Here is an Example of Financial Engineering

Dow is down 5.16% as I write. I came across a video that explains some of how as investors we are manipulated by our government. We read a headline number like GDP or unemployment and think we understand what it means and may be use it as a way to judge risk. But do we really have a clue? You may not agree with George, but why did the government back in the 90’s change the way it did calculations?

4 Replies to “Here is an Example of Financial Engineering”

  1. Fascinating stuff.
    I got the sense that CPI figures were understated. Partly to reduce payments tied to inflation (e.g. Social Security payments).

    But I didn’t know how.

    Or the funny business with unemployment and wage numbers.

    1. We tend to look at finance as a surface, say a boat on a lake. The surface is defined by the length and the width. But finance is much deeper, It’s 3 dimensional and is defined by what ever features are hidden below the surface. If you’re hauling ass on the lake and hit a sand bar… Misstatement of economic data are the sandbars.

  2. While the FACTS he presented are accurate, the commentary was extremely one-sided. There are good reasons for measuring GDP, CPI, and unemployment in certain ways.

    There are good reasons for measuring in different ways too. These numbers are not black and white. I encourage everyone to understand how the headline statistics are arrived at (if that’s important or entertaining for you).

    No need to imply some nefarious purpose behind compromises for these calculations. I don’t have a Ph.D. in Economics but do have one in a related field.

    1. I didn’t find a nefarious purpose but if you think for a second the government is honest in it’s narrative then you live in denial, and the problem with living in denial is you misprice the risk. There is a saying by Chris Cole that says volatility is the thing that brings us to the truth. If you live in truth volatility doesn’t touch you because you’re already at the truth. If you live in the tail, volatility will eat your lunch. Today the Dow fell almost 7%. The S&P almost 6%. My portfolio fell 0.19% on the net. Some accounts went down, some went up, and this is the point and it’s not political. It’s about survival not narrative. Survival cares if you live or die. Narrative only cares about wining or loosing. Narrative doesn’t give a shit about living or dying.

      If you base your analysis on the “V recovery” narrative for example, or the “virus is over” or the “virus is like the flu” narrative for example are you living in the truth? Volatility is going to take you out and the volatility will be introduced in your life by your willful choice to believe in bullshit. The government is more than willing to sell you bullshit because it’s politically expedient. CNBC is more than willing to sell you bullshit because their buy side bullshit is what generates their profits. When you buy they get paid. When you don’t buy they don’t get paid. The whole point of the Sandals commercial is to get you to put a 10K vacation in your shopping cart. You and the old lady can get just as drunk for a week on $200 worth of Gin.

      Tomorrow will be interesting. Trend on the S&P was 3013. The S&P broke trend and closed at 3002. The machines will see breaking trend as a huge negative on the future based on probability of a continuing downward market and down is a long way down possibly all the way to the March low. The Robin Hood “traders” are bidding up the future to a +38 point gain. So what’s the truth? Which side of the trade do you want to be on? The unemployment headline number was purposely misstated to 13M when it was actually correctly calculated at 19M by the former head of the BLS. The 10 year went from .93 to .65 in 3 days. That’s a 30% move. The VIX went from 27 to 40 in one day a 32% move. The VIX is the measure of equity volatility and it just went up 32% and your ability to predict went from having a probable direction, to no more reliability than a coin flip, but the Robin Hoodies have placed their bets because the narrative is “the market always goes up”. 19M unemployed or Robin Hoodie sentiment. Place your bets ladies and gentlemen. The volatility will reveal the truth.

      Here is a little fun fact. There NEVER has been a bull market in HISTORY when the risk range of volatility was trending between 26 and 86. The volatility hasn’t been below 26.01 since Feb 21, 2020. Never is a long time. If I’m going to bet, I’m not going to bet against never. There have been multiple bear markets in that range. In FACT that range is typical of bear markets. I flipped on FBN for a second yesterday to see what the talking heads were saying and to see if Liz Clayman had broken out her DOW 2000 hat. Yesterday was the 4th worst point drop in Dow history, so I thought it kind of historic. One talking head had revised his V to a square root sign. Square root signs often have the right leg of the V part lower than the left leg. They always have a LONG horizontal line connected to the right hand of the V. That’s from a guy who probably believes the unemployment numbers. Last week the unemployment was purposely understated by 3M, bring the real number to 16.3M not 13.3M and the retired head of the BLS revised her estimate to 19M. So what’s the real number 13 16 or 19, and why is there a 31% discrepancy? Seems like a pretty big discrepancy to me in a number that measures a binary state employed/unemployed. If your computer couldn’t decide if its a 1 or a 0 31% of the time would any of the data be reliable? If the COVID tests are only 80% reliable (and that is the reliability) how many have COVID? On what “number” do you base your reality? You either know the truth or the volatility will show it to you.

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