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Barry Ritholtz
I'm Chief Market Strategist for an institutional research firm, and the Chief Economics Commentator for an asset management firm.
Interests: I'm a fan of anything which can hold my attention (deficit) for more than a few moments: technology, market analysis, music, film, legal theory, literature, gardening, vintage sports cars, philosophy.
Recent Activity
Goddamn, that was good. I need to do that more often. (But he made it so easy!)
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Barry Ritholtz is now following The Typepad Team
Mar 15, 2010
Wrong for years? In what way? My position on B/D has been consistent for a long time: Ever since a major modification was made to the Birth Death adjustment (proposed in 2001, and implemented a few years after), the NFP data has become increasingly misleading. The attempt was to capture early improvements in employment at the start of a recovery was the goal. But the trade off was it wildly overstated economic strength at the end of a cycle. For example, in 2007, approximately 75% of reported new jobs were due to this adjustment. In 2008, the BD adjustment inexplicably showed lots of job creation in construction and finance. The people who ignored the below the headline changes missed the warning signs. Lots of economists blindly cheerleaded their way right into the recession -- never saw it coming. The worst offenders were the ones who dismissed the effects of the B/D changes. This cohort of economists totally missed the worst recession in generations -- they were utterly blindsided, and the people who followed their advice saw their 401ks and retirement accounts mangled. Jeff, with all due respect, I do not recall where you stood pre-recession (Q4 2007) -- were you expecting an economic contraction? Were you misled by the BLS data? Did you have any clue of the coming storm? My criticism of the BLS data -- I am NOT one of the a conspiracy folks -- is that it needs to be carefully parsed and dissected to get at the worthwhile data hidden within. The BD data was only part of it.
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Its his own incompetence that biases his beliefs that you cannot spot a bubble. In fact, Luskin himself missed the three biggest bubbles in modern times, costing his clients -- and anyone foolish enough to follow him -- untold millions: 1) He stayed bullish throughout the 2000 collapse, ultimately leading to his mutual fund to be closed after it lost two thirds of its assets; 2) He insisted Housing was not a problem heading into 2005-06; 3) 10 months into the worst recession in our generation, he insisted there was no recession. The market collapse was the worst since 1973. When Luskin says bubbles cannot be spotteds in real time, what he is actually saying is HE CANNOT SPOT THEM. He is blind, ergo, everyone else is blind.
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Telling readers you have a tool that might be of utility if they learn to use it properly, and integrate it with other valuation/analytical methods and risk management approaches isn't sexy, and doesn't sell. But screaming you can turn people into millionaires? That has always been a winning strategy for selling to rubes
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The Birth Death Model used to be a minor adjustment in BLS NFP data. It has been around for many years. Since '06/07, it has become a major statistical nuisance. The theory behind it was that small businesses are under represented in the Establishment survey. Much of the job creation comes from these smaller firms. The 2001 changes (effective 2003) BLS significantly modified the B/D adjustment. They went from a minor statistical adj to overweighted. There were two methodological problems with this adjustment: 1) It took a primarily MEASURED data series and introduced a significant amount of extrapolated/modeled data into it (deducing new NFP job from new state Incs). 2) The model improved accuracy somewhat in the beginning of the economic cycle, but at the cost of making BLS data much less accurate at the end of the economic cycle. Example: In 2007, about 75% of the new jobs created were due to the B/D adjustment. ~~~ Since someone challenged my integrity about the motivations for my B/D adjustment criticism, allow me to point this out: I run money, and don't care about the ideological or political battles between economic theories or politicians. I only want to protect my clients capital and generate positive returns when opportunities arise. I cannot say the same of the people who were the staunchest defenders of the BD adjustment. Indeed, many of the people who took the BLS data at face value, who did not delve beneath the headlines, and approached such data interpretation in a no-critical fashion got mangled in the markets. Those "analysts" who did not skeptically approach BLS inflation data, NFP jobs info, B/D adjustment -- were way too bullish going into 2008. They believed the official data as well as the spin, if you followed the advice of less critical thinkers, you lost tons of money . . .
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Excellent post
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