"Kee" Points with Jim Kee, Ph.D.


  • Economic Update 
  • Populist Nationalism
  • Replication Crisis


Economic Update


Last week a lot of US data pointed to a positive picture as we head into the final quarter of the year. Business inventories, retail sales, consumer sentiment, – all indicated continuing expansion. The Atlanta Fed’s GDPNow model for third quarter GDP growth has actually strengthened as we’ve passed through the quarter. It is now indicating 2.7% annualized third quarter growth. The first or “advance” estimate will be released by the Bureau of Economic Analysis on October 27th (2nd quarter was 3.1%). Looking globally, the International Monetary Fund (IMF) released its October 2017 World Economic Outlook, raising its global growth projections slightly from 3.6 percent to 3.7 percent for 2018. The IMF cited “broad-based upward revisions in the euro area, Japan, emerging Asia, emerging Europe, and Russia, offsetting downward revisions for the United States and the United Kingdom.” Of course, estimating the growth rate of something as vast as the “global economy” down to the decimal point is a little silly (I’ve never met an economist who thought otherwise), but “stronger rather than weaker” is a decent takeaway.


Populist Nationalism 


An interesting take on global populist/nationalist movements: “India’s loss will be our gain,” said 2017 Nobel Prize winner Richard Thaler regarding Raghuram Rajan’s return to the University of Chicago from the Reserve Bank of India. Rajan has argued that the rise of populism around the world has been driven by the fact that the outsourcing and automation of jobs brought about by the information technology revolution has been magnified by trade. This has led to despair (as prior Nobel Laureate Angus Deaton showed in his work on mortality rates) and, according to Rajan, will probably get worse. But the point is that these negative effects are very concentrated on segments of society with few other options, like moderately educated workers in factory towns. In contrast, the governance centers tend to be in big cities, and they are largely isolated from these impacts. That is, people in governance centers (“capitol cities”) like London and Washington, D.C. tend to be insulated from dislocations in the rural areas, like Northern England or the US Midwest (or Oklahoma City versus Okmulgee). According to Rajan this has contributed to the rise of “populist nationalism” (Stigler Center at the University of Chicago). I am right in the middle of Rajan’s new book, I Do What I Do, which is a collection of essays and speeches delivered during his time in India. He insisted upon waiting until one year after his tenure to publish it. I’ll try to bullet point some of the main insights in future Kee Points, and there are many. For example, Rajan questioned those retirees in India (and here?) who wish for higher inflation because they want higher interest rates on their savings; the higher inflation will also erode the value of their principle! That’s no different than having low interest rates and just periodically selling part of your principle.


Replication Crisis


Replication crisis: That’s what many in the academic community are calling a growing development in the area of academic research. Investigators in many fields, from psychology to cancer research to investing and finance, are finding that many experiments and statistical research cannot be replicated, which calls into question their validity. Driven by the pressure to publish and often by a superficial understanding of and/or use of statistics, many researchers are publishing spurious results and perhaps fudging their data a bit (changing time periods, omitting periods, creating data transformations that destroy information, etc.). This is evidenced by the inability of subsequent researchers to be able to replicate (duplicate) many scientific results, hence the moniker “replication crisis.” While some of the higher profile examples come from the fields of biomedicine and psychology, the fields of investments and finance certainly have their share. For example, Duke University professor Campbell Harvey, past President of the American Finance Association, was intrigued by research suggesting that many scientific test results published in medicine were false. Looking to his own field, he gathered information on 315 tests that were conducted in finance, and found that about half of them were false (including his own), meaning they claimed some discovery when there really wasn’t one. In his own words (from Garden of Econ, Harvey’s blog):


“The intuition is really simple. Suppose you are trying to predict something like the returns on a portfolio of stocks. Suppose you try 200 different variables. Just by pure chance, about 10 of these variables will be declared “significant” yet they aren’t…I show this by randomly generating 200 variables. The simulated data is just noise, yet a number of the variables predict the portfolio of stock returns…what you would expect by chance.”


Harvey’s work suggests that a plethora of investment products purporting to display profitable results are generated by this process, and just generating the best random strategy (with zero implications on how it will work in the future). We in the business call that product proliferation. Harvey wants the profession to go back in time and detail false research findings. It all reminds me of the early computer work statistician Harry Roberts did in the 1950s producing charts from randomly generated numbers that looked exactly like stock charts (calling into question the “technical analysis” of the day). I don’t see this as a crisis at all, but rather progress and advance. Shining the light on flawed practices is a good thing in science, not a bad thing; it should lead to better understanding and better outcomes for investors (and patience) going forward.