Why the Data Makes No Sense
inflation, fed toolkit, corporate pricing power, guy debord
data and reality - podcast and youtube up soon
The Perfect Storm
Things are really weird right now. That’s really the only thing that anyone should be saying with any sort of certainty! The Fed is still planning to rip, inflation is still not where we want it to be, and parts of the economy are rebalancing, as Mary Daly described last week.
There are going to be a lot of pressure points on consumers moving forward too. Stimulus ended1, and now student loan payments are starting back up. Auto loans are teetering off the edge of a cliff and mortgage rates have skyrocketed.
A very brief philosophical aside that I think will help set the tone for this piece - in the ever prescient Society of the Spectacle, Guy DeBord walks through a lot of what is happening today. The first sentence is -
“In societies where modern conditions of production prevail, life is presented as an immense accumulation of spectacles. Everything that was directly lived has receded into a representation.”
We have a world where we are pretty disconnected from the things we own. We have really no idea why or how or even who made that thing. We are completely separate from the process of the products that we end up consuming. That creates this weird element of cognitive dissonance. We are then separated from the moral choice of consumption. For example, if we truly saw the conditions that places like SHEIN make their clothes in, we might not buy that shirt.
Because we are separated, morally and emotionally alienated from the things that we exist around, we project value onto those things as social instruments and signaling tools. As Stephen West highlights in his podcast about DeBord
Social appearances mean more to us about something’s value than substance does. The illusion matters more to us than the truth. The exchange value of an item in the marketplace matters more to us than anything to do with its use value.
How things appear as an appearence is more important than how they appear in reality. “The spectacle is not a collection of images, but a social relation among people, mediated by images.” Then of course, that’s where things get messy and weird. We can’t agree on what reality is.
The reason that I went through all of that is because that’s what’s going on with the economy. Of course, most of DeBord’s thesis applies to market systems, but right now, in our economy, we have a mess on our hands.
The data isn’t reflective of reality
Companies are fluffing out earnings, also not reflective of reality
The Fed is using a toolkit that has maybe not a strong connection to reality
And most of all we beef with words without understanding the underlying concept
Data and Reality
There are so many questions. U.S. CPI forecasts are usually very wrong. We can’t really agree with what is going on with GDP. Are job openings the right thing to look at to gauge the success of the labor market?
We have all this data. All these numbers!! But we still have really no idea what’s going on. And that’s how it is right? It’s all an art, not a science. But there are two points here. We need data that is -
And some of the numbers that we look at are neither of those.
Survey data: In terms of data being comprehensive, with the survey data that we have, people aren’t really responding anymore, which makes the data more volatile, making markets more volatile, causing uncertainty to rise in this endless loop of “wait what’s real and what isn’t?”
Labor market data: In terms of data being representative, there is data saying that the labor market actually isn’t doing that well and that job postings are declining more than Labor Department reports of job openings. That’s not great.
Also, EmployAmerica has done a lot of amazing work on how job openings aren’t even the best metric to look at - quits are a better indicator.
It’s good to have data to pull from. But when the data becomes not very comprehensive or not very representative, that creates a series of issues because we are using different survey and labor market metrics to gauge policy decisions (or market response) but it isn’t really a comprehensive or truly representative look at what’s going on.
Inflation might not be bad? And 2 jobs is procyclical?
And then the weirdest thread to pull on here - what we think about what the data is telling us might not be what we always thought it was. Inflation might not be that bad of thing? Obviously it’s not good, and the levels we have now are completely unsustainable. But there are benefits:
Inflation wage gains: There are signs that lower-wage workers are finally getting an upper hand with respect to wage gains, with lower earners earning the biggest pay raises versus higher earners in decades
Wealth disparity still rages: But on the exact flipside of that - “top incomes in the US have surged, driven by capital gains realization and business profits. The income share of the top 1% now far exceeds the previous peak in 1928” as Philipp Heimberger highlights
Corporate pricing power: And then of course, there is a lot of worry around wage price spiral but not a lot of focus on price price spiral as companies continue to raise prices and more and more pressure is put on the consumer.
We are worried about wage price spirals when people are finally getting paid more (at least nominally with inflation as a forcing function) and maybe not paying attention to the sleeping dragon of price price spirals, a term Lael Brainard coined in reference to companies raising prices.
Another interesting example of what the data is telling us might not be what we always thought it was - as Guy Berger highlighted -
“The number of folks working multiple jobs is, paradoxically, a procyclical indicator”
The underlying idea being that as labor markets improve, it’s a good thing that people can find a second job. Of course, ideally they would get compensated more at just one job.
But it just shows how many ways there are to slice and dice the data we see. And how the data that we look at isn’t always representative of the reality that we exist in.
Companies are fluffing out their numbers to try and make earnings look good. This is bad! But of course, it’s good (for now) for the stock markets (and the longevity of the management teams executing upon these decisions). I’ve mentioned this FT article to so many people at this point, but I found this line just so striking
(We’re in) a society in which it is easier to protect shareholder rights than civil rights
And of course we are! We are obsessed with the appearances of appearances, with molding reality to whatever narrative the stock market wants it to have that day. We are short-term garbage raccoons chasing infinite effervescent dollar signs that we will never reach.
Wage price spiral vs Price price spiral: Companies are raising prices to try and manage the cost of running a company in a high inflation period2, but we need to recognize that those elements are creating pressure for consumers.
Trashcan living: That the endless chase of profitability and margin could hurt people more than the Fed’s toolkit ever could, and the misaligned focus with number go up creates all these long term problems.
Companies have always fluffed out numbers, but as the Bloomberg piece highlights -
“The pressure on these leadership teams is intense… If you’re getting ready to release your earnings and you can move a penny around somewhere from left to right, it just might tell a better story that as long as it’s legal, they do it.”
So even what companies are reporting, and their stock price movement relative to that, isn’t really… real. It’s real in the sense that it’s a narrative, but the long term consequences of juicing will likely outweigh the short term benefits.
Phillip Jefferson said
“Changing the 2% inflation target could call into question the FOMC's commitment to stabilizing inflation at any level. It might lead people to suspect that the target could be changed opportunistically in the future."
The Fed is concerned with the appearances of appearances.
And one thing that people will likely get mad at me about but is fundamentally true - the Fed is doing what they can with what they have. Should they have moved faster? Of course, probably, hindsight is 20/20. But what the heck were they moving with, right?
Toolkit is limited: Interest rate hikes are a fine tool, but the Fed is throwing uncooked spaghetti at the wall and trying to see if it will stick. They are like “sure? We will raise rates between 5 to 5.25%? And hold it there? Maybe that will work?”
And the real toolkit is the psyop: And of course, the focus is on the dot plot, as Kashkari highlighted. It’s not about what they do, but what they signal that they will do. The Fed’s job - and it’s an important one - is to run a psychological operation on the economy to make sure that people and markets are pricing in what they want them to price in.
If you look at what is happening to the economy, 20% of the economy is getting beaten to a pulp by the Fed - the interest rate sensitive components like mortgages and auto loans. But the other 80% is moving and grooving (at least according to the data). So because the Fed is tightening into a world that isn’t really responding to it, it brings in more worries that they are taking the hammer to the whole economic wall3 rather than just the inflation nail.
The Fed is dealing with an economic reality, but with a toolkit that can only do so much. I’ve talked about it a lot, as have many, many others, but there has to be other policy implemented to help the Fed achieve their goals.
Words vs Concepts
The final thread to pull on society of the spectacle is our fascination with words instead of concepts.
There was a poll stating that 71% of Americans think that we should spend more on ‘assistance to the poor’ but if you call it ‘welfare’ only 30% agree.
We just get in our way so often. Byrne Hobart had a good tweet about this
A great theory I heard about this is that 19th century written communication had a long lag time, so you had to be very clear and had to be good at modeling someone's mental state based on their writing. Lower-latency communication means we get much less practice.
I think the line “modeling someone’s mental state” is really important there. Because if you go back to Society of the Spectacle, a big concept there is that we4 are so far removed from everything - from understanding how our water gets out of our faucet to how our clothes are made.
Extrapolating that, we just don’t spend much time being that empathetic to the world around us because we don’t really practice the faculties that would require us to do so. We don’t “model someone’s mental state” very often, especially in writing. That creates that weird gap between understanding what “welfare” and “assistance to the poor” means.
We can’t really agree on what reality is.
Elon Musk is recruiting a team to build an “anti-woke” AI and I think that if you had to ask anyone to define what that meant, no one would really know. To be clear, people should do what they want! If you want anti-woke AI, sure! But it just ties into DeBord really well.
Images detached from every aspect of life merge into a common stream, and the former unity of life is lost forever. Apprehended in a partial way, reality unfolds in a new generality as a pseudo-world apart, solely as an object of contemplation.
In terms of how we should approach data not being representative or comprehensive of reality, I think sentiment is a great gauge. I did a piece for Bloomberg Opinion exploring how trends like deinfluencing can tell us how people are feeling. Fed members are constantly speaking to their communities, so I think all of this is factored in.
But we are most definitely in a grain-of-salt economy. Data is not a definitive, but it is a tool meant to be used in conjunction with other tools. It’s not a final painting, but rather the strokes on the canvas that require us to step back, take a closer look, and really reflect on narrative, reality, and interpretation.
Thanks for reading.
Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
There is also this thread that is tangential but important - people have no concept of what their economic reality should look like. There are all these middle managers at Big Tech companies that wanted to retire as millionaires at 40! And now they are mad that they can’t! Which is valid and fine and good but it just underscores how much disparity we have in our economy. There are people who worry if they *ever* are going to be able to retire, contrasted against those that are angry they can’t mail in the check with a $550k/year salary.
Please remember this refers to the collective ‘we’ - I know it doesn’t apply to everyone!