This is pretty funny. From the St Louis Fed. No comment necessary:
“Relationships between macroeconomic time series are not usually straightforward enough to establish with a simple graph. The problem is that almost all time series tend to grow in the long term as an economy grows. So, any measure in nominal terms will grow even more, since inflation rates are almost always positive. Because time series can exhibit a common trend, it becomes difficult to interpret whether there is a relationship between them beyond that common trend. We call this spurious correlation. There are various ways one can isolate the common trend, and we show some here using M2 and total federal debt. Above, with just the raw series, all we can see is that they both tend to increase in the long run at roughly the same rates.”
They go on to show how such a chart can be manipulated intentionally to create the appearance of a correlation where there is none. It’s a clever, funny and totally accurate post. Go have a read.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.