 Risks from doctored statistics
Jim Willie
CB
Archives
Jim Willie CB is the editor of the "HAT TRICK LETTER"
May 27, 2005
For specific
detailed analysis of the Gold, USDollar, Treasury bonds, and
inter-market dynamics with the US Economy and Fed monetary policy,
see instructions for subscription to my newsletter research
reports, which include stock recommendations positioned to rise
in the commodity bull market.
One cannot
blame any institution from wanting to present a brighter picture
than reality, to paint a rosier description in order to impress,
perhaps even to minimize or deny some elements of weakness. Ask
any person being interviewed for a new job. Ask any applicant
looking for a loan. Ask any man who has eyes and designs for
a very lovely woman. The US Economy is portrayed as far healthier,
far more vibrant, far more robust, in its growth and stability
than is actually the case. The USGovt is in the business of selling
US Treasury debt.
The list
of doctored official governmentally produced statistics is so
comprehensive that a far easier task is to produce a list of
undoctored statistics. My view of durable goods orders and housing
starts has been assured of accuracy, although so many games can
be played with seasonal adjustments. We should do away with all
adjustments, or else report the nominal number along with a percentage
swing for typical seasonal behavior. It is much like permitting
murder by euthanasia (not youth in Asia). If permitted, then
dissidents and whistle blowers can easily slip through the gates
and be routinely scheduled for processing, a quick short-circuited
abrupt end of life. What is so troubling about the doctored statistics
is that the practice is now engrained and institutionalized.
Nobody even seeks out nominal figures. Most people seem to expect
adjusted statistics, and might even demand some adjustment in
order to make sense of them. Ripe are the opportunities for constant
alteration with little justification even offered by way of asterisked
footnotes. In the criminal world, an oft-used device is the singular
event, like an accidental death or supposed suicide or drive-by
shooting or large fire or damaging explosion, which could offer
extensive cloud cover for the theft of documents and egregious
malfeasance in fraud, of course blamed on the victim.
INADEQUATE
ADJUSTMENT FOR PRICE INFLATION
The
red herring in recent months is the rise in the price index seen
for 1Q2005 at 3.3% announced at the end of April. What makes
this noteworthy is that adjusted Q1 growth in Gross Domestic
Product (GDP) was stated as 3.1%, less than the price index for
the first time recent memory, going back to the 1980 decade.
What a watershed event in GDP stats!!! So, of nominal economic
growth (plain numbers, no adjustments for anything), more of
that growth was attributable in Q1 to price inflation than to
actual increase in commerce and business, as in sales of goods
& services.
My analysis
indicates US GDP real growth is between 1.5% and 2.5%, no more.
We all regard the CPI as a joke stat, which misrepresents consumer
prices as an indication of price inflation generally. Take a
look at this! The wizards see fit to adjust nominal GDP by even
less than the silly CPI. The unaltered GDP is pushed down, in
an attempt to remove price inflation, by an amount even less
than the under-stated CPI. Any lack of proper adjustment in nominal
GDP is falsely labeled as real economic growth. In my view, most
of it comes from inadequate adjustment of higher energy &
material costs, even food costs. Ironically, we boast that
the economy is strong enough to handle higher energy costs, but
evidence of that strength to handle more burden is distorted
growth from wrongful (favorable) adjustment of those same energy
costs!!! Most economic growth comes from hedonics to information
technology and improper removal of general cost increases. The
most glaring obvious higher cost born by the public and business
world is for energy costs. The 1Q2005 Personal Consumption Expenditures
(PCE) index was up an annualized 2.54% which is below the price
index of +3.3% announced. The PCE is also known as the GDP Deflator.
Find a rationale for any claim that the economic price rises
were up only 6.3% since the 1Q of 2002. You cannot. It is nonsense
and pure deception. Our GDP growth is mostly exaggerated technology
spending and price inflation!!! The chart below has been
shown before, and is worth an update.
Data from
the trade deficit and inventory levels suggest that the 3.1%
growth in US gross domestic product for the first quarter will
be revised upward. The March trade gap narrowed from $60.6 billion
to $55.0 billion, to spark a US$ rally. Then came the US business
inventories, meanwhile. They were up 0.4% in March, but below
consensus. On one hand rising business inventories might reflect
growing business confidence to restock their pipelines. On the
other hand higher inventories could also mean that sales have
dropped and stocks have started to accumulate.
HIGHER COSTS
FILTER THROUGH THE ECONOMY
The
trend from 2001, when the Federal Reserve embarked on their grand
money giveaway, has been for the Producer Price Index (PPI) to
have grown at a greater pace than the Consumer Price Index (CPI).
This is not the good news reported, but rather a severe sign
of stress. The catch phrase here is "cost push" for
producers. In recent months, they might have been able to pass
along more of their rising costs. However, the trend has been
for the PPI to rise at roughly twice the pace of the CPI. The
end result is that profit margins for producers are squeezed,
when those employers have already been pressured by higher health
care costs. The stock market rejoiced low core April CPI (excluding
food & energy) of +0.0% rise. Given the +0.6% rise in
the PPI for the same April month, and the core PPI of +0.3%,
one must answer the tough question of what consequence comes
from the difference in PPI over the CPI. Herein lies the
producer squeeze. General Motors had its answer, or rather Standard
& Poor had an answer pertaining to GM.
Another item
somewhat overlooked by markets is the rise in PPI and its effect
on GDP itself. Indicative of higher costs paid, improperly adjusted
payments for goods in the intermediate markets seem systemically
overlooked in the calculations of the GDP statistic. By focusing
on the final demand, the US Gross Domestic Product (GDP) fails
to properly adjust for higher material costs throughout the entire
US Economy.
So in summary
of basic Sherlock Holmes detection, we see the PPI rising rather
sharply. The CPI (for consumers in urban centers who don't eat
or use energy) has been tame by comparison. But remarkably, the
GDP (used to pound the table to proclaim strong growth) removes
only a fraction of the price inflation easily observed. This
again is nonsense and pure deception. Outside technology,
our GDP growth is mostly price inflation!!!
The queer phenomenon
of how our particular US version of monetary inflation and doctored
measurement of price inflation is unique in the Western world.
We in the USA have managed to spew new money into the system,
and have the CPI reduced in the process. This strange effect
was explained thoroughly in a past article "Inflation
Pushes Down the CPI" in February. As money pours into new home
mortgages, housing prices rise and rents fall. As money pours
into new cars, used car prices fall. As the USDollar has fallen,
commodity, materials, and energy prices have risen, so as to
cause economic distress, liquidations, bankruptcies, outsourcing,
and reduced wages. Meanwhile the huge trade deficit with Asia
has resulted in gargantuan inflow of low priced imported products.
The collective effect is for lower consumer prices. One correction
is warranted. In that article, my words said that used cars comprise
30% of the CPI weighting. It is actually about 12%, all tolled
with used cars, rentals, and leased cars included. Again,
notice how the GDP Deflator, used to remove price inflation from
nominal figures, is even below the horrendously suppressed Consumer
Price Index. The Deflator receives almost no attention whatsoever.
TAXATION
WITH LOBBIED REPRESENTATION
The
Treasury Dept (home of the IRS) has reported a 20% increase in
payroll income tax withholdings, year over year. The IRS has
taken in an added $45 billion in tax receipts. Just two weeks
earlier, the US citizenry had to grapple with income tax payments,
even as 3.5 million people were forced into Alternative Minimum
Tax requirements. Last year in 2004, an unfortunate 2.9 million
people were forced into AMT. It is estimated that an incredible
20 million people in April 2006 will be compelled to pay according
to the AMT guidelines.
Some might
regard the income tax rising trend as a sign of restored health
in the expanding US Economy. The flipside interpretation is that
the AMT has put households in a vise to squeeze them, many of
them wealthy. At the same time corporations no longer benefit
from tax breaks such as the favorable equipment depreciation
schedules. One sage view was that it would be worrisome if the
IRS tax stream had NOT improved markedly. With so many wealthy
(and not so wealthy) US taxpayers set to run through an AMT meat
grinder a year from now, the pressure is squarely on the US Congress
for tax reform before next year's calendar pages are turned over.
Higher tax
bills combine with higher gasoline costs, reduced tax incentives,
and reduced credit extended by households to make for a risky
situation. The result has been air pockets in the economy. Whether
those pockets are filled and absorbed, who knows? The fact remains
that the US Economy is weaker than reported. Some evidence was
seen with retail centers reporting lower weaker sales in April.
The most notable weakness was from the discounters like WalMart,
where the lower income households tread and ring up purchases.
RISKS &
IRONY OF FALSE CLAIMS OF STRENGTH
The
risks that come from false claims of economic strength are many.
If a man staggers in his walk from internal weakness, frailty
(like with emphysema lungs), or structural problems (like with
bad hips and knees), then any added burden like a heavy backpack
or full military gear with flack jacket is likely to weigh him
down unduly. He is at risk of falling or wheezing until he falls.
The combination of higher systemic costs and income taxes combined
in April to deliver a shock, only to be compounded by higher
gasoline costs. The weight of the backpack is made more problematic
by stiff headwinds of higher interest rates.
As the US
Federal Reserve struggles to find and achieve neutrality, it
must consider the false representation of US Economic strength.
The real economy (where things are made, grown, and serviced)
might be far weaker than we know, and the financial sector might
be more teetering than we know. When pundits and experts proclaim
neutrality in the Fed Funds interest rate target, they look to
the CPI in an absurdly indefensible exercise. Past patterns of
rate hikes might not offer an effective yardstick for rational
decisions. In 1993 to 1995, the US Economy was nowhere nearly
as vulnerable to Asian labor competition, nor anywhere nearly
as dependent upon zero percent finance deals. My memory has no
links to 0% deals for cars, furniture, home electronics, or home
appliances over ten years ago.
Behind the
scenes, the 8000 hedge funds ply their risky trade. Only two
hedge fund failures have reached the news headlines, that being
KL Financial out of West Palm Beach in Florida. How many other
funds failed and did not make it to the media? My guess is hundreds,
but unless fraud is charged and reports surfaced, we do not hear.
Financial market vulnerability might be associated with hedge
fund survival much more than we realize. The trouble with
this murky center of risk management (or is it mismanagement?)
is that that we hear of the problems and damage only after the
damage is done. Regulatory oversight is missing.
ENERGY PRICES,
CONSERVATION & GDP STATISTICS
Since
the mid-1990 decade, the USA seems to have been walking in reverse
in its sensible ways. Homes are larger despite higher air conditioning
(electricity) and heating costs. Cars roll off the assembly lines
at 45% in favor of inefficient guzzler Sport Utility Vehicles.
Finally, dependence upon home equity to support lifestyle is
prevalent. With rising gasoline costs, both sales and profits
are down for SUV and Detroit coffers. Can anyone link the bond
and financial distress of General Motors and Ford to its heavy
reliance upon SUV sales? Profits are down 40% generally for that
class of vehicle. Sales are down 40% for certain SUV models.
The Hummer stands as the most grotesque example of wastefulness,
not to mention its last place slot on reliability.
Ironically,
any attempt to reduce energy consumption, whether nationally
sponsored and promoted, or privately initiated, would reduce
energy sales. Given that the GDP grossly fails to properly
reduce the higher costs, calling it economic growth instead,
any conservation program would result in a sharp decline in the
GDP statistics. The lower crude oil price, the lower gasoline
price at the pump, these will be reflected in greater purchasing
power for consumers. Don't expect any conservation programs
to be announced or urged.
Moreover, the
recent drop in the crude oil price, from a March $57 high to
a current $48 per barrel, has been a welcome breath of fresh
air to consumers and businesses. The hidden effect sure to be
seen in Q2 GDP statistics is a softer quarter than perhaps expected.
Why? Because much of our proclaimed economic growth is nothing
but price inflation. The lower energy prices across the board,
given the inept tracking and adjustments, will be seen as softer
Gross Domestic Product quarterly final numbers in the second
quarter. Without a doubt, what has helped promote false growth
on the way up (for energy prices) will soften the growth on the
way down.
Risks abound
when increasing the cost of money (interest rates) even as other
costs are still in an upward trend. Look for more GM and Ford
stories, more corporate bond distress, in coming months as the
US Fed tightens and hikes interest rates in its mindless silly
"measured" fashion. Our Fed Chairman has a proven track
record of being a monetary drunk driver. The Fed defense of
the USDollar (via rate hikes) is putting the entire US Economy
at great risk, ironically from fallout coming from the financial
sector (bonds, housing, hedge funds). It is far more fragile
and susceptible to more rising costs, like that of money itself.
When devices are used to deceive on robustness of growth, the
entire system is put at risk. We may enjoy the higher stock prices
from deceptive earnings. We may enjoy the higher bond principals
from deceptive price inflation. But when pressure is put on a
system whose resilience and strength is less than advertised,
the potential for big problems is heightened. These potentials
are regularly discussed in the Hat Trick Letter monthly issues.
Political pushback from the banking circles will likely to enough
to halt the Federal Reserve in endless measured 25-bpt interest
rate hikes. If another inverted yield curve (3-mo TBill yield
higher than 10-yr TNote yield) like that seen in spring 2000
will not stop the Fed tightening cycle, then the Fed itself needs
to have forced mass resignations.
From Hat
Trick Letter subscribers:
"As
an aside, I've been managing money for 15 years and have met
a number of top minds from Wall Street and I can say that I consider
your work exceptional. You've got a terrific way of knitting
seemingly unrelated pieces of information into a clear, concise
view of the big picture." (Philip B in New York)
"Let
me join those who think your analysis of the global economy extraordinary.
Your Petro-Dollar & Protection Racket should be on the front
page of every newspaper in the country." (Elaine W in California)
"I
think your commentaries have some of the soundest analyses that
I've read. You and the Mogambo Guru have quickly become my most
trusted sources of the truth. He makes me laugh in spite of the
seriousness of the situation, and you make me THINK." (Cheryl K of California)
"Of
the many newsletter writers out there, I think you are one of
the few that have the best grasp of the big picture." (Todd C of Tennessee)
May 24, 2005
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
Willie Archives
website:
Golden
Jackass
subscribe: Hat
Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
about subscriptions, contact him at JimWillieCB@aol.com.
321gold Inc
|
