Spurious Correlations in Financial Markets

Aug 7, 2024

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In the financial markets, it's common to spurious correlations based on historical data. However, the economic landscape has evolved, and banks now invest more in treasuries and borrow from the Fed rather than traditional lending. This shift questions the yield curve's predictive power. Additionally, spurious correlations show absurd links between unrelated data points, emphasizing the need for critical analysis of data to avoid misleading narratives.

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Financial markets often draw conclusions from patterns, such as the inverted yield curve predicting recessions. Today's economy differs from 30 years ago, with banks favoring treasuries over traditional lending, altering the yield curve's predictive power. Correlation does not always imply causation; the inverted yield curve's causative effect may be weakened. Spurious correlations can be humorous but highlight the pitfalls of finding meaning in random data patterns. The bond market, at $130 trillion, dwarfs the $50 trillion US stock market and $100 trillion global stock market. The increasing debt and bond market highlight the importance of access to capital. AI's impact is currently seen as limited by many CEOs, viewing it as a potential rather than immediate profit driver. Microsoft's expenses on data centers have increased significantly, reflecting the infrastructure investment for cloud and AI services. Commercial real estate faces challenges, with significant losses on properties due to rising interest rates and reduced demand. Residential real estate is also under pressure, with 41.4% of median income now spent on new mortgages, surpassing 2008 levels.

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