Voodoo Math, Apples and Oranges, and Andrew Ross Sorkin’s Misinformation

I wrote a post yesterday explaining what was wrong with Andrew Ross Sorkin’s voodoo non-math regarding the “better-off-ness” of Cypriot depositors compared to U.S. depositors, even accounting for a hypothetical 10% haircut.   I actually understood the point Sorkin was trying to make, but he used the wrong example.   Instead of using German deposits which are in the same currency as Cyprus (where the math would have worked just fine for him), he compared Cypriot Euro deposits to U.S. dollar deposits, which is like comparing apples and oranges.   They are not equivalent.    I’m going to try to come up with some non-financial analogies for you, but first I want to explain why this bothers me so much.

We have a financial intelligence problem here in America.  We may not be alone in the world in that respect, but hey – I’m a U.S. citizen, so I’ll stick to the U.S. for now.  It kills me when newspapers like the New York Times (The Paper of Record ???)  publish Sorkin’s false claims, and it kills me even more when CNBC allows him to repeat them on the air the next day.   See, if our News Sources are going to feed us this misinformation from the top, then how can we possibly expect our populace to get it right?   The sources we are getting our information from are making us dumber!

Anyway, I’ve been eagerly waiting for Sorkin to publish a correction of his blatantly false claim from his NY Times article:

“Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?

The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.”

That’s false.  I explained why at length yesterday.  Then this morning, Sorkin was on CNBC with Steve Liesman and Joe Kernan, and they were talking about how U.S. savers have had a sort of 10% haircut of their own in the form of low rates they’ve earned.   Kernan is discussing the issue with Liesman, and they cut to Sorkin, who says:

“look, if you — if you take out the fx issues, and the currency, you would actually have been better off keeping the money in Cyprus and having your money confiscated than you would here in a U.S. bank”

Video here:

 

Kernan thanks Andrew (for “proving” his point!), and gives Liesman a raspberry “nanny nanny boo boo” type noise.   Great job guys – really well done: make blatantly false claims and emulate a 10 year old.   Is there any wonder our collective national financial intelligence is craptastic?  Aww never mind – we won’t acknowledge that ignorance, or the fact that it comes right from the top news sources: we’ll just blame the big bad banks every time we do something ignorant.  Much easier that way.  Oops – I’m getting sidetracked – where was I?

Oh yes – Sorkin’s latest falsehood.   I guess that either Sorkin read my post, or someone told him that he had to account for FX rates, because you’ll notice that today on TV he added the qualifier “If you take out the FX issues.”   There’s only one problem – YOU CAN’T JUST TAKE OUT THE FX ISSUES!  Now let’s try some terrible real world analogies.

Pretend that its 2008, and Andrew owns an apple orchard.   Andrew can grow apples, but the problem is, his apple trees aren’t multiplying very quickly right now – their reproduction rate  is about 1% annually.   He has 100,000 trees, and he’s only getting 1000 new trees this year.  Blame it on the bees, the rain, the Fed – whatever – the trees are not reproducing very quickly.    Then there’s Joe:  Joe has an orange grove.   Joe’s 100,000 orange trees are spreading like gangbusters – expanding at a rate of about 5% a year.

Fast forward to 2013.    Andrew’s 100,000 apple trees have expanded into 105,100 apple trees.  Joe’s orange trees, however, have exploded into 127,600 orange trees!   Sadly, the evil banksters come and bulldoze 10% of Joe’s orchard just for kicks, but Joe still has 114,840 orange trees left!  We can obviously conclude that since 114,840 is a larger number than 105,100, that Joe has been better off than Andrew, right?  Of course not – ya know why? Cause that’s comparing apples to oranges!  See what I did there?

Astute readers will notice that I used the same numbers from Sorkin’s voodoo math inequality of Cypriot Euro-based accounts to U.S. dollar-based account:

“If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.”

To make the fruit comparison viable and accurate, we need to take into account the cost of converting Andrew’s apple orchard into Joe’s orange grove.     Or compare the sales price of Andrew’s apples to the sales price of Joe’s oranges.   Or something to make it so that we’re talking in consistent terms!   I’ll give you another, even more accurate example in the postscript.

Because comparing apples and oranges, well, there’s a saying about that or something

Andrew Ross Sorkin Gets The Cyprus Math Wrong

-KD

Postscript:

Here’s an example that might be even easier to understand, in the manner in which I’d teach it to a fifth grader:

It’s 2008 and Brian has a herd of cattle that weighs 100,000 pounds.  Cattle, in 2008, are selling for $10/lb.   Brian’s cattle gain weight at a rate of 1% per year.

Brian’s neighbor is Jim.  Jim has a herd of pigs that weigh 64,516 pounds.  Pigs, in 2008, are selling for 15,50/lb.   Jim’s pigs gain weight at a rate of 5 % per year.

After five years, Brian’s 100,000 pounds of cattle have grown into 105,100 pounds of cattle.   Brian’s 64,516 pigs have grown into 82,340 pounds.  Unfortunately, he then lost 10% of his herd to a disease, so he was left with only 74,106 pounds of pigs in his herd.

Who is better off?   Brian or Jim?

We need some more information, right? Namely: the current price of pigs and cattle!   Currently, cattle are selling for $10/lb, and pigs are selling for $12.90/lb.

You’ll notice that Brian’s starting 100,000 pounds of cattle at $10/lb was worth $1,000,000 dollars in 2008 – exactly the same value as Jim’s 64,516 pounds of pig @ 15.50/lb.  In other words: back in 2008, we could have bought the cattle herd or the pig herd for the same amount of money.    What are their respective herds worth now?

Brian’s 105,100 pounds of cattle at the current rate of $10/lb are worth $1,051,000, and Jim’s  74,106 pounds of pigs are worth $955,967.   Once we neutralize “cattle pounds” and “pig pounds” into a common denominator (dollars in this case), and have consistent comparison points, we can draw accurate conclusions:   Brian has done better than Jim has.

Do you need me to extend the analogy?

Brian’s cattle growing at 1% were U.S. savings accounts.

Jim’s pigs growing at 5% were Cypriot savings accounts.

The price ratio of pigs/cows of 15.50/10 back in 2008 is the EUR-USD exchange rate at the time of 1.55, and the current price ratio of pigs/cows of 12.90/10 is the current EUR-USD exchange rate of 1.29.

Q.E.D.

Hey Sorkin – Are you smarter than a fifth grader?

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