Lies, Damn Lies and Statistics

[Zorrofan]

Mark Twain said it best: There are three types of lies - lies, damn lies and statistics. Here are few links to counter recent press about how things are getting better! Cardboard, on a recent thread, started me thinking about how we get "headline" reports on the improving economy but the subsequent, usually less positive revisions always seem to be reported on the back page. Here are a few links that go against the current mainstream media view of everything getting better......

 

US corp debt at record levels? For what it is worth, we have heard that corporations are sitting with massive amounts of cash, waiting to be deployed except for uncertainty about the economy. Or are they? Here is an alternative view....

 

http://www.marketwatch.com/story/the-biggest-lie-about-us-companies-2010-08-03

 

Another banking crisis?

 

http://www.telegraph.co.uk/finance/newsbysector/epic/barc/7923014/Banking-system-on-verge-of-new-crisis-hedge-fund-Noster-Capital-warns.html

 

Euro-banks need to refinance over $122 billion this year alone?

 

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a9S.Zzc96QGY&pos=5

 

 

Plenty of "meat" for the bears. No wonder Pren, Seth Klarman and others are worried....

 

cheers

Zorro

 

[Cardboard]

I have never seen treasuries spiking like this in my investment career with the stock market doing as well as it is. The SPY is down 8.0% from its 2010 high which does not even qualify as a correction (10% down).

 

I have seen the treasury market go up before while the stock market kept on going higher for a while until it played catch up, but the bond market was not at these yields or getting there so fast. Yet, they were also ignoring the warning. It was different this time, the bond vigilantes had it wrong. It is acting like there is something truly nasty brewing underneat.

 

I also like the logic of comparing treasury yields with dividend yields or earnings yields. Then I guess that they will dump their stocks en masse if the 10 year goes back to 4 or 5%? Well, I guess not because then they will have another justification to hold stocks.

 

Investors give an applause for QE2! If this is not a sign that the economy is doing poorly which will hurt earnings and that pumping money into the system has not worked so far then what is? Yet the market rally on this news.

 

Cardboard

[ERICOPOLY]

Okay, well if the title of this thread is going to be about lies, then here is a topic of interest to me:

 

Do people today believe the government is lying about inflation in the CPI?

 

In the past year a number of people were very eager to point out to me the "ShadowStats" website published by John Williams that argues the government understates inflation.

 

Are we to believe, now that we're facing very low inflation from the CPI which is scaring the market about deflation, that the government is deliberately understating inflation?

 

The topic came up when I was arguing how gold had been rising faster than the CPI for a very long time, and therefore is likely to be significantly overvalued.  People jumped out of the woodwork to announce that John Williams has the real data!

 

So where are those people now?  Why is it that when the deflation scare is based on the CPI, people aren't calmly saying that John Williams has the real data and that the government numbers overstate deflation risk?

 

No doubt the John Williams fans are smugly saying that this deflation scare is a crock of bull.  They know the government is deliberately reporting a low CPI to fool us into panicking about deflation.

 

I'm sorry but it doesn't make sense.  According to the ShadowStats theory the government merely has to go back to the old method of measuring inflation and all will be well on the deflation front for now.

[ERICOPOLY]

I also like the logic of comparing treasury yields with dividend yields or earnings yields. Then I guess that they will dump their stocks en masse if the 10 year goes back to 4 or 5%? Well, I guess not because then they will have another justification to hold stocks.

 

Let's say the rate goes back to 5% but you pay 40% tax.  That's only a 3% yield at a 40% tax rate, which is where high income rates are headed.

 

I rather make 7% tax-deferred compounding from solid blue chips than 3% after-tax compounding from bonds.  If we're talking about very high grade blue chips, that's still more than twice the compounding rate.

[SmallCap]

ERICOPOLY,

 

I see the Gov CPI numbers as being an attempt to quantify and put into one number millions of small changes around the country. As such it will never be perfectly accurate and I don't expect it to be. I look at it in the same way I look and the DJIA, it was meant to quantify a lot of numbers into one number and approximate the impact of those other numbers. Both the CPI and the DJIA are flawed systems that have had to be adapted numerous times to account for changes in the system. one could make a good argument that some of the changes in the DJIA makes that indicator inaccurate.

 

I see the comparison of ShadowStats and CPI the same way I see the comparison of DJIA and the S&P500 (maybe not the best comparison but you get the idea).

 

One question I would throw out to the board is this, are there any non government organizations that track inflation? I know the university of Michigan tracks consumer sentiment I wonder if there is a similar organisation that keeps track of inflation.

[Smazz]

 

Are we to believe, now that we're facing very low inflation from the CPI which is scaring the market about deflation, that the government is deliberately understating inflation?

 

This govt is killing itself trying to show some kind of inflation - if they are going to fudge the numbers it would be in the other direction. No govt wants to be the one on record of a deflationary period such as what we are getting.

[ERICOPOLY]

 

Are we to believe, now that we're facing very low inflation from the CPI which is scaring the market about deflation, that the government is deliberately understating inflation?

 

This govt is killing itself trying to show some kind of inflation - if they are going to fudge the numbers it would be in the other direction. No govt wants to be the one on record of a deflationary period such as what we are getting.

 

That's what I think too.  However people have argued many times that the government switched the way they measure CPI in order to do nefarious things such as rip off social security pensioners (the payments are indexed to the CPI).

 

I went to ShadowStats yesterday and their numbers show that the old measure of CPI (the "shadow" stats) measures a stronger reading than the new official measure of CPI.

 

So that's the funny thing -- if the government had never switched the measure of CPI then the inflation rate would presently look higher and people would feel less worried.

 

Let's entertain this for a moment -- if the gold bugs are right, then we currently are having inflation but almost nobody believes it because we are "duped" by the CPI.

 

Actually, the latest MKL conference call pointed out all kinds of prices that have been rising -- they seem to be making the same argument, that the CPI is understating the true inflation out there.

 

Here is what they said on that conference call:

"I don’t hear bondholders talking about things like the fact that Disney just raised the admission price and the tuition and medical bills among others continue to rise."

 

It's funny though, everybody seems willing to accept such arguments when we're all afraid of inflation, and the media is hyping inflation, but when the media is hyping deflation we all seem to fall back on trusting the government CPI again.  It's like we have a tendency to make things as scary as possible -- on the one hand get scared that we don't really have a handle on how strong inflation really is because you can't trust the government, but then once the fear is one of deflation we suddenly trust the government number because it is scarier.  This is a strange collective behavior -- I suppose it is a caution instinct, but it's not that logical.

 

People seem to trust whichever method scares them the most.

[Smazz]

Timely  to this debate,

this just got posted on the Canadian Side questioning Stats Can job numbers:

 

http://www.thespec.com/News/Business/article/824001

 

 

[Cardboard]

I don't trust the CPI either way. Our cost of living may still be going higher in a deflationary environment. Stuff that people buy everyday. IMO, it is the big ticket items that may see deflation because they usually require credit.

 

They have really screwed up with this QE2. Bernanke should have instead raised interest rates to 1 or 2%. One Fed member talked about that recently, so it may eventually happen.

 

If some people can't afford a 1% increase to their mortgage rate, then they can't afford this house anyway. Banks should do a workout with such folks if possible and then move on. For the rest of the population, a 1% increase to interest rates would be a shocker. They would then likely rush to buy that home or car that they are looking for, but are currently hesitating because of deflation: it may get cheaper, interest rates are heading down. This could have quite a positive impact on home prices and the economy. The mentality would flip up side down. With "some" interest rate, retirees would also have some additional money to spend.

 

Regarding the banks, they have benefited enough from large interest rate spreads. For the most part, they are now well capitalized. What would help them a lot more now and especially regional banks is more "good" activity. More lending to people and small businesses who can pay and then more write offs of questionable loans.

 

What is clear with the zero interest rate policy is that it does not give more money into Main street hands, benefits only to bankers who cash in the spread and creates a thinking that things must be bad.

 

Cardboard 

[ERICOPOLY]

Right, if I were going to try to stimulate consumer spending for items that require credit I would make the credit cheaper.

 

Cutting the tax rate to zero for the interest on such loans would do it.  The reason being is that the lender could ask a lower interest rate and still make the same profit.

 

It must have been discussed at some point... after all, muni bonds have this special treatment and it allows then to borrow money cheaper.  Same would happen with consumer credit loans if they had an easier tax treatment.

 

Or lets say the banks don't lower the interest rate -- at least they'd be more willing to lend with the extra profit (from no taxes) providing a fatter margin of safety.

 

Given that this would help on the interest rate side of things for consumer loans, they could probably also raise the Fed funds rate at the same time a little bit to give retirees more income.

 

Politically, people may get upset about the banks getting a lower tax rate.  However, this other method they have of throwing money at banks (near zero Fed interest rate) doesn't guarantee that they will lend.  My idea would throw the banks a bone only if they play ball.  Citigroup just got recapitalized but they don't plan on doing much growth in the US -- they're instead taking their show on the road to developing markets.  So the money that goes to Citi is in some ways a form of foreign aid.

[Guest broxburnboy]

I came across this article about a year ago and pasted it on my desktop to occasionally reread. It remains in my mind a good analysis of the deflation/inflation  knife edge on which policy makers balance:

It addresses some of the issues raised in this thread.

 

http://earthblognews.wordpress.com/2010/02/28/post-collapse-active-market-management-and-knife-edge-economics/

 

[SmallCap]

Is anyone aware of of any non government entity that tracks inflation using a different methodology then the CPI uses? I think that just as one measure (like PE ratio) doesn't do an adequate job of explaining the company's situation and it is nice to be able to double check against some different numbers I would like to check the CPI against another methodology of tracking.

 

SmallCap

[RRJ]

Is anyone aware of of any non government entity that tracks inflation using a different methodology then the CPI uses? I think that just as one measure (like PE ratio) doesn't do an adequate job of explaining the company's situation and it is nice to be able to double check against some different numbers I would like to check the CPI against another methodology of tracking.

 

SmallCap

 

shadowstats.com is the one I know of.  He does a good job, if a bit more paranoid than me.  He's economist trained from what I gather. 

[SmallCap]

I have checked that out but he uses the same methodology as the CPI used to from what I can gather.

[vinod1]

About 6-7 years back I did a little bit of research (as an avid efficient marketeer at that time most of my effort went into aggregate market valuation and getting inflation right is a key concern) on the methodology behind inflation calculation.  I was pretty impressed with the sophistication and the level of detail that go into calculating inflation. I had only two issues that I had disagreed with at that time and still disagree with now:

 

1. Hedonic adjustments for quality improvements. This leads to understating of inflation. The basic idea is that price increases due to better quality should not result in inflation. So if you had a 100 thread count bedsheet that costed $10 in 2000 and the a 400 thread count bedsheet costs the same $10 in 2010, this would result in deflation (a negative adjustment). It would not matter that a 100 thread count bedsheet is not currently available.

 

2. Using rent equivalent for measuring housing inflation measure instead of home prices. Thus a large part of the housing bubble did not get into CPI as rents did not increase all that much during the bubble.

 

Other than these two, the CPI calculation is pretty robust and cannot really see any mischief or some hidden govt manipulation.

 

Thanks

 

Vinod

[Aberhound]

Someone is buying hundreds of billions in UST through London. Many believe that it is the Fed or some shadow US government entity. In the private sector we know that off balance sheet arrangements are rampant, banks and others have been allowed to use phoney accounting, and bureaucrats were given the President's formerly exclusive authority to allow public companies to lie when signing the Sarbane Oxley certifications. Such secretive conduct has the unintended consequence of eroding confidence. Hoover's great depression biography explains that he was shocked to discover in the midst of 1931 sovereign defaults that the debts accumulated were much worse than expected. Do we expect any different this time when the level of debts is much higher? Hoover said in his book that during 1929 to 1931 he would have acted much differently and much sooner had he known the true extent of the problems and he would have received more support in Congress. Are we not repeating past errors by suppressing the truth and failing to deal with it rationally? Perhaps the voters and government unions would be more forgiving about politicians cutting back on past overly generous promises which we can no longer afford now that the false debt-driven cornucopia of growing government revenues has ended and governments are faced with long term declining revenues as warned by Minsky.

[Guest broxburnboy]

About 6-7 years back I did a little bit of research (as an avid efficient marketeer at that time most of my effort went into aggregate market valuation and getting inflation right is a key concern) on the methodology behind inflation calculation.  I was pretty impressed with the sophistication and the level of detail that go into calculating inflation. I had only two issues that I had disagreed with at that time and still disagree with now:

 

1. Hedonic adjustments for quality improvements. This leads to understating of inflation. The basic idea is that price increases due to better quality should not result in inflation. So if you had a 100 thread count bedsheet that costed $10 in 2000 and the a 400 thread count bedsheet costs the same $10 in 2010, this would result in deflation (a negative adjustment). It would not matter that a 100 thread count bedsheet is not currently available.

 

2. Using rent equivalent for measuring housing inflation measure instead of home prices. Thus a large part of the housing bubble did not get into CPI as rents did not increase all that much during the bubble.

 

Other than these two, the CPI calculation is pretty robust and cannot really see any mischief or some hidden govt manipulation.

 

Thanks

 

Vinod

 

Those who receive payments (pensioners) look at the way the BLS calculates CPI with a more critical eye..

 

http://abcnews.go.com/Business/PersonalFinance/social-security-benefits-social-security-check-low/story?id=8835753&page=2

 

There are some facts about CPI however:

 

It is a BLS calculation used by the government to index a myriad of ongoing liabilities.

It is a measure of the rate of change in prices of consumer items typically purchased by "average" income earners.

It is not necessarily an accurate measure/indicator of inflation/deflation for items outside the basket, although it is commonly and publicly used for other comparisons, usually in some sort of advocacy.

The methodology of the calculation of CPI has changed over the years, substituting and indexing  items of different quality and kind, making CPI to CPI comparisons in different eras, problematic. particularly since the methodological changes of the mid 1980's.

Some say the changes in methodology tend to understate ongoing inflation. One of these is John Williams from Shadowstats.com, who continues to track the changes in the original CPI basket (pre 80's). His calculations show that current BLS CPI calculations.. understates inflation using the original basket and methodologies.

Some think that Williams is a profiteer, charlatan and doomsayer but take no issue with his calculations.

Keep in mind that the government has a vested financial interest in understating inflation... it reduces its indexed liabilities.

 

[Zorrofan]

Sometimes I wonder if the truth is being suppressed deliberately or is it simply a desperate grasp for something positive if the face of the grim reality.....

 

We are starting to see more stories like this - warning sign or for contrarians a sign of the bottom?

 

"HINDENBURG OMEN: “SAVAGE DOWNTURN AHEAD”?

13 August 2010 by TPC

A menacing sounding technical set-up is forecasting a potential equity market crash.  This technical pattern, known as the Hindenburg Omen (named after the famous zeppellin that crashed in 1937) develops when all 5 of the following criteria are met:

 

1.That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.

2.That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.

3.That the NYSE 10 Week moving average is rising.

4.That the McClellan Oscillator is negative on that same day.

5.That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

Yesterday, all 5 criteria were met.  It’s an unusual event and Albert Edwards, the eternally bearish analyst at Societe Generale, says stocks are “tottering on the edge”:

 

“Equities are tottering on the edge as increasingly recessionary data becomes apparent. It would not take much to tip them over that edge.  A savage equity downturn is imminent.”

 

According to Wikipedia a stock market crash has always been preceded by a Hindenburg Omen and stocks are generally down in the following months"

 

Denial, a nice place to visit but I wouldn't want to live there!

cheers

Zorro

 

Someone is buying hundreds of billions in UST through London. Many believe that it is the Fed or some shadow US government entity. In the private sector we know that off balance sheet arrangements are rampant, banks and others have been allowed to use phoney accounting, and bureaucrats were given the President's formerly exclusive authority to allow public companies to lie when signing the Sarbane Oxley certifications. Such secretive conduct has the unintended consequence of eroding confidence. Hoover's great depression biography explains that he was shocked to discover in the midst of 1931 sovereign defaults that the debts accumulated were much worse than expected. Do we expect any different this time when the level of debts is much higher? Hoover said in his book that during 1929 to 1931 he would have acted much differently and much sooner had he known the true extent of the problems and he would have received more support in Congress. Are we not repeating past errors by suppressing the truth and failing to deal with it rationally? Perhaps the voters and government unions would be more forgiving about politicians cutting back on past overly generous promises which we can no longer afford now that the false debt-driven cornucopia of growing government revenues has ended and governments are faced with long term declining revenues as warned by Minsky.

[Cardboard]

Zorrofan,

 

This is quite a bit technical to say the least! 2.2% of ... How did they get that?

 

Another famous one, but much simpler is the Death Cross. That is when the 50 day moving average crosses on the way down the 200 day moving average. It happened a few weeks ago and the last time prior to it was in late 07!!!

 

Many technical signals at the moment indicate a breakdown.

 

The guys on this board will think that we are completely insane and they are right. The issue is that the computers have been programmed with these technicals and traders use only that stuff, so might as well know a little before they go bizurk and give us crazy valuations again. P/E's and yields must be incorporated into the black box too, but I have never seen them count for so much.

 

The 10 year treasury is also yelling: "the sky is falling" and GDP growth for the 2nd quarter will likely be revised downward almost a full percentage point from 2.4% due to inventories and exports. The ECRI has gotten a little better last week and this week, but it is still down 9.8% indicating a recession. Housing is still not doing well at all. So fundamentally, the computers may decide to sell as well.

 

At least this time around I am ready. I am 100% certain that I won't time the bottom, but if things get crazy and stocks are again abandonned, I will have at least cash available to deploy. 

 

Cardboard

 

[Zorrofan]

At least this time around I am ready. I am 100% certain that I won't time the bottom, but if things get crazy and stocks are again abandonned, I will have at least cash available to deploy. 

 

Cardboard - Amen to that. All i know for certain are two things

 

1. no one really knows what is going to happen

2. we live in interesting times!

 

cheers

Zorro

[Guest broxburnboy]

Although in the long term, I have no idea how this will all turn out (I lean to the  bearish side outcomes), I think in the short term (next few months) we will likely see a stock market correction, followed by a reflation.

The downward movement of stock prices is the result of the exhaustion of the stimulus funds and tax breaks of the last reflation.

The Fed is still in charge (make no mistake... the movement of the  markets are thoroughly directed) as long as it can continue to sell debt to finance another reflation... and its stated policy and past history is to reflate any bubble. Greenspan (is it my imagination, or is he starting to look and sound like Lady Macbeth) was on TV last week crowing the importance of the stock market in any meaningful economic recovery.

There is an election coming in the US in November, the incumbents need to point to another "recovery" in stock prices, which means we need the correction sooner rather than later in order to properly time the next rally.*

 

*The opinions expressed herein are the sole musings of the author, which he is inclined to recant, and may bear no resemblance to actual events.

 

You may be interested in this more rational and well documented article:

 

http://theautomaticearth.blogspot.com/2010/08/august-13-2010-bubble-psychology-and.html

[oec2000]

It does not make sense to discuss inflation using a single measure such as the CPI or the GDP deflator. For a huge and diverse country and economy such as the US, it is meaningless to talk of a single inflation number. Inflation is local (depends on where you live) and dependent on socio-economic factors such as income, sex and age among other things. Surely, inflation means different things to a retired auto worker in Detroit, a young investment banker in Manhattan and a high tech worker in California.

 

I think the gold bugs look at monetary inflation which they believe will eventually translate into price inflation at some point - not an unreasonable premise.

 

Because we all have different circumstances and perspectives, we can all argue that inflation is understated or overstated and all be right. I think it is more important to use the measure as a tool while understanding its shortcomings rather than trying to push a particular point of view. Personally, I find it more useful to look at the trends rather than the absolute numbers.

[SharperDingaan]

 

Most folks would suggest a reasonable S&P P/E in the current climate is 10-12x. If the `consensus`earnings estimate of 760 is reasonably accurate;the S&P should be around 7600 to 9120 - yet it closed on friday at 11,528. We should see a S&P drop of at least 21%.

 

QE2 would not be initiated were there no pressing reason. Most would suggest it has more to do with boosting market liquidity than lowering interest rates. When liquidity is high price levels are high; when it isn`t, prices drop (liquidity discount prices in). Yet the day after the QE2 announcement the S&P dropped 200+ points (2%); if anything the market should have risen, and the additional liquidity reduced the drop over what it would otherwise have been.

 

Dodging a bullet is one thing, but when the other guy has a machine gun you will eventually lose.

 

SD