The Truth About ECRI's Black Box, And Lakshman Achuthan's Attacks On Wall Street

Monday Lakshman Achuthan of ECRI (who I am still convinced is just Jeff Goldblum in a bald cap doing the longest method acting prep work of all time) was on Squawk Box and gave the cockiest interview I have ever seen.

You have to respect the marbles on a guy with no economics or mathematics training to speak of, calling out everyone on the street (never mind that a few shops are predicting recessions as well) saying that the firm for which he simply is the head of marketing and operations is infallible. It’s awesome stuff, markets are wrong, economists are idiots, him and his subscribers are the smartest people on the planet because they are the only people looking at forward looking indicators. Priceless. If you haven’t seen it yet I implore you to click through below.

The exchange with Steve Liesman went about as viral as finance arguments can when Steve pushed Achuthan for any component of his “contagion of leading indicators” call and he flat out refuses and then blames consensus reliance on physics and models for the divergence from ECRI’s model which of course the only model that works.

I am an economist by training and am regularly in touch with both buy side and sell side economists, in house and elsewhere, so the idea that nobody looks at leading indicators is beyond insane.

As a matter of fact most everyone goes out of their way to focus on leading indicators because measuring based on metrics that are two or three months stale when validated like GDP does not really help your clients who are trying to position for the future.

For example here is the widely followed Conference Board Leading Economic Index courtesy of Dr. Mark J. Perry’s blog for both the long term and short term which has a much longer history and a better track record.

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Ok but that’s a similar subscription based service looking to predict recessions, how about sell sides. Luckily Wells Fargo puts out a proprietary leading index and it too has a longer history and a better track record. Lets see what that has to say.

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Hmmm maybe they are missing the point though. From what ECRI says, sell sides are crazy physics posers and surely do not have all the information. Again luckily for us, the Fed which has access to every conceivable domestic economic data point also puts out a leading economic index. Schocker alert! It has a longer history and a better track record than ECRI. Let’s see what the Fed has to say.

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With all the alternative leading economic measures pointing toward continued expansion, this led me to think along Leisman’s line of thought, what exactly is in the ECRI indicators? Clearly their two recession calls have impressively lead equity markets. So I gave their index a look, and charted against equities which confirmed it does lead the SPX in downturns. Naturally on my end the next look was at ECRI against the bond. What I found was that the their Weekly Leading Index is a near match to the inverse of the trend line on the bond. Here’s the ECRI Weekly Leading Index (which is 16 days lagged mind you) charted against the US Treasury 10y bond future from the quarter the firm launched. It’s not even normalized and it is charted on the same axis.

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The ECRI, and the bond for that matter, may be right as rain on the call but if you have a near perfectly inverse correlation with readily available market infromation and one that is currently being intervened in, it’s pretty hard to make the point that you’re infallible, worth your cost, or the only model on the planet worth looking at.

Maybe this might be worth reflecting upon before you tell everyone the black box that you didn’t even develop is the be all end all greatest thing on the planet.

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