Panic, Housing, and the Economy: Ritholtz versus Malpass

A current theme at "A Dash" is how people can use various sources of information in "doing their homework".  Inevitably, we must all make choices about what to read and how to use the information.  We are working on some general criteria for this purpose.

There is so much data, and so little time!

Choosing Sources

The approach at "A Dash" is eclectic and modest.  We recognize the intelligence and expertise of others.  We try to find the real experts on any topic so that we can invest and trade effectively.  We understand enough about economics, government data, and research methods to act as an intelligent consumer.  We are particularly suspicious of opinions from hedge fund managers whose knowledge is a mile wide and an inch thick. Those who concoct complex theories without sound causal models or quantification –and then tell the world about their wisdom– are immediately suspect.

A Great Example

An excellent article in today’s Wall Street Journal illustrates this point.  Among sources who regularly deliver a helpful perspective is David Malpass, Chief Global Economist for Bear Stearns.  We like Malpass because he (and his team) have consistently found a stronger interpretation of economic data than his competitors at other firms.  He has explained various important subjects like why this recovery is different from those in the past, how to make the right interpretation of labor force participation, why household debt and savings data are misleading, and other similar topics that, quite frankly, most market pundits do not seem to understand.  At "A Dash" we call him the Mythbuster.  He has had the best analysis of the post-bubble economy and has also made some good market calls along the way.  Most importantly for us, he has had excellent explanations and data at each step, carefully laid out in the slides for his frequent conference calls.

We wondered whether the current controversies surrounding his firm would silence him.  He has a well-known and carefully documented viewpoint.  While Bear Stearns clients get the regular benefit of his insights, he frequently publishes in major business publications like the Wall Street Journal.

We were delighted to see this morning’s Wall Street Journal op-ed piece where he analyzes the state of panic (as of last Friday), the economy, and housing issues.  We always like the public articles, since (unlike proprietary reports for Bear clients like us), we can share them with our readers.  Today’s article is a typical Malpass piece, cogently argued and supported with some excellent data.  Everyone should read the entire column, but here a few high spots:

  • Low jobless claims and unemployment is more important for the economy than housing or the stock market.  (Makes sense if you think about it).  It is reflected in consumer confidence data.
  • Residential construction and home inventories are not that far from long-term averages.
  • Those highlighting the impact of housing on the economy choose a wildly abnormal period for the comparison.
  • Losses from foreclosures are "double-counted" in many analyses; and – -most importantly
  • The cost of mortgage resets (from ARM’s) is very small compared to overall income gains.

Read the entire article to see the data (and get some valuable insight).

Ritholtz’s Criticism

We were surprised to see the aggressive criticism of this article on Barry Ritholtz’s site.  The Big Picture is also one of our regular sources.  Barry always has his finger on the issues of the day.  While we may not agree with his conclusions, the arguments presented  are always worthy of analysis.

Barry seemed to have had a gut reaction that no one from Bear should be writing an article about panic in the markets, even though the Friday Bear Stearns conference call was intended to address exactly these issues.  While it took the weekend for cooler heads (like ours) to explain the call, there is certainly nothing wrong with a Bear Stearns economist doing his job.

Ritholtz goes on to write the following:

More Chutzpah.

I haven’t even gotten to the substance of the piece, which is — let
me blunt here — idiotically child-like in its bad facts and poor
arguments. It is so weak that it relies on the Conference Board’s
backward looking, ill thought of sentiment measures, and conveniently
ignores the more recent WSJ/NBC poll, which shows two thirds of Americans believe we are already in a recession or will be in a year.

Nothing to see here, move along, move along.

Any analysis — and I hesistate to use that word — which claims "Neither the economy nor job growth has been dependent on housing" is simply a case of reductio ad absurdum.

We strongly urge readers to check out the entire Malpass article with respect to facts and arguments.  It certainly seems like Barry is rejecting the analysis because he does not like the conclusion and the source.

Barry’s Single Substantive Argument

Since Barry has ignored most of the Malpass analysis, we are left with one point of comparison, the single point that he himself chose — the sentiment measure.

Barry dismisses the Conference Board survey as "backward looking and ill thought of" and says that the survey quoted in the Wall Street Journal is "more recent."

Here is what says about the Conference Board Survey:

They give it a "B-" in importance.  The July reading, a new high for the cycle, was an increase of more than seven points and was similarly strong on expectations and jobs.

The Wall Street Journal Survey

Barry cites the WSJ/NBC poll, but it is quite clear that he has not really read the results.  The poll is more recent by a few days, so that argument is not persuasive.  Another difference is that Barry’s preferred poll includes 1000 registered voters instead of the 5000 consumers, many of whom are not registered voters.  This is a difference, but the importance might be difficult to track.

What bothers us most is that the Conference Board survey has a long history with many points of comparison.  The wording of a question can have a big effect on the answer, so longitudinal comparisons (as the statisticians call them) are quite important.  If Barry had looked at the underlying data, he would have seen the following table readily available from the article pointer:

Recession_questionThe data show a conclusion that is dramatically different from that reported by Barry, when one looks at the historical comparisons provided by the study authors.  While it is true that many people (incorrectly) believe that we are currently in a recession, that percentage has declined dramatically in recent years.  In fact, the percentage saying that we are not in a recession and will not be for the next twelve months has actually increases to 25% from the mid-teens levels.

Briefly put, the public has been wrong in recession forecasting, but is now less wrong than in past years.  The data are completely consistent with the Confidence Board results when examined in this light.


We think that Barry over-reacted to the Malpass article, getting wide publicity for his viewpoint.  While David Malpass does not need any help in defending himself, we hope that Barry will take a fresh look at the data and revise his conclusion.

Meanwhile, the readers of "A Dash", numbered only in thousands, enjoy a contrarian trading advantage over the tens of thousands reading The Big Picture.  To see this, take a look at the  rather scary "boo-yah" comments responding to the Ritholtz article.

Doing homework is not easy.  How many readers would dig down to analyze the underlying survey results?  Homework is hard.  It begins with picking the right sources.  More to come.   

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  • MARK T August 8, 2007  

    Ritholz used to be quite good, but has suffered from a weird form of Stockholm syndrome, he has been captured by his own readers and has become the sort of blinkered bearish commentator he used to denigrate. The “You the man” type commentary from his readers simply reinforces this behaviour. He has sadly goe from a “must read” to a “why read?” Glad to say that a dash has filled the gap…

  • Steve August 8, 2007  

    I read Barry’s blog because it’s pretty entertaining, but I’ve really soured on his analysis over time. He strikes me as someone who has made up his mind and then hunts down data to support his viewpoint, rather than following the data to see where it goes. The WSJ poll is a perfect example.

  • Barry Ritholtz August 8, 2007  

    You completely misunderstood the point of that post: The entire WSJ Op-Ed struck me as utterly disingenuous.
    For Bear Stearns to come out and claim “the Credit Crunch will be fine” — on the EXACT SAME DAY they chose the Cayman Islands as the venue for the bankruptcy liquidation of their 2 hedge funds to “limit creditors’ and investors’ ability to get their money back” — well, that simply struck me as unbelievably sleazy.
    That was why the post was titled “The “Chutzpah” of Bear Stearns” . . .
    Its about their audacity and gall — not the substance of Malpass’ column

  • Jeff Miller August 8, 2007  

    As always, we are happy to have you stop by the site to clarify where I have gone wrong.
    I admit that I got off on the wrong track, thinking that you were discussing substance, when I read the passage I quoted in my post — “child-like”,”poor arguments”, etc.
    I can see that I was wrong because your comments got a big play in the financial media — Dow Jones, Reuters, etc…
    It sure is a good thing that I am not shooting for the audience big time, since I do a very poor job of it!
    If you get around to it, would you please revisit the WSJ poll, something that you have cited numerous times. I believe your conclusion to be inaccurate, but as usual, I am willing to be corrected.

  • Bill aka NO DooDahs! August 8, 2007  

    I would think the investors in the BSC funds were very happy with the Cayman Islands location while the fund was making money … taxes have something to do with that?

  • Jeff Miller August 8, 2007  

    Bill –
    Thanks for your comment, which captures the situation nicely.
    I guess most folks are interested in the story about the Bear hedge funds and willing to assume that Malpass wrote something on command. My observations are more about the substance of the Malpass article — something that seems to have gotten lost in the story.
    He is a regular contributor to the WSJ op-ed section and his article is completely consistent with what I regularly read from him as a Bear customer. I have no idea whether the timing was manipulated or a complete coincidence.
    My interest is informing readers about the housing market and panic. Malpass has been right for a long time and investors might want to pay some attention.
    As usual, your comment captures the key issue for most observers, something that I apparently did not grasp when trying to discuss the substance of the article.

  • muckdog August 9, 2007  

    Dr. Jeff, you write well. You write good, too.
    Just to focus on a side and not the meat of it all, I am amazed that 2/3rds of folks in that poll believe that this is or will be a recession.
    I wonder how much the Iraq War is tempering folks’ moods. Especially considering the polling numbers for the President and Congress.

  • Bill aka NO DooDahs! August 9, 2007  

    What most laypersons don’t realize, and what Barry as a money-runner SHOULD realize, is that:
    1. the Cayman Island location was chosen for a REASON
    2. BOTH parties get some good out of it, especially investors in profitable times
    3. “accredited investors” should know their risks
    It’s just the way business is done for many hedge funds, probably for most money managed by hedge funds.
    The real audacity and gall is shown by the man who predicted four of the last zero down calendar years for the U.S. stock market, who now takes advantage of a short-term period of fear in order to claim that he was “right on method” the whole time. It also takes a lot of audacity and gall to make posts containing quotes like Buffett’s “You try to be greedy when others are fearful, and fearful when others are greedy” and Lynch’s “The key to making money in stocks is not to get scared out of them.” while he’s also making posts actively trying to scare the average investor out of the market.
    Funny stuff.

  • DrToast August 9, 2007  

    I think you could be right about Iraq. There’s probably some “contagion” of sentiment about Iraq and our current government that has spread into feelings about the economy.

  • Jeff Miller August 9, 2007  

    I really appreciate the comments from everyone on this topic. The disparity between the public and reality is a good topic that I will take up further.
    I still feel like I missed the target somehow with this one. The key point is that the public has been depressed about the economy throughout the Bush administration. In 2004, the campaign hauled out a number of negative economic arguments — something we would have done as Democratic strategists. But we are not doing politics here. Instead we are trying to figure out what works.
    When everyone is too negative, it is supposed to give us an opportunity. When you see simplistic analysis you should think, “I wish I could play poker against that person.”
    So with Iraq, the key for the investor is how it affects interest rates and earnings. For the citizen, the answer might be quite different.

  • Capitalgain August 10, 2007  

    Why even bother with Scared Beary?
    Modus operandi of Beary–he either tries to discredit the information or discredit the source of the information that doesn’t support his position. He is an intellectually dishonest investment pigmy with very thin skin. In fact, Beary’s not an investment guy at all, he’s a marketing guy. A snake-oil salesman, and liar.
    Scared Beary is the very same flim/flam artist that projected DJIA 6800 for 2006 in the annual Business Week survey in December of 2005; its still on the web. Bring that up and this incompetent moron gags on his own bloated tongue.
    He also polices his web site 24/7 (an odd way to spend time), referring to those who disagree with him as “trolls and assholes,” as per his very own post of a few days ago. Not exactly a mature or thoughtful guy; certainly not anyone who can be trusted managing money.
    He doesn’t keep score by the accuracy of his predictions. He is constantly out trolling for like-minded lunatics who see the world in the very same way that he sees the world. It’s easier to find those folks and then convert them into fee-paying clients than it is to find the truth or accuracy.
    It’s the oldest game in town. These guys keep score on the basis of how much money they have under management or subscriber count and the fees that this generates…being right or wrong is only a SIDE-SHOW at best.
    Funny how BEARY goes nuts when an economic number occasionally mirrors his bearish views… for that instant, they are always legit … but when the number goes the other way, as they usually do, they are manipulated and part of a huge conspiracy.
    The permabear mentality:
    #1 Bears don’t have to compete with the larger number of “bulls” who tend to be right, by varying degrees, some “95% of the time.” The market is up, on average, 8-10% a year leaving the permabears shoveling shit in Petaluma 95% of the time.
    #2 Forget the facts, fear sells even bigger.
    #3 Bears don’t keep score based on performance results (that would put them out of business in a heartbeat), he keeps score by the amount of fees he can generate.
    #4, There are always enough fools and investment pigmys out there to make it worth his while to peddle his brand of snake oil. Likeminded financial morons travel well together.
    #5 Bears aren’t investment guys, they’re marketing guys (snakeoil peddler) with a flim/flam niche.
    #6 Bears are focused on yesterday because its easier than being focused on the future. If you notice, they spend an inordinate amount of time analyzing, agonizing over and discrediting both the reported data and/or the sources of that data. Real investment guys look forward and don’t drive their portfolios looking in the rear view mirror.
    #7 Most good money managers tend to be optimistic (because of #1), PermaBears are always pessimistic.

  • dn August 11, 2007  

    #6 Bears are focused on yesterday because its easier than being focused on the future. If you notice, they spend an inordinate amount of time analyzing, agonizing over and discrediting both the reported data and/or the sources of that data. Real investment guys look forward and don’t drive their portfolios looking in the rear view mirror.
    That’s maybe the most absurd thing I’ve ever heard. “Bears” drive with the rearview mirror, but bulls look ahead? You mean like how the majority of bulls didn’t see any of the housing/mortgage stuff coming despite the fact that it was completely obvious and totally inevitable? (To name a one recent example of many.) My bet is that you were oblivious, despite the obvious endgame of that whole mess.
    Bulls, just by virtue of being bulls, look ahead. That’s just classic. Good luck hanging on to those “capital gains,” dude.

  • Capitalgain August 11, 2007  

    Warehouse funding is now non-existent for 100% LTV mortgages TO low FICO pilgrims with no documented income. What a surprise. There is also virtually no market for MBS or CDO’s, and the margin calls to the Hedgies which own these vehicles have forced them to sell their equities en mass. Unwinding their longs have driven the prices of good companies down, and unwinding their shorts have caused the price of crappy companies to rise.
    RESULT – A short term opportunity for long term investors to pick up quality equities and mutual funds at bargain prices.

  • Don March 11, 2008  

    Do you still think Malpass was right?

  • Jeff March 14, 2008  

    Don – I do not really understand your question, wondering “right about what?” He has been right for over five years on most of the key economic metrics and moves. All forecasts should come with a time frame!
    I think he is correct on the measurement of savings, and it is pretty obvious that most who disagree do not bother to look at the data he cites.
    We’ll see about some of the other points, and I promise to write more.
    Meanwhile, what do you think? We’ll soon learn whether Fed policy has an effect on the economy, with a lag. I realize that many have already decided — those who do not need data!