If one were to compile a “Best of” (Errant Pundit Fodder) for 2017, the Hard vs. Soft Data debate would probably be Top 5.
And if one were to ask any economist for a quintessential hard data point, it would be difficult to convictedly argue against 'GDP'.
That hard data, of course, looks like the following (complete with colored arrows and pleasant hues of green for the not yet caffeinated):
The problem with the Hard vs Soft Data debate is basically two-fold:
1. Historically, accelerations in soft data have led accelerations in hard data most of the time. The coincident-to-leading nature of many soft and survey based indicators is why they’ve risen to prominence and why we monitor them in the first place.
2. The Hard vs Soft chart is interesting from a psycho-behavioral perspective but its main thrust rests on a misguided premise. Macro is about the slope of the line. It’s about better/worse and asset returns augur to the trending rates of change in growth and inflation. Absolute good/bad or the magnitude of ‘beats’ relative to consensus is largely sideshow. Sure, to the extent the market is an efficient discounting mechanism, the performance relative to expectations matters but it’s not a defining characteristic or underlying driver of asset performance when growth is Trending.
It essentially distills down to this: If you knew growth, revenues and profits were going to progressively accelerate for a year and half, would you short that on a premise that one flavor of data would beat expectations by a lower magnitude than a second flavor of data?
Anyway, those two points seem so self-evident that it’s difficult to imagine this note necessary. But since the Hard vs Soft data chart has again been making the rounds this past week and - despite the conspicuously negative utility imparted in 1Q17 - I've again had to field questions around it, a short humpday rant to jumpstart November seemed well-placed.
To growth,
Christian B. Drake
@HedgeyeUSA
