Macro Hive Deep Dives: Overcoming Fake China Data / Forecasting Payrolls / Buying Slow, Selling Fast

Welcome to our second Deep Dive newsletter. In this edition, we summarise three weighty academic papers down to five minute reads. The first, a Fed paper, looks into how fake is Chinese GDP data and how best to use alternative indicators to measure growth. The second paper looks at how to use ADP employment data to better forecast the official US payrolls data. Finally, we feature an excellent paper that outlines how the lack of effort around selling decisions (as opposed to buying decisions) explains much of investor underperformance.

Enjoy!

What’s Wrong with Chinese GDP Data? (2 min read) Scepticism has always surrounded Chinese growth data, especially its GDP statistics. The data is released extremely quickly after the end of a quarter and is hardly ever revised, making one wonder if it’s simply invented. Indeed, local and provincial officials are pressured to meet growth quotas handed down by the government, so there’s pressure to bias national GDP data upwards from those providing it. Here, we break down a recent Fed paper, ‘Is China Fudging Its GDP Figures? Evidence from Trading Partner Data’, to reveal a new take on assessing China’s economic activity.

Improving Forecasts for US Payrolls (3 min read) For government agencies and economic policymakers, assessing the performance of the labour market significantly aids their decision making. Every post-war recession in the US has been associated with a year-on-year drop in payroll employment, while outside of recessionary declines, the year-on-year payroll growth has always been positive. It is perhaps because of this that the monthly release of the official US payrolls data is the most market-moving US data series. As you might imagine, then, the accuracy of this measurement has a lot riding on it; and researchers from the New York Fed have recently made proposals for improvement in recently published paper entitled: “Improving the Accuracy of Economic Measurement with Multiple Data Sources: The Case of Payroll Employment Data”.

How Investors Lose Money When They Sell (3 min read) There is ostensibly no reason why an investor’s skill would differ between buying and selling a stock. Both activities involve, at least theoretically, a similar process. But a recently published paper, ‘Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors’,  suggests that behavioural biases in decision-making can plague even the most sophisticated of investors.

In the 1980’s the American economist Richard Thaler observed that people often demand much more to give up an object than they would be willing to pay to acquire it in the first place. He named this ‘the endowment effect’. Thinking similarly a few years later, academics Daniel Kahneman and Amos Tversky coined the term ‘loss aversion’ to describe when the disatification of giving up an object is greater that the satifisfcation of acquisition. So how do these phenomena play out for investors?

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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