Data-Dependent ... on Imaginary Data

Invisible Derivatives
Giant Mystery
Zero Confidence
Sonoma and the SIC in San Diego

Federal Reserve officials like to say their policy course is “data-dependent.” That sounds very cautious and intelligent, but what does it actually mean? Which data and who’s interpreting it? Let’s ask a few questions.

Photo: Federal Reserve Board of Governors

First, how could their policy choices not be data-dependent? The only alternatives would be that they made decisions randomly or that there was an a priori path already determined by previous Fed policymakers that they were forced to comply with. A predetermined path would, of course, eventually be leaked, and then everybody would know the future of Fed policy. Until they changed it.

Of course, they do depend on data, and lots of it, but are they looking at the right data? If it is the right data, theoretically speaking, is it accurate? As we will see, more often than not they are basing their decisions on data created by models that rely on potentially biased assumptions derived from past performance, etc. Often the data they look at is actually a sort of metadata, a kind of second-derivative model, with all sorts of built-in assumptions, quite removed from the actual data.

That approach is actually reasonable when you realize that the amount of data that must be managed is simply too large for any human being to process in a coherent manner. The data has to be massaged, and that means making assumptions that create the models in the programs. Those are assumptions are not made by computers, they are made by human beings who are doing the best they can – using models based on assumptions they build in to guide them as to what assumptions they should make about the data. Convoluted? Yes.

I certainly don’t know all the answers to the problems with national and global economic data and metadata management, and it’s far from clear the Fed knows those answers, either. Whatever your economic and political ideology, we can all agree that these are big problems. Today we’ll look at how big.

First, a quick update on the Strategic Investment Conference. This is especially for the many of you who wish you could attend but have conflicts. For you, we have something new: the SIC Live Stream Virtual Pass. Video coverage for all the conference sessions will be streamed live over the internet straight to your computer or mobile device! It’s not quite like being there, but it’s darned close.

The technology to do this is quite expensive, as you may imagine. We’re making the investment because this year’s message is so important. Our theme this year is “Crossroads” because that’s exactly where the world is. We are at an inflection point and have big choices to make. Right ones will speed us along. Wrong ones could slow us nearly to a halt.

We are actually approaching multiple crossroads simultaneously. You know the list: In addition to the Fed, other central banks are on the cusp of big policy shifts, too. Geopolitical challenges are cropping up everywhere, and some big emerging-market countries are on shaky ground.

We’ll be exploring those crucial issues and more at SIC with 25+ top experts. If you can’t join us in San Diego, the Live Stream Virtual Pass will bring the conference to you. You’ll see all the sessions and even be able to submit questions to the speakers.

I’m doing this because I want every reader to have every opportunity to get ready for what’s coming. The SIC Live Stream Virtual Pass will be your ticket, and at a very reasonable cost.

I’ve lost $4 million, 3 years worth of work, and other people’s money.” — Investor (Feb. 6)

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If you suffered, learning how 25 of the world’s top money managers and investment strategists are positioning their portfolios for the road ahead could save your portfolio from further losses.

Watch them live March 6–9!

Now, back to the data.