Real Clear Politics / Real Clear Markets
February 11, 2013
Investing In A World Of Make Believe
By _John Browne_ (http://www.realclearmarkets.com/authors/john_browne/)
In recent years, a high degree of economic, financial, and political
uncertainty has resulted in acute volatility in stocks, real estate,
commodities
and precious metals. I believe that another aggravating factor has been the
increasing skepticism through which the investing public views government
statistics and statements.
To make prudent decisions, investors need to know key economic indicators
such as economic growth, inflation rates, unemployment levels and the real
cost and value of money. For the past 20 years or so, the key assumptions
behind the calculation of these figures have been changed, or more accurately
distorted, in favor of government image.
Perhaps the most important government statistic for investors is the
inflation rate. The precise degree to which money is depreciating is the
bedrock
upon which all other financial determinations rest. The inflation rate is
the prime input that determines the discount rate used for calculating the
real present value of investment returns.
The basic U.S. inflation rate is published in the form of the Consumer
Price Index (CPI). This purports to represent items selected to represent the
spending of the average U.S. citizen. But a closer look reveals some
troubling distortions. For example, health care expenditures are weighting at
just
one percent of spending. Americans who are struggling with obscenely high
medical costs will recognize this as absurd on its face.
In addition to weightings, the actual price increases are largely
arbitrary. For example, if the price of an automobile rises by 20 percent, but
is
'assumed' to have added technology that equated to three quarters of the
higher price, the price is deemed to have risen by only 5 rather than 20
percent. (See _Peter Schiff's mid-January article _
(http://www.europac.net/commentaries/inflation_propaganda_exposed) that shows,
among other things, that
the government reported newspaper and magazine prices to have risen just 35
percent over the past 12 years while actual prices rose by more than 130
percent.)
For the past few years, the Fed has maintained that the U.S. inflation
rate, which is represented by the Consumer Price Index, or CPI, has hovered
around two percent. Most consumers who buy food, goods and services such as
health in the real world, will find this figure derisory.
However, Shadow Government Statistics (SGS), an independent data service
published by John Williams, calculates key U.S. Government statistics
according to the methodology used during the years before the election of
President Clinton. Using those yardsticks, SGS shows the U.S inflation rate
over
the past few years has hovered around six percent, or three times the
declared Government rate.
The inflation rate is key also to calculating the key economic growth rate,
or GDP. By deflating the nominal GDP by the Government's 'official' 2
percent inflation rate, the U.S. economy shrank by some 0.5 percent in the
last
quarter of 2012. But if a higher, and I believe more accurate 4 percent
inflation rate had been used, the U.S. economy would have been seen to
regress by 2.5 percent. At that rate of inflation the paltry yields paid on
bank
deposits, and by 10-year U.S. Treasury bonds, are currently in deeply
negative territory.
Regarding stock markets, the Dow passed 14,000 last week, to great acclaim.
However, if discounted by the 'official' CPI of approximately two percent
per year the Dow would have to reach about 15,400 to equal its October 9,
2007 high of 14,165. But discounted at a 4 percent per year inflation rate,
the Dow would have to stand at more than 17,500 to pass its all time high
in real terms.
Of course, the low inflation rate also provides the government with
breathing room on the fiscal side. Low inflation keeps a limit on the
increases
that federal agencies are required to pay out to beneficiaries of programs
such as Social Security. With the budget so tightly constrained by huge
deficits, the low inflation data is essential to government planners.
More chicanery can be seen on the unemployment front. The government
currently claims the unemployment rate to be at just 7.9 percent. But when
calculating unemployment using the pre-Clinton methodology, SGS finds it to be
around 22 percent. SGS does not exclude, as the government does now, all
those who have left the workforce out of despair of finding a job, or those
who
have accepted part time jobs in lieu of full time employment.
A world of politically manipulated 'official' statistics and misleading
Government statements makes investment decisions more difficult. The result is
that, despite falsely negative 'real' short-term interest rates and an
abundance of debased cash, consumers and corporations continue to hoard cash.
While the Dow has in fact surged in nominal terms, the leading U.S. equity
funds continue to show significant outflows of investment funds. Rising
stock prices have not convinced many Americans to get into the game. This
should provide needed perspective on the current media euphoria
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