How to Win Any (Financial) Argument

My friend Jerry got robbed at gunpoint in Cincinnati once, but he had the stones to ask the mugger if he could keep his driver’s license.

Mugger (brandishes pistol): “You even know WTF this is?”

Jerry: “Come on man…the DMV, gimme a break.”

So the mugger gave him his license back. Jerry proved himself to be a complete arse-cod that day, but I still admire him…and I herniated myself laughing that he was more afraid of the DMV than, like, a Ruger SR9.

Now: I don’t suggest trying to win arguments with muggers, but I do recommend trying to win arguments with people who argue finance based on ignorance and/or feels.1 The Facts Are on Your Side. So today’s topic is the St. Louis Federal Reserve’s FRED data repository, an irrefutable collection of 508,000 financial and economic data series from 87 gold-standard sources.


Pay attention to the charts presented by your favorite market gurus and you’ll often find in their corners the words “Source: Federal Reserve Economic Data.” In short: FRED, meaning the facts the gurus are giving you are verifiable as so.

Hard to be a market guru, but being a competent researcher is crucial to anybody on the road to FIRE. Case in point: early during February’s market turmoil I offered a summary of the Chicago Board Options Exchange’s “Volatility Index,” AKA “Fear Index” or simply “VIX.” The article was well-received among people who weren’t aware of it, in part for the perspective it gave them into the Scary Unknown. But there are many many other useful market measurements/indicators/etc. besides the VIX. And rather than doling them out one-by-one, I’ll show you how to find and use exactly the ones you want, by yourself.


So let’s use the VIX as our example.

First go to FRED and create an account if you like (but which isn’t mandatory.) The search bar’s at top right, so search for “VIX.”

FRED will present a drop box of related indices. The topmost is the one you want. Select it.

You’ll be taken to:

That screenshot’s cropped, but you can see there are twenty VIX-related data series. The top one is again the one you want. Now click the checkbox next to “Index, Daily, Not Seasonally Adjusted” and then the “Add to Graph” button. Note that you don’t have to check the box to the left of “Add to Data List.”

You’ll get:

Does the spike on the right look familiar? It should.

Read my VIX post and you’ll understand why this chart’s helpful, but next I’d like to show you ways to make it even more so.


To get the most out of FRED you need to know four of its charting tools, all of which are easy to use.

The first tool is the time controls at upper and lower right. These are quick-and-dirty methods to scope out your data. In the above chart I’ve clicked “Max” at upper right for VIX data going back to 1990.2 The slider at lower right is also useful: try zooming around with it. If you’re trying to call up a simple chart of a single data series, you may be able to finish it right here.


The next tool–the Big Kahuna–is the “Edit Graph” function.

Using your VIX chart, click “Edit Graph” at top right, go the “ADD LINE” tab, and under “Add data series to graph” enter and select “S&P 500.” Close the sidebar by clicking its X.

You’ll see that the series don’t compare well, but that’s only because they’re not scaled with respect to each other.

So try this. Go back to “Edit Graph” and under “EDIT LINES”  choose line one. That’s the VIX. In the “Units” dropdown box choose “Index (Scale value to 100 for chosen date)” and “Copy to all.” Observe that the date defaults to the first day of VIX data that FRED offers.

Much better, right? But what’s with the S&P only going back ten years?

Sadly, due to intellectual property issues the S&P 500 and Dow Jones and NASDAQ and other indices only go back that far.3 But the chart’s still useful. Since we have ten years of S&P data simply click “10Y” at upper right. (Otherwise you’d return to “Edit Chart” and manually enter the date you wanted to begin with.)

Mmmkay. Now we’ve got something to chew on.

For starters, look how the origin points of the VIX and the S&P 500 are both 100. That’s the scaling function at work: the S&P:VIX ratio equals 1:1. As you see, though, in late 2008 the S&P:VIX ratio jumped to 1:3.5. Panic at the beginning of the housing/credit crisis.

It becomes obvious that downturns in the S&P correspond to spikes in the VIX…which is to be expected since the VIX is a function of near-term S&P options premiums.4

See the shaded area at left? That’s the housing bubble/credit recession. But between roughly 2012 and now, the recovery has taken hold and continued. The S&P has steadily run up, so investors have perceived less market risk and the VIX has been flatter. But as of the beginning of February? An abrupt swing in the S&P:VIX ratio from 6:1 to 1:.7.

What’s most interesting about this chart, then, isn’t the ratio itself but the degree to which it changes. These swings occur because investors perceive greater market risk and are therefore hesitant to sell options without pricing in higher premiums. In short, higher uncertainty = higher perceived risk = higher options prices, which is exactly why the VIX is nicknamed the “fear index.”


The third tool to know is the “Download” button at the upper right of the page in the…what, yellow?…bar. (Bear with me…I’m red-green colorblind.)5 Use this button to pull data in a form that suits your own purposes.

 

 


Finally, scroll down to the “Notes” area for sources, definitions, etc. To quote from the VIX info: “VIX measures market expectation of near term volatility conveyed by stock index option prices.” Pretty much the thesis of my last article.

Now that you’re more familiar with FRED, let me encourage you to explore on your own. And a great place to start is this article: “The Top 10 Economic Indicators: What to Watch and Why.” Although the article lists alternative sources for them, I’ve found FRED to be the best way to manipulate them, compare them, and place them in context. And several of these indicators are already featured in the “Popular Series” tab about halfway down FRED’s home page, saving you the work.


So there’s your intro to FRED. Go ye hence and win arguments.

And please, if you’re already familiar with FRED, I invite you to help the rest of us by sharing your observations, favorite data series, uses, etc. in the comments section below.

Footnotes

  1. Lord. HORRIBLE segue, but since I’m sitting in a truckstop at 3:13 AM washing down a hotdog with sour coffee, we might as well roll with it.
  2. Although the VIX has been retroactively calculated to the mid-80s and only traded since 2006, 1990 is at the moment as far back as FRED maintains.
  3. So this example is merely illustrative. You can find other graphing tools out there that’ll pull up longer time-series data for these indices, but FRED’s unquestionably the most comprehensive. If you perhaps wanted to compare the VIX to five of the leading economic indicators, you’d be hard-pressed to find that capability elsewhere.
  4. Options primer. A call option is the right to buy a certain financial instrument at a certain “strike price,” while a put option is the right to sell a certain financial instrument at a certain strike price. Each kind of option carries a “premium”…the price the buyer pays to the seller for the right to “exercise” the option at its strike price. One options “contract” gives you the right to buy or sell a “standard lot”–in the case of stock options usually 100 shares–of the underlying instrument until the option’s “expiration date.” On the expiration date an option may or may not be “in the money,” meaning preferable to its market price. And options aren’t good forever; they have expiration dates at which time they can no longer be exercised. “Short-term” options, then, expire soonest. So a quick example: you pay the $10 premium on a $35 stock option that expires later this month. It’s short-term, in other words. At the time of expiration–usually the third Friday of each month–the stock’s trading for $40 in the open market. Since you have the right to buy the stock at $35 you’re $5 in the money, so you exercise the option for 100 shares times $35, or $3,500, and immediately sell them. Although the option was in the money, you still lost $5/share on the entire transaction–the $5 profit per share less the $10 premium per share. But if you hadn’t exercised you’d be out the entire $10. I can further clarify if you like. Simply leave me a comment.
  5. Did you know people with red-green colorblindness make good snipers? Their eyes aren’t tricked by the colors that make camouflage blur out to people with normal vision?

Author: ER Dude

Sick of your job? After a thirteen-year career, Early Retirement Dude fled corporate America for good. You can do it too! Visit http://EarlyRetirementDude.com or email EarlyRetirementDude@gmail.com.

5 thoughts

  1. Thanks, this is like teaching a person to fish instead of just handing them a fish. I poked around the site and really like the geographical Fred section. https://geofred.stlouisfed.org/

    Another new word of the day “Arse-cod” thinking it was a fish I found the “black-arse cod” from Australia https://en.wikipedia.org/wiki/Black-arse_cod.
    But I think your context was your friend Jerry plays a lot of Call of Duty https://www.urbandictionary.com/define.php?term=Arse%20COD

      1. Yes GeoFred can kill a few hours it’s too bad there is a lot of “no data available” for many of the things I tried to dig deeper into. Great tool and the price is right!

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