from the past eight years, and I would not necessarily disagree, to a point. But, I suspect we may see a greater willingness on the part of many to accept these continued falsehoods from a friendlier face, at least for the time being. Any revolution, therefore, may be further delayed...

nickbert's picture
nickbert
Status: Diamond Member (Offline)
Joined: Jan 14 2009
Posts: 1208
Re: Fuzzy Numbers: Extent of the Deception Revealed in ...
phredd wrote:

I'm probably not going to be popular for saying this, but higher than usual positive adjustments are to be expected in bad times under normal regression-to-the-mean analysis.  "This is the worst we've ever seen, and experience suggests it can't really be this bad."  Now that may well be wrong, but I don't think it is motivated by evil, or by a systematic desire for deception.

(snip)

Never ascribe to malevolence that which can be adequately explained by incompetence. (Corollary to Occam's Razor.)

I would have to agree actually.  I can easily see how the current administration might think that putting heavy 'spin' on financial data, even though misleading, may serve the greater good and may help heal the economy.... i.e. "if we can just 'restore confidence'".  But of course if the underlying logic of their assumptions are flawed, then in the long run it still wouldn't work despite any good intentions behind their actions.  I expect there are a large number of parties with purely selfish and perhaps even malevolent intentions, but I don't think they comprise a grand or well-orchestrated conspiracy of any kind.  Incompetence, desperation, and self-delusion can easily explain much of what we've seen so far and expect to see down the road.  But no matter the intention the end result is the same, though... we can't take the government's word or what the MSM says at face value if we want to survive or thrive in the years ahead.

- Nickbert

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