Missing the Point

There’s a strong correlation between the Philadelphia Federal Reserve’s measure of business confidence (OUTFGAF), and employment, or Non-Farm Payrolls as the Bureau of Labor Statistics calls it. And the Philly Fed’s measure just went into freefall. What will that mean for employment? From Zero Hedge:

-700K NFP print coming?


And here is Wall Street’s economist brigade again proving they are worth every penny based on their predictive skills: we just had an 8 standard deviation miss to consensus.

So how can economists have been so wide of the mark? Nassim Taleb says it’s because we drastically underestimate the probability of unlikely events writing them out of predictions:

There are two classes of risk. The first is the risk of volatility, or fluctuations – think of Italy: in spite of the volatility of the political system, with close to 60 postwar governments, one can consider the country as extremely stable politically. The other is a completely different animal: the risk of a large, severe and abrupt shock to the system. Think of many of the kingdoms of the Middle East: where countries exhibit no political volatility, but are exposed to the risk of a major upheaval. The problem is that the second type of risk, which we can call blow-up risk, is far more vicious, mainly because of its sinister, hidden nature. This creepy nature is behind the inability of institutions to handle it properly. And, worst of all, the two types of risks are not correlated and one is often mistaken for the other.

Another possibility is that in some cases we may be looking at entirely the wrong data altogether. As I wrote in my first ever post:

As we can see, corporate profits had no trouble whatever bouncing back from the crash. And unlike the employment rate, they were not in a slump going into the crash. But the problem is not contained to corporations making too much money. The real problem is that governments have been convinced that the health of the economy should be measured primarily by whether or not corporations are doing well.

This means that when governments act, their actions are tailored toward assisting corporations, not assisting individuals or communities.

And, when the mighty and powerful blow up, they tend to blow up all over the little guy.

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