Wall Street spends billions of dollars trying to answer one singular question:
What happens next?
But instead of getting answers, mining for more data often leads to more questions.
This is especially true when it comes to the “soft data” surveys and feedback-based insights many investors rely on.
In today’s Moneyball Economics, I’m going to show you why one widely followed economic indicator can give investors a completely false sense of confidence — and how I separate useful information from the noise when I’m trying to figure out where the economy and markets are headed next.
Video Transcript:
I’m Andrew Zatlin. Welcome to Moneyball Economics.
The other night I had the chance to watch one of my all-time favorite movies, Men in Black. I mean, what a great movie. You got Will Smith and Tommy Lee Jones, peak acting talent. You’ve got this wonderful whimsical storyline where they’re government agents protecting planet earth, monitoring space aliens living here.
Well, you may remember about a third of the way into that movie, there’s a little twist in the storyline. They discovered that suddenly space aliens are fleeing the planet.
And as Tommy Lee Jones asks, “What do they know that we don’t know?”
This kicks off a fact-finding mission. He goes down to the newspaper stand. He buys up all these newspapers. Well, the National Enquirer type of brags, the stuff where it says, “I’m having Elvis’s baby.” And that is how he gets his data, because knowledge is power.
And typically the first step in gaining knowledge is getting data.
So for example, when the internet first came out, we saw an explosion in alternative data. For example, I remember this guy kicked off using satellite data to track Walmart parking lots. The premise being, if you want to know if consumers are out and about and shopping, take a look at how occupied the parking lots are or how vacant.
This was huge. And so there was actually a huge industry that kicked off with alternative ways of tracking activity. I myself have my own proprietary ways, but the challenge is transforming that data into knowledge.
For example, recently Visa came out with their quarterly earnings report and it was fantastic. As they announced they had growth of 10% year over year on their revenues. That’s huge. And they even said that this was trend. It wasn’t a one-off. It’s been like this for about a year, year and a half.
If you are feeling bullish, you would take that data point 10% year-over-year growth and you’d say, “Oh my God, consumer behavior is strong.” This is not the sign of consumers pulling back. Consumers are out and about. They are spending money. The US economy is super strong.
Another way to interpret this would be actually this is a sign of a consumer under massive stress.
10% growth is well above wage growth. That means they’re not really going to be able to pay off this 10%.
And so the question comes out, is it possible that they’re living paycheck to paycheck and to keep things going and get through the month, they’re using their credit card more and more?
This is what I do.
I look at data and I have to transform it into knowledge because even if it’s hard data, doesn’t mean that it’s obvious what it’s telling us.
And not just that, there’s another problem with hard data and that is it’s kind of backwards looking. It’s tracking something that has happened. It’s not very predictive. Now to bridge that gap, what has happened using the hard data and what could happen, a lot of economists rightfully extrapolate. If this has been going on, it’s likely to continue going on and that’s how economists function. But there’s another way to do this.
There’s another way to predict consumer activity or behaviors or whatever, and that’s by talking to consumers. This would be a form not of hard, but something that’s called soft data, a soft survey.
I ask you, for example, it’s midterm elections. I’m going to ask you who you might vote for. That doesn’t mean you voted. It’s not an actual fact yet, but if what you’re thinking today translates into your actual action, then I’ve got a head start in terms of understanding what’s about to come down the pipeline.
A lot of soft surveys are out there that do this, that talk to people, ask them questions, and then try to quantify that and say, “Based on these answers, we can expect the following.” We got a finger on the pulse. Here’s what the heat map is telling us.
And we see this in a lot of places and it’s become kind of gospel in some ways, even though just like with the polls during election season, if you open it up and look at the methodology, they look pretty damn shaky.
For example, here’s one. You ever heard of consumer sentiment? This is one that moves the markets. It’s supposed to measure. It’s done by the University of Michigan. It’s supposed to measure future consumer behavior based on how consumers are feeling today. What do you think about inflation? Are you going to spend more or less? Well, the problem from the get-go is methodology.
They’re talking to up to 500 people. They’re talking to up to 500 people that they’ve been able to reach on the phone who knows they might be at work and so you’re talking to somebody else who’s not at work. In any case, 500 people, it’s not a very solid base for determining what America is about to do.
And as a result, historically, there was a time and place when this was a very decent predictor, but today it’s not. I mean, if we look at the last quarter’s earnings releases of retailers, of credit card companies, of restaurants, they’re all saying, we kind of use this word resilient.
The consumer’s resilient in the face of this inflation or higher interest rates because it indicates that they’re struggling. And you had some companies come out and say, forget resilient. The consumer’s strong. Just flat out the numbers are saying, ignore the sentiment.
They’re spending. They may have said that they’re not going to spend, doesn’t matter. They’re spending. Soft surveys drive a lot of stock market behavior. They are often referenced by a lot of economists. To close out, I’ll use one that’s not about consumer, but about business behavior. And this one moves the markets a lot. It’s called the Purchasing Managers Index, PMI.
And again, the methodology is a problem here.
The PMI talks to 500 or so executives around the nation, 500. It’s okay, whatever. And they try to make it spread across all different industries and sizes and so forth. But the problem is you can look at it from one month and it could be doom and gloom and you go to the next month and it’s, oh my God, it’s a ticker tape parade because it’s human emotion. It’s not factual. It’s, I feel bad because inflation’s kicking my butt, but I’m still going to hire because business is still soaring.
And yet the PMI surveys are held up as gospel by a lot of economists and they try to derive knowledge from it because there is this endless race to understand and predict because that knowledge, that ability to predict the future is monetizable in the stock market and elsewhere.
So my advice to you today is knowledge is power. Getting information is important, but always look at the source of that information, right?
A lot of the things that are held up as factual, well, first of all, they’re not factual. They’re based on these soft surveys. And secondly, the methodology’s kind of shaky at best.
Remember folks, we’re in it to win it.
Zatlin out.
