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Statistics and other untruths

I’m sure many of you have heard the witticism, “Don’t believe statistics you didn’t make up yourself!”. It tends to be used in the context of economic data originating in China, which is often treated with a good deal of scepticism. However, in this case, the data came from the U.S.

The U.S. mania for collecting data never ceases to amaze some observers. There are statistics on almost every single aspect of economic activity and the population. Seeing as the U.S. always wants to be the best, the biggest and the fastest at everything, one shouldn’t wonder that President Trump, who comes across as more of a carnival barker than a diplomat, claims as a success the fact that the U.S. has published its GDP growth figures one whole month earlier than all the other economies. On April 26, the U.S. gave its initial estimate for economic growth of 3.2% for the first quarter of 2019. This comes as a surprise considering that this figure is no less than 0.9% over the consensus figure of Wall Street economists, 0.5% higher than the Atlanta Fed’s GDPNow model and almost 1.8% higher than the New York Fed’s figure!

However, note the word estimate. It is not unknown for the initial estimate of GDP growth to be sharply revised. We reported on this phenomenon in our July 2014 Market Commentary entitled Sex and Drugs and Rock ’n’ Roll. First quarter growth in 2014 – originally estimated at +1.7% – was continually revised over a period of five years first to +0.1%, then to -1%, -2.9%, -2.1% and finally to -1%! It seems that there is considerable room for improvement in the process of calculating/estimating economic growth. There is only one reason why the capital market reacts to economic data at all, which is this: there’s nothing better out there! However, everyone should ask themselves whether the capital market’s reaction is appropriate in light of the fact that the data is not exactly reliable.

Let’s look at the mystery of the GDP growth in the first quarter of this year. Figures 1 and 2 show the progression of change in U.S. gross domestic product based on the expenditure approach. There are two other ways to measure the GDP of a country: the production approach and the income approach. Please refer to Wikipedia for a definition of these approaches¹. Looking at the two charts, two things jump out at us: for one, growth seems to be lower more often in the first quarter than in the other three quarters. Secondly, the gold section of the bar, which indicates inventories, is just as often in positive territory as it is in negative territory.

Let’s start with the latter. The inventories figure is not directly estimated. No statistics office employee walks around a company’s warehouse taking an inventory. This figure is a residual, calculated mathematically. Working backwards from the final result, the difference between what one has and what one should have gives you the figure for inventories. So far so good. However, one should be able to see some degree of causal link otherwise one runs the risk of questioning the credibility of the process!

BIP-Wachstum USA

Figure 1: U.S. GDP growth

BIP-Wachstum USA

Figure 2: U.S. GDP growth

The circle in Figure 2 indicates the inventories component of growth. This additional 0.7% growth represents a not insignificant 32 billion dollars in additional inventories. Now for the causal link. One can only store what has been either produced or imported. The thing is, the U.S. central bank reported² a 0.3% decline in industrial production in the first quarter of 2019. The GDP report itself mentions a 3.7% decline in imports. If there was no additional production or import, where do the above-mentioned 32 billion dollars come from? Another reason could be a sharp decline in private consumption. But the other estimates (see above) rule this out. If private consumption had shrunk to that extent this would for sure be a bad sign of the state of U.S. growth because it is highly dependent on private consumption. The cause is assumed to be elsewhere instead. As already mentioned, there is a certain degree of seasonality to growth. In the first quarter of each year, growth rates are often much lower than in the other quarters. Now, the data that comes from the U.S. statistics office is already adjusted for seasonal factors. This means that an attempt is made to filter out effects related to weather or public holidays using special calculation methods in order to smooth the data to a certain extent. Herein lies the rub. One can assume that the calculation methods were changed in order to improve seasonal adjustment. However, the other participants were not made aware of the changes in method. This is why the other estimates differ so widely from the official figure of 3.2%.

We would like to end the discussion at this point, as otherwise there is a risk of straying into the territory of legends and conspiracy theories. However, we are asking readers just to pay particularly close attention to this figure for growth. We are quite certain that the market is in for significant revisions.

Perhaps one of the better ways to determine the state of such an important economy as the U.S. is the real estate market. This can serve as a barometer for the important U.S. consumer. Figures 3 and 4 show the rates of change for property sales, in new home as well as existing home sales. Note that, with almost ten times the number of units, the latter is, of course, the more significant segment for us to consider. The period of weakness in new builds that began in summer 2018 seems to have come to an end for now, while the sales of existing homes have been more or less in constant decline for more than a year.

Verkäufe von Neuimmobilien in den USA

Figure 3: Sales of new homes in the U.S.

Verkäufe von Gebrauchtimmobilien in den USA

Figure 4: Sales of existing homes in the U.S.

At a value of over 50, the property developers’ index (see Figure 5), constructed in a similar way to the familiar purchasing managers’ index, indicates that the situation remains positive. One downer, however, is the sharp fall in the second half of 2018, and only some of this ground seems to have been made up as yet. Figure 6 shows the probable cause of the temporary weakness in the new homes market. The increase in mortgage rates in the second half of the year, triggered by the rise in yields on long-dated U.S. Treasuries to above 3.2%, led to a steady decline in mortgage applications. It is obvious that a rise in the cost of property financing has a negative effect on mortgage applications. It is also interesting that mortgage applications shot up significantly when interest rates were falling again from the beginning of 2019.

US-Immobilienmarkt Zustand

Figure 5: State of the U.S. housing market

Hypothekenanträge (linke Skala) und Hypothekenzinsen (rechte Skala invertiert)

Figure 6: Mortgage applications (left-hand scale) and mortgage rates (right-hand scale, inverted)

This latter reaction, especially, makes it patently clear to us how sensitive to interest rates this market segment is. If you think about it, you will realise that the whole U.S. economy is highly sensitive to interest rates. It would be interesting to know whether it’s true to the same extent for other economies. However, that is probably more of a topic for an economics dissertation.

All we can say is that the U.S. economy is doing better than six months ago. We are somewhat sceptical about the data for the first quarter of 2019, but that changes little about the fact that the picture is more positive overall, which is largely due to the interest rate level. We therefore believe that the U.S. central bank will be very careful about using an interest rate hike as a monetary tool to combat inflation. Otherwise they run the risk of throwing the proverbial baby out with the bathwater.

We should therefore get used to the idea of a falling trend in U.S. yields for many months, which, of course, does not bode well for yields in the eurozone. Cue Japan.



Positioning of the Ethna Funds


The month of April ended with a surprise. The EU Statistical Office, Eurostat, published its initial estimate for GDP growth in the first quarter of 2019 at 0.4%. Before that, U.S. economic growth had been calculated at 3.2% on an annualised basis. Both estimates exceeded expectations, as fears of a sharp economic slowdown prevailed over the course of the month. Growth in the U.S., however, was not entirely convincing. Investors criticized in particular the lower private consumption in the U.S. Continued weak data on industrial production in the U.S., China and Europe also led to just cautious optimism among market participants for the further development of the global economy.

Nonetheless, yields on 10-year sovereign bonds rose slightly over the course of the month. 10-year Bunds ended the month with a minimally positive yield of about 0.01%, while 10-year Treasuries are now yielding about 2.5%. However, interest rate volatility was low in general. We expect no significant changes in these two core yields in the near future, as both the ECB and the Fed are expected not to change their key rates. The Fed confirmed in March that they would remain “patient”, because with persistently low inflation no interest rate rises are required, and with economic growth remaining solid an interest rate cut seems unlikely.

The overall wait-and-see attitude of central banks led to falling risk premiums for corporate bonds, which currently account for not quite 90% of the invested fund assets. As a result, the Ethna-DEFENSIV again made strong gains in April. The solid start to the corporate reporting season continues to support our expectations for stable to slightly lower risk premiums, from which our bond portfolio should continue to benefit accordingly.

We considerably increased our open currency positions over the course of the month. The open USD position now tops 22%. We have also built up an unhedged currency position of around 5% in Swiss francs. Within commodities, we have shifted a small proportion of the gold position to oil, so that 3% of the fund assets are now invested in oil certificates and less than 5% in gold certificates. In line with our fundamentally positive view of risk-weighted assets, we have again built up an allocation of 6.5% in equities by purchasing futures.


The Ethna-AKTIV’s result for the month was 0.89%. After a modest participation in the equity rally in the first quarter, April was the first month in which the equity portfolio contributed most of the fund performance. While the fund’s YTD performance currently stands at an impressive 5.17%, it is slightly below our expectations at the moment. Nevertheless, we would like to take this opportunity to note positively that - although the enormous market recovery of the last four months was not our expected scenario at the beginning of the year and we therefore only had a small equity allocation - our approach of a diversified mixed fund worked. Bonds generated most of the performance while positions in currencies and commodities were also positive contributors.

Looking ahead, we see the environment and the positioning based on it as follows: the key central banks, the ECB and Fed, have reiterated their rather accommodative wait-and-see stance. Inflation data in the major economies remains moderate and interest rates low. We are seeing surprisingly good figures this earnings season. This shows that the negative trend in revised profit forecasts in America has come to an end for the time being. In the U.S. in particular, the signs are pointing to a return to growth. Accordingly, the word recession has been removed from the vocabulary for the time being. On the whole, all these signals very clearly recall the Goldilocks scenario. Admittedly, the economic cycle is lasting a very long time but, on the one hand, this is no reason for it to end and, on the other hand, risky assets historically yielded very good results particularly in these phases. Given this scenario, equities remain an attractive investment alternative. However, caution is advised: we must bear in mind that this is not a one-way street. The higher volatility heralded in March has not yet materialised; quite the contrary. Both actual fluctuation and short positions on the VIX volatility index are currently back at the extreme levels that indicate overly euphoric sentiment.

The equity allocation we increased to 30% over the course of the month is therefore being actively managed and risk-controlled. In contrast, profit-taking slightly reduced the bond allocation. At the same time, we extended the duration slightly. We still believe that oil will continue to rise both due to our preferred economic scenario and based on the sustained tensions surrounding Iran and Venezuela. Not until the price of oil goes past the 70-dollar mark will we take profits by making sales. Our USD position was validated by fresh highs for the year last month. Since we assume that multi-year lows will be tested again, we have expanded the allocation to approx. 30%.


Again in April the equity markets showed no weakness and continued their impressive upward trend. Most of the leading global indices were up in April for the fourth month in succession. In the U.S., the major indices are just about to hit fresh highs. The dramatic rally of recent months raises the question whether any further upside potential remains or whether markets need a hiatus. In the past, strong rises in the stock markets in winter and spring were often succeeded by a bumpy start to May. On the other hand, the company results that have been published this reporting season have been very solid on the whole. In a situation such as this, we pay closer attention to sentiment on the capital markets. If too much euphoria sets in, this would be an important signal for us to adjust the equity allocation going forward and to reduce risks.

  • In April, we further improved portfolio quality and honed the profile, for example by purchasing U.S. industrial, insurance and online banking stocks such as Berkshire Hathaway and Charles Schwab. The conglomerate Berkshire Hathaway, which specialises in industrial operations and insurance, is known to most people, for one because of its owner Warren Buffet. Charles Schwab is not quite as well-known because the bank operates almost exclusively in America. However, there are parallels to be drawn with Berkshire. The bank is named after its founder Charles Schwab, who has run the business for several decades – similar to Warren Buffett – as founder, majority shareholder and CEO. These two additions bring fund gross equity allocation at month-end to 64.7%.
  • There are currently no bonds within the Ethna-DYNAMISCH portfolio. However, the two newly purchased stocks are telling of our opinion of interest rates. While we remain sceptical about European financials on account of the zero interest rate environment, the U.S. is worth a look. The fall in interest rates in recent months was very pronounced; indeed the scale was hardly to be expected. Nevertheless, the U.S. economy remains astoundingly robust. Normally, this is the perfect environment for interest rates to hold steady or even rise. In recent months, the market has priced out all interest rate rises. Due to the strong economy and the booming equity markets, fears of rising interest rates could return to the bond markets in the second half of the year. Both Berkshire and Charles Schwab, for example, would also benefit from rising interest rates.
  • Gold lost a marginal amount of value last month. Given its low weighting in the portfolio, however, this hardly had any effect on the fund. With its positioning in USD resulting from U.S. equities, the Ethna-DYNAMISCH benefited from the slightly weaker euro.

We also hold the widespread opinion that equities are the most promising asset class in the current environment on careful consideration of all aspects. Apart from potential tactical adjustments to the allocation mentioned above, we want the Ethna-DYNAMISCH to remain substantially invested in equities.

Figure 7: Portfolio ratings for Ethna-DEFENSIV

Figure 8: Portfolio structure* of Ethna-AKTIV

Figure 9: Portfolio structure* of Ethna-DYNAMISCH

Figure 10: Portfolio composition of Ethna-DEFENSIV by currency

Figure 11: Portfolio composition of Ethna-AKTIV by currency

Figure 12: Portfolio composition of Ethna-DYNAMISCH by currency

Figure 13: Portfolio composition of Ethna-DEFENSIV by country

Figure 14: Portfolio composition of Ethna-AKTIV by country

Figure 15: Portfolio composition of Ethna-DYNAMISCH by country

Figure 16: Portfolio composition of Ethna-DEFENSIV by issuer sector

Figure 17: Portfolio composition of Ethna-AKTIV by issuer sector

Figure 18: Portfolio composition of Ethna-DYNAMISCH by issuer sector

* “Cash” comprises term deposits, call money and current accounts/other accounts. “Equities net” comprises direct investments and exposure resulting from equity derivatives.

The investment funds described in this publication are Luxembourg investment funds (fonds commun de placement) that have been established for an unlimited period in accordance with Part I of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the “Law of 17 December 2010”). An investment in investment funds, as with all securities and comparable financial assets, carries the risk of capital or currency losses. The price of fund units and income levels will therefore fluctuate and cannot be guaranteed. The costs associated with fund investment affects the actual performance. Units should solely be purchased on the basis of the statutory sales documentation (Key Investor Information, sales prospectuses and annual reports), which can be obtained free of charge on the website or from the fund management company ETHENEA Independent Investors S.A., 16 rue Gabriel Lippmann, L-5365 Munsbach. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information or a solicitation of an offer to buy or sell securities. Contents have been carefully researched, compiled and checked. No guarantee for correctness, completeness or accuracy can be provided. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information, or an offer to buy or sell securities. The contents have been carefully researched, compiled and checked. No guarantee can be given for correctness, completeness or accuracy. The information includes past data which are no indicator of future performance. The management fee, custodian bank fee and all other additional costs are taken into account in the calculation of the unit price as stated in the provisions of the contract. Performance is calculated using the BVI method (German federal association for investment and asset management), which means that the calculations do not include an issuing charge, transaction costs (such as order fees and brokerage fees), custodian bank fees, or other management fees. Including the issuing surcharge would reduce performance. The performance shown is not a reliable indicator of future performance. Munsbach, 03/05/2019