Flying Under the Radar: John Mauldin
Here at "A Dash" we are long-time subscribers to John Mauldin's email commentaries. He has an engaging and personable style. He has a knack for taking complex subjects and explaining them in a way that most people can understand. He has great sources, allowing him to provide information that others might miss.
Briefly put, we look forward to his messages and often find something of value.
Mauldin has a million readers, putting him far above any bloggers and rivaling some of the mainstream media sources. One must expect his viewpoints to have significant impact. His readers rely upon him. We suspect that few do any further checking.
A Big Issue
One drawback to his email (and website) approach is that there is no external fact checking or commentary. When one reads something from the Washington Post, the New York Times, or the Wall Street Journal, there is a presumption of a staff that does fact verification. There is also the opportunity for readers to object.
With the most popular blogs, there is also plenty of opportunity for other bloggers or readers to object. Issues quickly bubble to the top.
It is different with Mauldin. He covers many topics each week, relying upon some favored sources. It often seems that he does not personally verify the opinions presented. Furthermore, there is no mechanism for objections.
Let us take a look at this week's message. We find two problems, but few will ever hear of them.
Mauldin provides an update on FASB and changes in accounting rules. He writes as follows:
Slip Slides Away
But it is quite possible that
the financial stocks see an improvement in earnings this quarter. The US
Financial Accounting Standards Board (FASB) changed the mark-to-market rules
last week, which many (including your humble analyst) thought was needed.
First, they suspended the mark-to-market rules for assets in distressed
markets. Second, they widened the definition of "temporary"
impairments of troubled assets, which will "allow banks to write up the
value of some troubled assets if these have been hit by falling markets without
(yet) suffering any significant credit losses." (www.gavekal.com)
Here's the important part.
The board decided to make the new changes effective immediately, prior to full
board approval on April 2.
As my friend Charles Gave
noted, this will allow banks to write up their paper, and it happens before
Treasury Secretary Tim Geithner starts putting taxpayer money at risk. Expect
to see a pop in valuations. It will be interesting to see if Citi and B of A
post profits this quarter.
(I should note that the
International Accounting Standards Board sent out a scathing press release. I
guess from that we should assume that European banks will not be so fortunate
as their US counterparts.)
There are several errors in this analysis.
- FASB did not make an immediate change. There is a proposal for public comment, ending on April 1st. The decision will be made on April 2nd. Nothing was settled last week.
- The IASB site shows no scathing release. In fact, the IASB has been more "liberal" than FASB in the attempt (which everyone supports) to find a fair value for assets. The US has been over the top on marking to market, despite illiquidity.
- The suggested relationship to the Geithner plan is inaccurate. The bidders under the plan wil make independent valuations. That is the purpose of the auction approach. The mark-to-market rules make no difference for them. We invite Mauldin to explain why this might occur.
We are troubled that there are no links to original sources in the article. The Gave link takes one to a subscription site, with no ability to review the analysis.
Housing Data and Revisions
In a second troubling section, Mauldin writes about the new home sales data. He objects to the popluar media claim that new home sales were up 4.7%.
But if you look at the data
series, there was nothing unexpected about it. For years on end, February sales
are up over January. It seems we like to buy homes in the spring and summer and
then sales fall off in the fall and winter. It is a very seasonal thing. If you
use the seasonally adjusted numbers, you find sales were down 2.9% instead of
up 4.7%. But the media reports the positive number. Interestingly, they report
the seasonally adjusted numbers for initial claims, which have been a lot
better than the actual numbers. Not that they are looking to just report
positive news, you understand.
This is a simple mistake. The 4.7% increase was in fact based upon the seasonally adjusted data.
Plus, as my friend Barry
Ritholtz points out, the 4.7% rise was "plus or minus 18.3%". That
means sales could have risen as much as 23% or dropped 13%. We won't know for
awhile until we get real numbers and not estimates. Hanging your outlook for
the economy or the housing market on one-month estimates is an exercise in
futility, and could come back to embarrass you.
This is correct. Barry accurately notes that the confidence interval is wide, so the monthly numbers do not tell us much. Since we all want to find an early indicator of change, what does Mauldin suggest?
But that brings up my final
point tonight, and that is how data gets revised by the various government
agencies. Typically with these government statistics, you get a preliminary
number, which is a guess based on past trends, and then as time goes along that
data is revised. In recessions like we are in now the revisions are almost
There is no conspiracy here.
The people who work in the government offices have to create a model to make
estimates. Each data series, whether new home sales, employment, or durable
goods sales, etc., has its own unique sets of characteristics. The estimates
are based on past historical performance. There is really no other way to do
So, past performance in a
recession suggests higher estimates than what really happens. Then, the numbers
in the following months are revised downward as actual numbers are obtained.
But the estimates in the current months are still too high. That makes the
comparisons generally favorable, at least for one month. And the media and the
bulls leap all over the "data," and some silly economist goes on TV
or in the press and says something like, "This is a sign that things are
stabilizing." It drives me nuts.
There are several major problems with this explanation to his readers.
- Most importantly, preliminary estimates are definitely not based upon "guesses." They reflect actual data available at the time of the report.
- The assertion that numbers are revised down during recessions has no support in his article. It does not agree with our own observations. In the series that we follow most closely, the payroll employment numbers, revisions reflect reports from companies that are slow to submit data. One would need a theory about slow-reporting firms to support the Mauldin hypothesis.
- Recent revisions, like GDP, actually moved higher. Someone asserting a general pattern should provide supporting data. Mauldin does not.
The Mauldin conclusion is one of many sources inviting people to ignore actual economic data. This is a costly error.
What is Mauldin's advice?
estimated data. The key thing to look for is the direction of the revisions. If
they are down, as they have been for over a year, then that is a bad sign.
Further, one month's estimates are just noise. Look at the year-over-year
numbers. When the direction of the revisions is positive and the year-over-year
numbers are starting to stabilize, then we will know things are starting to
This might be interesting if he were to provide any data. Let us provide some help.
We agree with the problem. Everyone wants monthly changes, since that is an early indicator of a change in the trend, or a leveling off. Unfortunately, the monthly data has a wide error range. We need several months to see some stabilizing.
The Census Bureau provides the data, but Mauldin does not provide this result. We did the research.
He is correct in saying that a 40%+ decline, year-over-year is pretty terrible. What is the perspective?
From the actual data, one can readily see that the search for year-over-year stability would have shown a signal in 2006, and again in April of 2008. These would have both been costly mistakes.
The crushing blow came with the decision to allow Lehman to fail. This has been the turning point for any economic series.
That decision, and the failure to deal with "troubled assets" made any forecaster looking for a moderate recession look foolish, and the doomsayers look brilliant.
Our main point is that those who are trusted interpreters of data have a special responsibility. Most of Mauldin's readers assume that he has carefully reviewed the sources he cites. Since we enjoy his commentary, we encourage him to provide more links to actual sources and data. When there is an error, he should report it in his newsletter. Most of his readers will not see corrections from any other source.
We expect the mark-to-market story to play out in the coming weeks. The decision has not been made. The basic market misperception is that the banks will have the power to make their own decisions about when to ignore market prices. This is not the proposal, and would not be adopted in the current political environment.
Regarding new home sales, the key point is the dramatic decline in inventories, over 30% in the last year. Anything that boosts sales could take the "months of inventory" number down dramatically. Looking at the actual data is crucial.