The Machine Moves Slowly

My ultimate hope for this market is that we migrate more to one driven by company fundamentals rather than Macro considerations. It gets a bit tiring listening to every Federal reserve board member discuss their ultimate opinion on the direction of interest rates.

I am not one to rant but I will pick on one phrase that I think can be tossed forever: “Data dependent.”

The U.S. central bank as well as the European central bank continues to tell us they are “data dependent.” To be honest this is a phrase without meaning. Data dependent? What data are you talking about? How was the data collected? Why are you looking at THAT data?

Just to pick on one sector, let’s think of the housing/shelter data in the CPI. Sure, it’s data but is it the right data? The CPI data looks backward and averages rents in the rear-view mirror and has a bias for this data rather than new rents recently written. The CPI program also collects rent data only every 6 months so changes in shelter cost will lag badly.

Is this data? Sure. Is it the “right” data? Who knows?

But to take this further, once this data collection process is in place it now gets built into quantitative models to reflect outputs from those data sources. And these models don’t often get updated.

According to the Bureau of Labor Statistics, the 2022 release of spending weight data used to calculate CPI was just updated from the previous weights established 2017 (5 years prior). And these updates were done to reflect the changes in Covid spending patterns from 2 years prior.

In essence, the machine does move slowly.

I don’t expect the Federal reserve to have perfect clarity on what’s going to happen in the economy. I am not a complete idiot about this.

I do, however, expect the Federal reserve (or any central bank) to be explicit about what data they are viewing, why they are viewing it, and the possible downfalls from that data set/model (in essence, what could they be missing).

Until they do this, I am going to assume that every time I hear the phrase “data dependent” I can replace it with “I don’t know.”

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