Outside-IN

Outside-INblog

Outside voices and views for advisers

Uncle Sam's conjurring has clients investing in make-believe

Are government data related to inflation, unemployment and growth making it harder for investors?

Feb 26, 2013 @ 12:01 am

By John Browne

Investments, inflation, GDP
+ Zoom
What, no pixies?

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 with which the investing public views government statistics and statements.

To make prudent decisions, investors need to have key economic indicators, including 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 the government.

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 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. 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 1% of spending. Americans struggling with obscenely high medical costs will recognize that 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% 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%. ( See Peter Schiff's mid-January article that shows, among other things, that the government said newspaper and magazine prices have risen 35% over the past 12 years, while prices actually have gone up by more than 130%.)

For the past few years, the Fed has maintained that the U.S. inflation rate has hovered around 2%. Consumers who buy food, goods and services such as health care in the real world will find that figure laughable.

However, Shadow Government Statistics, 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 Bill Clinton. Using those yardsticks, SGS shows that the U.S inflation rate over the past few years has been around 6% — or three times the declared government rate.

The inflation rate is also key to calculating the economic growth rate. By deflating the nominal GDP by the “official” 2% inflation rate, the U.S. economy shrank by some 0.5% in fourth-quarter 2012. But if a higher —and I believe more accurate — 4% rate had been used, the U.S. economy would have been seen to contract by 2.5%. At that rate, the paltry yields paid on bank deposits and by 10-year U.S. Treasury bonds are in deeply negative territory.

Regarding stock markets, the Dow Jones Industrial Average passed 14,000 recently, to great acclaim. But if discounted by the “official” CPI of around 2% per year, the index would have to reach about 15,400 to equal its Oct. 9, 2007, high of 14,165. But discounted at an inflation rate of 4% annually, 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 number 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 to beneficiaries of programs such as Social Security. With the budget so tightly constrained by huge deficits, the low inflation data are essential to government planners.

More chicanery can be seen on the unemployment front. The government claims the rate to be 7.9%. But when calculating unemployment using the pre-Clinton methodology, SGS finds it to be around 22%. 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.

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 in fact has surged in nominal terms, the leading U.S. equity funds continue to show significant outflows of investment funds. Rising stock prices have not persuaded many Americans to get into the game. This should provide needed perspective on the media euphoria.

John Browne is the senior economic consultant for Euro Pacific Capital Inc. This commentary originally appeared on the firm's website.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

What's next for Carson Coaching?

Ron Carson is leaving Omaha? Well, not completely, but he is taking his Carson Coaching events to Las Vegas in 2018 and Chicago in 2019. Check out a huge party he hosted so, after 23 years, he could leave Omaha with a bang.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

10 signs your client is cheating on you

Sure signs that clients may be on the way out the door.

Morgan Stanley sees slower fee-based asset flows on fiduciary rule delay

Flows to advisory accounts, while still higher than the start of 2016, dropped off more than 20% from Q2 and were the lowest in a year.

How adviser salaries stack up to other jobs

Median compensation hovers just under $100,000 on the low end and reaches nearly $300,000 for bosses.

Finra ranking brokers in effort to crack down on industry's bad apples

All 634.403 reps have been ranked based on factors such as prior regulatory disclosures, disciplinary actions and employment history.

How to save retirement planning from tax reform

Losing big deductions, even in lieu of a larger standard deduction, may cause taxes to rise in retirement.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print