An economist visits the Grand Canyon with his wife. They peer together across that vast, majestic maze, tinted with orange and distant blue. His wife asks, “How old is this?”
He says, “10 million and 6 years.”
“What’s the 6 years?” She demands.
He says, “I was here at a conference six years ago. I asked the ranger how old it was, and he said it was 10 million years old.”
The secret of economics and financial markets is what we are taught in graduate school. Use the decimal point. Fool people with numbers. Make them think we know precisely what we’re talking about when in fact we don’t. Most projections and estimates are a mile wide, especially if they cover any period of time after the next hours. Here’s an example. The Congressional Budget Office of the United States projects that the federal deficit over the 10-year period from 2022–2031 will be 12.266 trillion. (You can see the numbers here. Clicking the link will land the spreadsheet in your downloads folder: https://www.cbo.gov/system/files/2021-02/51118-2021-02-11-budgetprojections.xlsx.)
Think about that one. The CBO hasn’t been able to get close to an accurate long-term deficit projection ever. There was a time when they actually projected surpluses. If you remember the history, Alan Greenspan actually publicly stated that he was worried that surpluses would be so large that the United States would run out of Treasury notes and bills. They wouldn’t be able to issue any because of the surplus, so the Federal Reserve wouldn’t have any Treasury bills, notes, and bonds to purchase for monetary policy. There are not a lot of folks around who remember that, but I do (“Remarks by Chairman Alan Greenspan: The paydown of federal debt,” April 27, 2001, https://www.federalreserve.gov/boarddocs/speeches/2001/20010427/default.htm).
So what’s the .2 or the .26 or the .266 in the CBO’s deficit projection? The only thing we know about the deficit is that it is likely to be large. And we don’t know whether the largeness has any real meaningful impact or not. We can only guess at these things.
Numbers make us look like we know what we’re talking about; but the truth is that most forecasters, most economists, and most financial gurus are guessing. Let me give you a different example. My very dear friend Frank and his wife Ellen live in Seattle, Washington. He sent me the following note, which I think describes how perplexed we can be about numbers. Frank wrote:
“Ellen looked at the weather on her Microsoft Surface this morning, and the app says here there is a 24% chance of rain between 10 and 11 AM. Why they did not carry it out to four decimal places, I do not know. Why we are supplied with numbers like this, as if people really know what they are talking about, I cannot quite fathom. I do know that people seem to be hungry for certainty; so we conjure up labels, ‘statistics,’ and repeated lies that must be true because we hear them so often. If it is truly only difficult, in predicting, to predict the future, does this mean we know we have a 24% chance of being correct?
“A question from the above ‘statistic’ comes to the fore. Does anyone know if a 24% chance of rain means that 24% of a certain geographic area will have rain, or that there is really a 76% chance of everyone in the area staying dry? Or that there is a 100% chance of rain for some 14.8-minute block of time between 10 and 11?
“Most important, who can I sue if rain comes before 10 or after 11?
“Meanderings of a certifiable geriatric specimen,
“Frank”
Let’s go to a different number. National Public Radio recently argued that 12 people are primarily responsible for the anti-vaccination movement in the United States. Here’s the link: “Just 12 People Are Behind Most Vaccine Hoaxes on Social Media, Research Shows,” https://www.npr.org/2021/05/13/996570855/disinformation-dozen-test-facebooks-twitters-ability-to-curb-vaccine-hoaxes. Imagine. Twelve people are able to persuade millions of Americans, maybe 20–25% of the adult population of the United States, to forgo vaccination. What an incredible power held by 12. Remarkable. Think of the headline if it were to read something like this: “150,000 separate URLs redistribute incorrect information about vaccines. Because of that, millions allow themselves to be persuaded to their own peril.” Ask yourself a question. Would you read the story if it said in the headline, 150,000, or would you be more attracted to read it if the number cited is just 12? Use of numbers. Multiple ways. All kinds of distortions can happen.
Social media does, of course, amplify distortions of truth. The internet went nuts this week over former President Trump’s visit to the North Carolina Convention. I received all sorts of emails from folks who wanted me to know that President Trump wore his pants backwards at the convention. They were certain of it. They speculated about why. What’s wrong with him? Is it a cognitive disability? Did he have an intestinal accident right before the performance and have to change his pants? Did he not have a separate pair of pants so he had to wear the pants that went with the rest of the suit and turn them around? You can’t make this stuff up. So we consulted a fact checker, and here’s what Snopes had to say, in a nutshell: “Nope, sorry folks, you may not like Trump, but he wore his pants the right way around.”
But let’s get back to numbers and the stories behind them. We hear a lot of things about Texas these days. Texas has met with lots of criticism about all sorts of things from its electric grid to its gun laws to its healthcare system and its handling of COVID. But Texas also happened to attract 4 million new citizens who came from other places in the United States, according to the Census Bureau (“Census Bureau announces 4 million more Texans, state will gain two seats in Congress,” https://spectrumlocalnews.com/tx/austin/news/2021/04/27/texas-gains-4m-residents--2-congressional-seats-in-census). So, who knows what the magic is in Texas. We asked around. We got the answer, and we have the proof. Our friend Howard, who lives in Texas and is the Chief Executive Officer of a financial firm there, noted to me that, whatever happens, Texans keep their priorities in the right order. He attached a photo to illustrate his point.
There you have it.
We’ll end this Sunday with a couple of notes. Number one, watch the numbers. We call that the confidence interval. Remember that the unemployment rate that’s published on a Friday can be plus or minus 100K people in the payroll number and still show up in the newspapers as the same figure. My colleague Bob Eisenbeis points this out. So many people don’t understand statistical margins of error. They think the number 531,000 is a precise count. Well, it’s an estimate. You could drive a truck through the confidence interval and probably not scratch the paint on either side.
For every single thing we do at Cumberland, we try to source a second, independent verification; if we can, we get a third source and a fourth source. And if we can refine the estimates and get close to accuracy, we consider that effort a success. If I had believed that first email about Trump and his pants being backwards and forwarded it to others, those who received my email might have said, “Oh, if Kotok forwarded it, maybe it’s true.” In fact, the people who sent it to me thought maybe it was true. But it wasn’t, and a verification process turned up the truth. There is nothing new about the way Trump wore his pants this week. There are photographs to prove that, too.
Let’s turn back, for a moment, to the economist and his wife standing at the rim of the Grand Canyon, looking at the wonders of nature. We think that image makes a point not just about numbers in general, but about where we are now. If you stand at the Grand Canyon and see it from either end, South Rim or North Rim, it is a beautiful site, unique in the world. The North Rim, Google tells us, lies at an altitude of 8297 feet above sea level. Well, that’s true in one spot – the environs of the Visitors Center. Utah.com tells us, more usefully, that the North Rim ranges from 8000 to 8800 feet in elevation (“Grand Canyon North Rim,” https://utah.com/grand-canyon-national-park/north-rim). The South Rim, on the other hand, is about 7000 feet above sea level.
I have been to both rims, and I have been into the canyon. When you trek down into the canyon, whether from the North Rim or the South Rim, and you look around at the walls, they look alike. When you work your way down to the bottom of the canyon to the Colorado River and Phantom Ranch and then look up again, the sights, north or south, look very much the same.
But when you drive to the canyon from the north, you travel hundreds of miles through lush greenery and forests to come to the North Rim, where you see this marvelous site. Standing on the North Rim, you can barely see the South Rim 18 miles away. On the other hand, when you approach the Grand Canyon from the south, you come through dry, brown desert. You don’t see the trees on the South Rim. They aren’t there. You don’t see the lush greenery. It’s not there.
So, what, again, is the altitude of the top of the Grand Canyon? Is it 8000 feet? Is it 7000 feet?
I’ll close with this thought. We plunged to the bottom of the Grand Canyon, metaphorically speaking, with COVID and the pandemic. At the bottom, which was in April of last year, we had over 20 million people put out of work in one month. We endured an enormous shock. We hurtled through a transition that would, perhaps, mirror a three- or four-year recession or depression; and now we’re trudging back up. We have been trudging upward for a while. We launched this growth surge starting from all the way down at the Phantom Ranch level.
We’ll leave you with the following question: Which side of the Grand Canyon will we be on when we get to the top (which will happen soon). Will we find ourselves on the North Rim or the South Rim? Will we step into verdant forest, or will we find ourselves in a much drier desert landscape? The answer is, we don’t know. And anyone who thinks otherwise is guessing. But what we do know is, even given the most recent employment report, we still have 8 million fewer people in the workforce than we had before we started the pandemic. And we have a million more people dead in the United States than the mortality tables predicted back before the pandemic. Further, for every person who is no longer with us, we have between 5 and 10 people who suffer lingering symptoms or partial or full disability from COVID, and we don’t know where this goes. So be wary about the numbers. Happy Sunday, and we hope you stay safe and careful.
David R. Kotok
Chairman of the Board & Chief Investment Officer
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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
