Innocence Lost

One of the major impediments of modern day America is that information is no longer inherently credible.  As kids we were told “Don’t believe everything you read”.  I remember seeing those colourful newspapers in line at the grocery store beside the candy bars that displayed rather unbelievable stories.  My mother would reassure me those are just made up stories for entertainment.  Eventually I learned to take anything in print with a grain of salt and to look into it further if I was at all unsure.  Fast forward to today and it seems we must digest everything with a grain of salt taking no information for granted.  As information has become ubiquitous so too has the use of information. What I mean by that is more and more institutions are proactively using information as a powerful tool to drive an interested outcome.  Information is no longer neutral.

The mainstream media is being used by the ivory idiots to disseminate economic and financial information almost daily so that it reaches not only industry insiders (as used to be the case) but all Americans.  The idea being that if the Fed, the BLS and politicians can use mainstream media to convince the average Joe that recovery is just around the next quarter (every quarter) he will be better off for believing it whether it is true or not.  And so we have endless economic ‘indicators’ now providing for market proliferators to reassure us each week that next week will be better despite what this week brought.  But the real power is within each of the indicators themselves.

I’m always curious when I hear the talking heads on major media casually purport that most indicators are showing a healthy and strengthening economy.  Yet, they rarely, if ever, point to anything specific.  Well a couple days back CNBC’s Steven Leisman stepped up and gave us those indications of strong economic growth.  This was done in an attempt to understand how the main indicators could be pointing to strong growth without actually having that growth show up in GDP.  So let’s look at Steve’s strong growth indicators and see if we can’t figure out this mystery by looking beyond the headline.

Steve Leisman’s case for strong economic growth:

  1. Jobs report of +288K: Now let’s dig in past the headline here. The breakdown on June jobs goes like this… 800K new part time jobs and a net decline of 523k full time jobs ( Is that really a case for economic growth?
  2. Manufacturing, Services ISM: So these are private surveys that are answered by purchasing/sales managers to get a feel for how things are going. They are asked if things are better, worse or the same for a given month. The interesting part is that somehow these survey answers are ‘adjusted’, often turning raw data declines into adjusted data accelerating indicators as we had for May ( I’m very skeptical of any adjustments that reverse the raw data indication particularly on a simple survey.
  3. Housing Data: The only housing sales that seem to be improving are houses in the +$750K category. Housing sales for homes less than $750K are declining ( – refer to slide #9). The reality is that home ownership as a wealth driver is a muted effect post 2007 and this fact makes the hoopla around housing, which used to be meaningful, a big waste of energy.  Wealthy and REITs are buying houses and they are already wealthy.  When was the last time you thought about taking out a home equity loan so you could go out and spend that money??  Exactly… what’s home equity??
  4. Vehicle Sales +17M: 75% of vehicle sales are being done on credit with extended terms ( 25% of auto loans have duration of 73-84 months. ( When folks take on big ticket debt they have large monthly payments that squeeze out other spending and so the consumption effect is not a gain it’s a substitution and thus no economic growth.
  5. Stocks at all-time highs: This is probably the most deceiving of all. The market is at all times highs due to several things, none of which is a strong economy. Fed policy pushing down interest rates to zero forces investors and savers into overweighting equities. Fed guidance has provided a safety net to all those willing to invest in US equities by assuring they will step in as necessary to ensure an upward moving market.  This has led corporations to substitute share buybacks and dividend payouts for capital reinvestment as it is a better return with much less risk than building a new factory or hiring a bunch of folks. And lastly good old fashioned inflation. None of these are indicative or drivers of a strong economy.

As we learned in our undergrad logic classes, if the conclusion seems to be contradictory to the premises the argument is unsound or the premises invalid.  This really is the key to understanding the message being sung by the town criers whose job is to perpetuate the market euphoria. The headlines are too often invalid and the arguments unsound.

The inflation story too is something that has created a schism in perspectives between the elites and Main Street.  While Main Street gauges inflation by way of their pocket book the elites theorize and rationalise ways to reduce official inflation figures.  For instance, since the early 1980’s there have been various changes to the official inflation index (as set by the BLS).  These changes have masked the real level of inflation and the implications are both robust and profound.  We are being led to believe real underlying economic growth (e.g. real incomes and real GDP) is far better than it actually is simply by manipulating the official inflation figure. An additional benefit to government comes in the form of reduced payments to pension and social security benefits as they are tied to official inflation.  This helps make it appear as though they’ve done well to close the deficit when the reality is they’ve just stolen money from seniors to do so.

The CPI was created as a measure of cost of living based on the same basket of goods over time, which morphed into a cost of reasonable substitution with additive quantified qualitative adjustments.  That is a mouthful but essentially what that means is the basket of goods now replaces steak with hamburger when the BLS feels steak prices might push inflation beyond their desired range interval.  Further changes allow them to make nonsensical price adjustments by applying theoretical quantitative discounts to qualitative product improvements.  All this can get quite technical and for those who want to really dig into the matter a very helpful breakdown on the technical and historic aspects of the official inflation index is John Williams’ “Hyperinflation 2012”,  Have a look at the following charts comparing the current inflation figure versus what it would be using 1990 and 1980 basis for the calculation.

1990 inflation basis

1980 inflation basis

Both charts are courtesy of –

The key point here is that the government is one of the most prolific abusers of information.  The examples are endless and the motivation is clear.  You are to believe what they decide you should believe (a lot of money is spent researching how they can control your behaviour by controlling your information;  Currently the message is that you and most Americans are doing very well economically speaking.  They’d have you believe risk is at all-time lows and the future is nothing but rainbows and butterflies, which all sounds frighteningly like the message we received in 2007.  The somewhat sad truth in all of this is that information has lost its innocence, its integrity and its neutrality. One must not lose sight of that regrettable reality when planning for the coming years.