When I lived in China, I would sometimes meet with the National Bureau of Statistics to better understand their methodologies. Once I asked them "how can you possibly measure a GDP number in a country of 1.4 billion that includes modern megacities like Shanghai as well as huge swaths of poor, rural areas?" The response shocked me. To paraphrase: "we ask every province for their GDP estimate. Then we take those estimates and throw them in the trash because they are all too high. Then we look at how much electricity was used and we have a formula that converts that to economic activity."

Honestly, that's pretty reasonable! It's hard not to have sympathy for the folks with this impossible job. And it isn't specific to China - imagine being responsible for calculating housing inflation rates for the US. Gross. Even during quiet times, measuring economic conditions is an inexact science. Every data point has its own lag, its own measurement error, its own limitations. When the economy is sailing along this is a small problem - the next data point is likely going to look like the last since the world isn't changing much. But at turning points - like we are going through now - the limitations of economic data can be maddening. I could show you many data points that say the US economy is falling off a cliff, and many others that say things are more or less holding up ok. Currently, the data is a Rorschach test - you can find support for whatever it is you want to believe.

This dynamic puts two things into sharp focus:

1) Understand the linkages: Much of the confusion gets caused by the way weakening conditions ripple through a heterogeneous economy, and by extension, the data. Your economic textbooks will tell you that the first domino of a recession is rising interest rates causing less household borrowing, which in turn leads to less buying of stuff that gets bought on credit - houses, cars, etc. Not this time. This time, the weakness is starting with a tariff wrecking-ball that will cause a different set of dominos to fall in a different order. Understanding the sequencing of those dominos is critical.

2) Take advantage of markets that are inconsistently priced: Different market participants will interpret what is happening differently, and that can lead to very different economic conditions being priced into different markets. Oil is more or less pricing in a recession, while US equities are pricing in a glorious economic boom. Copper is splitting the difference. They can't all be right! And that creates opportunities to look across markets and create uncorrelated, high expected value trades.

Thoughts are always welcome!