Lies, Damn Lies and GDP Statistics

Holy Moses I have been deceived
Now the wind has changed direction and I'll have to leave
Won't you please excuse my frankness but it's not my cup of tea
Holy Moses I have been deceived (Elton John)

In February (Some Experts Got Some Splainin’ To Do) I pointed out that some economists thought GDP was being overestimated by as much as 2% because an incorrect “GDP deflator” was being used when adjusting the data.  At that time I did consider the possibility that the government could be intentionally manipulating the data to overstate GDP for their benefit. I did not raise the issue then because it would have sounded like “kooky talk” and appeared politically biased.  And I didn’t think it could be true because I did not believe the government would blatantly lie and abuse power this brazenly for political gain.

Based on the events of the past few weeks, it’s time to take a closer look at this.  The GDP numbers are calculated by the Bureau of Economic Analysis which is part of the Department of Commerce.  This is not the IRS, Justice Department or State Department, but this article (click here) details how government power was also misused at the FBI, OSHA and ATF.  With corruption this widespread, no government agency is immune from suspicion.

Last July I thought the U.S. economy was entering into a recession (Feelings, Really Bad, Feelings) and The Economic Cycle Research Institute (ECRI) said a recession had already begun. ECRI is very accurate in predicting recessions and recoveries.  However it has been predicting an upcoming recession since October 2011 and has received much criticism since then for its “faulty” forecast. The subsequent GDP numbers for the time period were 1.3% for Q2, 2012 and 3.1% for Q3, 2012.  However, when looking back at some important data for this period, it is difficult to find collaborating evidence that the economy was growing at all:

-         Data for the shipping ports track import and export activity which is a good indicator of overall economic activity.  A growing economy should show steady increases in both.  In mid-2012, this data was very flat. (See graph from Calculated Risk).  No signs of growth here.

-         Key measures of consumer discretionary spending (clothing and hobbies) were negative or very weak from June – October 2012. This type of consumer spending is vitally important for economic growth. Again, no signs of life here.

-         Miles Driven data remained flat and depressed (from 2008 levels, see graph).  If people are driving to work, driving to buy things, driving on business, driving on vacation, then miles should increase as they did until 2008.  Economists have been trying to explain away this data by saying more people are using public transportation and demographic shifts, but this should reduce the growth, not stop it.  There are no signs of economic growth in this data. 

-         And of course if the economy were really growing, then the job market would be growing.  I previously wrote that we have been in a “jobs depression”.  The rate of job growth is not even fast enough to handle the number of new workers entering the work force; so many people are leaving the work force. No real signs of growth.

So what difference does it make?  The GDP is just a description of reality, it does not determine it.  The only time this would really matter is before an important election, which of course happened just after preliminary Q3 was released. 

The story we were sold, and which we bought, was that the economy was getting better and faster growth (and good times) were just around the corner.  The story changes dramatically if we were really around 0% growth or in a very mild recession.  (And this corner has taken another year and counting).

I have no evidence that the GDP numbers have been intentionally overstated.  I only have my sense of economic smell and something doesn’t smell right.  I hope some economists will investigate this in much greater detail and share their findings.  There is no way to “audit” the government so it may take years to figure this one out.

So who do you trust now? I think we are operating in an “economic fog”.  Some major economic indicators are still “broken” and GDP numbers are now suspect.   On the other hand, ECRI has never backed off its recession forecast.  People have accused them of being arrogant and stubborn for not acknowledging they were wrong. But maybe, just maybe, they were right and we just don’t know it yet. 

We Are Losing This Decade

Many economists have said that although the U.S. economy has taken a big hit, it will not experience a “lost decade” as Japan did from 1991 to 2000. But from where we sit right now, I’m not so sure.

The problems in Japan started when an “asset price bubble” burst.  This resulted in the Japanese economy basically stalling out (with weak or negative growth) for around 10 years.  The problems here started when the housing market bubble burst, leading to severe damage to our financial system (Japan’s financial system was similarly damaged back then).  Additional damage occurred because the housing bubble also diverted capital to that should have been invested in other developing industries rather than housing.  When the bubble burst, these industries were behind the foreign competition and were not providing the jobs they could have.

If we say the economic problems started in January 2008, we are over five years into an economic malaise and we don’t really know when a strong recovery will begin.  The stock market is smoking, but it just recently exceeded its previous peak.  Any shock or cyclical correction would put us behind again.

The part of the economy where we are really losing is the job market.  We frequently talk about unemployment numbers. But numbers do not get unemployed, people do.  And the people losing the most in this mess are those who lost jobs since 2008. Once you lose your job in this economy, you can stagger around in the “employment wilderness” for years. Not being employed productively in your field of expertise causes you to lose income, professional value and personal fulfillment. Here are some examples from my personal network (names changed):

This economy can make you feel like
a "castaway"

-       Rich is a marketing executive who was let go in 2007.  Under normal circumstances he would have found another position in his industry in 2008.  However due the recession, he bounced around several jobs outside of his industry before finding something that fully utilized his experience in 2012.  Rich lost five years of productive work.

-       Bill is a 53 year-old industrial engineer. He has been unemployed for two years because his skills are most valuable when companies are expanding. Companies are not expanding in this uncertain environment.  Bill’s loss is two years and counting.

-       Cindy is a 50-year old marketing communications professional who was laid off from a large company in 2010.  She found a new job within a year with a small Internet-based communications firm.  However, she did not fit in with the culture of the new company and lasted less than two years. She is back looking for work the second time in three years. Even though the job situation has improved since 2010, there are still four unemployed people for every job opening and competition for good jobs is fierce.  She is on her way to losing two years.

-       Joe, a web-based marketing guy, was downsized from his company and it took him 15 months to find a new position. But after two years, his company was sold and he is on the market again.  He will also lose two years.

-       Craig is a 54 year-old marketing communications professional and has been looking for work for three years.  Becky, a product manager, has worked one year out of the last four.

-       Many college graduates have not found jobs in their field.  Some are still looking three years after graduation while working part-time.  They just lost the first three years of their careers and it will take them three years longer (or more) to pay off sizable college loans.

All these people have valuable skills that they could be using to grow the economy, but they can’t because companies are not expanding, jobs are not being created and the economy is plodding along.  This is a huge waste of human capital.  The economy suffers and the people suffer.

And the suffering has consequences. Largely due to the Great Recession, the U.S. Centers for Disease Control and Prevention reports that the suicide rate for men in their 50’s has increased over 50%.  Rates for other demographic groups are up also.

If we have already “lost” five years, when will this end? The Wall Street

Is this guy running our economy?

Journal reports that at the current rate of job growth (adjusted for population growth) it will take nine more years for employment to return to pre-recession levels.  Of course the rate of job growth is expected to increase soon. However if it takes even five more years (instead of nine), then five plus five I believe equals a decade.  We haven’t lost the decade yet, but we are well on our way.

Some people may argue that the situation is not that dire and that displaced middle-aged workers will just have to work into their 70’s to make up the difference. 

But just because people are living longer in general does not mean people are healthy enough or able to work this long. If you have to work that long, there is no guarantee that you will even have a retirement.

For example, my friend Jerry, age 64, planned to finish his long, successful, career this fall and begin enjoying a great, extended, retirement. They buried him last week.

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The Party’s Over – It’s Time To Leave Now!

Turn out the lights, the party's over

They say that, 'All good things must end'

Let's call it a night, the party's over

And tomorrow starts the same old thing again

In January I wrote that the Model T was predicting a major market correction in May or June.  Since then, the blog has experienced a record number of readers and I have received questions about the model, the blog, and other issues. So as May approaches, it is time for a review:

2000 – While doing an analysis of several factors in the commercial transportation industry, I notice a connection between the industry, the economy, and the stock market.  My analysis indicates I should sell my stocks immediately. I do not sell and soon afterwards the market tanks.

2001- 2006 – I isolate the factors in the commercial transportation industry that are key leading indicators to the direction of the stock market and construct the Model T.

2007 – I start sharing the forecasts of the Model T with a group of around 20 investment professionals and industry colleagues.   The Model T correctly forecasts the market peak in October, months in advance.

2009 (June) – I am downsized from my job after 16 years and cast into the worst job market since WWII. June 2009 was actually the very bottom of the job market.  It was a very frightening environment and can only truly be understood by those unfortunate enough to have experienced it.

2009 (September) – I decide I need to write a business blog as part of my networking and personal branding strategy to help find employment.  I decide to base the blog on The Model T because it is unique and would showcase my analysis, forecasting and writing skills to potential employers.

Therefore I am sharing this information with the world not because it has no value and not because I am so altruistic that I just want to help people. No, I made this decision because I saw it as my escape from unemployment.  Ironically, my three plus years of writing the blog have only produced one interview opportunity (albeit with a Wall Street investment firm).

2010 (April) – I start working in a new job, in a new field and a different function.  I assumed I would cease writing the blog, until my readers convinced me they wanted it to continue.

2013 (January) – The Model T indicates that the stock market will peak in May or June and I publish the forecast.

 

2013 (February – April) – The stock market continues to rise surpassing the 1550 (S & P) model prediction in March and the plus 2% (1581) upper range in April.  This movement is very consistent with the Model T forecast.

Today - Currently, the Model T is flashing bright red.  It says to sell now.  The acid test of the Model T has arrived.  I do realize that I am either going to look like a genius or a fool.  When I went public with the Model T I didn’t envision this post.  Maybe I thought only my 20 initial comrades would still be reading the blog at this point, but around 3,200 people (and counting) around the world have read the prediction.

Two weeks ago the stock market had a few days of losses and several analysts announced the correction had begun. I didn’t sell then because I trusted the Model T to get to May.  This was a “test” correction.  It is what my friend professional investor Jeff Kaufman would call a “head fake”.  Because that wasn’t really the start of the correction, it may cause you to keep your money in the market longer once the real correction starts.

It takes “stones” to pull your money out of the market when it is this hot, but my friend Kurt (one the original 20 and a close follower of the Model T) pulled a big chunk of his funds out of the market last Friday.  I will sell off around 45% of my holdings (this is my practical limit based on tax and other factors) on April 30.  I don’t recommend pulling all your money out of the market because the model could be wrong. As I mentioned last time, some analysts predict the market will continue to zoom to record heights.  If your money is in mutual funds, it is easier to move more money out if you desire.

And this is not “sell in May and go away”.  In is a coincidence that The Model T is advising to sell in May, but I sense that this makes a May correction more likely.  Regardless, the Model T says the market won’t begin to recover soon (see below).

People ask me how I am going to reinvest.  In the short-term, a good option is short-term bond funds.  However some analysts fear a stock market correction could trigger another shock to the financial system, so you may want to just sit on the cash until the smoke clears.

The Model T is predicting a correction down (eventually) to around 1350 (about 15%).  It says the market should stay depressed about a year before starting a modest recovery.  But it looks like we will have plenty of time to prepare for that.

Let the games begin!

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We're Dancing - Until the Music Stops

We can dance if we want to
We can leave your friends behind
Cause your friends don't dance
And if they don't dance
Well they're no friends of mine

There have been several recent articles complaining that the economy is not “in sync” with the stock market.  Of course these articles are rubbish and not worth even skimming.

The economy and the stock market are like a pair of flamenco dancers.  The man (the economy) usually takes the lead and the woman (the stock market) usually follows. But the woman can also lead, as the man watches admiringly.  At times (let’s say when the economy is very strong or very weak) the man and woman dance very close and in unison.  However there are many times when the dancers are physically distant and even though they share the same floor and music, the dances are not the same.

Let’s pretend our flamenco dancers were performing on a ship that encountered some horrific waves (the Great Recession).  The man was thrown off the floor to the right and injured his leg.  The woman was thrown off the floor to the left and broke a heel.  While the music continued to play, the man struggled to regain his bearings and limped back to the dance floor.  As he did, the woman repaired her shoe and still dazed, tried to resume the dance.  This dance is not going to appear very graceful for a long time.

I have written before about how many reliable economic indicators are still out of sync. So why would you would expect the economy and stock market to be more coordinated now? 

Yes, in the long run and in the big picture, the two have to be well connected, but at many times the correlation suffers.  If it didn’t, it would be much easier to predict the stock market.   The economy is basically the economy, but there is a big emotional and psychological aspect to the stock market.  Sometimes she dances as expected and other times she has a mind of her own.  But she is so sexy when she dances, that investors cannot resist her.  She creates such passion in her followers.  She rises, she swoons, she is memorizing.

The other strange thing about the articles is that you could argue the economy and stock market were actually dancing close together in Q1.   The economy grew 2.7 percentage points more than the previous quarter. (3.1% estimate Q1 minus 0.4% in Q4) and the stock market was on fire.  Of course the problem with this is Q1 is still just at 3.1% GDP and this is expected to be the strongest quarter of the year. 

And the employment report for March was just dog awful.  When almost a half million people are so discouraged they quit even looking for work, your job market reeks.  I’m so glad our government is laser focused on the economy and job market instead of spending time working on peripheral issues.

The latest Wall Street Journal Economists Survey GDP (total survey average):

Q1 = 3.1%

Q2 = 1.8%

Q3 = 2.4%

Q4 = 2.7%

If you would forecast the stock market from this data, the market would continue to increase at a slow to moderate rate the rest of the year.  However, virtually no one is predicting this scenario.  The two most common forecasts fall in one of two categories:

1.     The market is way undervalued.  The market will continue to go up, up, up, in anticipation of the economy growing even stronger.  Some proponents of this theory predict the market is about to explode into the stratosphere.

2.    The market is way overvalued.  The stocks have risen in anticipation of a stronger economy which hasn’t materialized.  Banks are weak, Europe’s weak and Obamacare is going to kill the recovery.  Some people on this side are not predicting a correction but a huge crash.

So that makes it very clear what to do, right?

Model T Update

The Model T prediction of an S&P peak of 1550 was surpassed on March 11 when it closed at 1556.  The plus 2% upper limit of 1583 was breached with a 1587 close on April 10.   This means the Model T was not able to predict the market peak within a 2% range this year. It does seem like the market is currently bouncing around in this range, which would indicate that we are near the top.

However the value of the market peak is not as important as the timing of this peak, and the Model T is still predicting a peak in the May/June period.  If the market is peaking in May, you would expect it to be humming in April.  I didn’t explicitly state this in my January (Sell your Stocks in May?) post , but of course it was implied. If you are not selling until May, you still expect to be making money in April!

Next Post: It’s Put Up Or Shut Up Time!

Diversifying Into Crap

Background: I manage what I call the GeoDon Fund, a portfolio of stocks that my grandfather George put together a long, long, time ago.  I inherited a portion of the “fund” from my mother in 2010.  The portfolio had been basically untouched for over 35 years and I have attempted to clean up, diversify and “modernize” the holdings based on the original investing principles George followed.

Scene: It’s Saturday morning and I’m reviewing the GeoDon Fund on my computer, when the ghost of George suddenly appears.

Don: George! What are you doing here?

George: I see you are reviewing our fund and I wanted to see how you are doing.

Don: The fund is going very well.  Look at these winners!

George: Are you following my rules?

Don: Of course I am.  Look at how I have diversified the fund and spread the risk.

George:  What about these stocks?

Don: Ah, these three were not good choices, but I diversified and didn’t put much money in any of them.

George: Diversification doesn’t work very well if you diversify into crap.  You just get three flavors of crap instead of one. And this dog, what does this company do?

Don: This is a commodity company.

George: Commodities?  That’s risky business, my boy. This doesn’t fit with the rest of the portfolio.

Don: I know it’s not exactly a blue chip, but it had potential.

George: No it’s not a blue chip. In fact it looks more like a cow chip! Why on earth did you buy stock in this company?

Don: Well it had a high dividend with significant growth potential.  It was a no brainer.

George: I can see how someone with no brain would buy this stock.  Son, chasing this type of stock is like chasing skirts; you may have some fun for a while but it never ends well.

Don: Hey, it’s not my fault!  The company lied and said the dividend was very safe and future sales looked strong.

George: Unfortunately it is totally your fault for believing that garbage.  That’s why you stick with the blue chips and quality firms.  Those companies have established integrity over time.  Why did the stock drop so fast?

Don: The company cut the dividend by 76% and then announced earnings were weak and would get worse.  All the big mutual funds dumped their holdings and the stock tanked.  I read that when a company deceives the market, mutual funds dump it because they can never trust the company again.

George: So did you do your own research on this company?

Don: No, we have this great thing called the Internet.  On the Internet, all these investment gurus said the stock was great, so I bought it.

George: Did any of these so called “experts” actually buy any of this stock?

Don: I don’t know.  I’m not sure that they are allowed to.

George: So these guys are not suffering a bit over this and you are left holding …..

Don:  A turd. The GeoDon Fund now has a turd.

George: How many turds?

My cat makes investments too!

Don: Three turds, I made the same mistake with three different companies. They all lied and I bought their stock.  The good news is that have some capital losses as a tax write off!

George:  Oh that’s nice.  I never had any capital loses to write off when I managed the fund.  So what have you learned from this experience?

Don: Don’t worry George, I have learned my lesson.  I am going to stick to the original principles of investing in strong, established, manufacturing firms with an emphasis in the healthcare, energy and transportation sectors.

George: That’s my boy.  Uh, what did this “lesson” cost you?

Unfortunately, you can't polish a turd

Don: The three turds are down about $6,500.

George: The classes in this school are very expensive, aren’t they?

Don: Yes, they are.  That’s why it won’t happen again soon.  I am going to stick to the original strategy for the fund and only buy stocks that fit with this philosophy.

(And with this George departs, his mission accomplished, for now)

We’re Buying Stocks Like It’s 2007

Streaking!

A headline in my Saturday paper said the Dow Jones just wrapped up its best streak in almost 17 years.  The recent 10 straight days of gains was the longest “winning streak” since 1997.  But remember the stock market is not a basketball team.  Basketball teams achieve winning streaks by playing well, the stock market has winning streaks because the fans decide that it’s time to keep cheering.  

Yes, this market is smoking hot!  Articles are speculating about just how high the market could go.  Other articles are encouraging investors to get back in the market big time.  Hot actresses with absolutely no knowledge of the market are talking about buying stocks in interviews.

But there have also been several articles comparing the exuberance about the stock market now to the excitement in the summer of 2007.  The market was also sizzling then.  Everybody was talking about and buying stocks.  There was speculation about how high the market could go. There was extreme investor confidence.  There was absolutely no way this market could fail.

When I instructed my broker in October 2007 to pull my money out of the market, he thought I was crazy.  This was the most contentious conversation that I have had with him in nearly 30 years of the relationship. That’s how hot the market was in October 2007, about two weeks before the crash started.

The stock market can break your heart!

The stock market is as stable as a high school romance.  It can catch fire and burn hot quickly without warning.  He/she loves me and this is going to last forever, that’s until it suddenly collapses leaving you devastated with a broken heart.

Is it Possible 2012 GDP Was Overstated?

The economy grew 2.2% in 2012, or did it?  ECRI (Economic Cycle Research Institute) says its recession forecast in 2012 is correct because when the 2012 GDP numbers are revised, it will show that we were really in recession for part of the year.

Is this possible?  I believe that the economy was so “jumbled” by the Great Recession that many of the usually reliable economic indicators are still giving off false readings.  This includes both the ECRI index and the GDP numbers.  However, if you look at some economic statistics; imports, exports, miles driven, freight, employment, it looks like growth was between 0-1% for the year. 

The two sectors that were strong in 2012 were housing and natural gas.  Housing was growing because its recovery did not start until Q1, 2012.  Natural gas production growth is due to technological innovation (fracking), not an economic cycle recovery.  Even if the economy grew at 2%, if you subtract out housing and natural gas, then the rest of the economy was very tepid.  That’s why many commentators say it still feels like a recession.  You also have to trust that the government accurately estimated GDP with no upward bias in an election year.  I have vowed not be political this year, so you must decide this one on your own.

Economic Growth Has Started (Again)

The economic reports for February have been very positive.  After a few months of 0% growth, the economy is looking much better.  My “expert” panel has raised the Q1, GDP forecast to 2.2%.  However growth will remain “choppy” with the forecast at only 1.6% for Q2.  The recent positive economic news has helped fuel the rise of the stock market and the hope of even higher gains.  However, the stock market has not been in sync with the economy for several months and a 1.6% growth in Q2 is not a positive sign.

Model T Update

The market exceeded the Model T forecast (as was pointed out by several alert readers) of 1550 on March 8.  I have been asked if the Model T needed to be recalculated.  Historically the model varies by +/- 2%, so the upper limit is 1583.  In addition, the timing of the model is more important than the S&P number.  The number is useful in determining if the model is functioning properly.  The model still forecasts a peak in May, however the fact that we are over 1550 (the peak so far in this cycle is 1563) means the peak could come in April.  I am planning to move a significant part of my money out of the market in early May.  Stay tuned.

Gamblers, Waiters and Strippers – Keys to the Recovery?

No Chance of a Recession Now?

The revised Q4 GDP came in at +0.1% (up from -0.1%) which means we are no longer in danger of going into recession! Booyah!  It also means that my December prediction of “near 0%” is still smoking hot, even if the economy is not.

Budget Cuts (or really just a decrease in the rate of growth)

The economy is still struggling in 2013 partially due to the ending of the 2% Social Security tax cut.  With your taxes 2% higher this year and gas prices on the rise, you now have between 2-3% less to spend.  So if government spending were reduced by, let’s just pick a number, say 2.4%, you would expect politicians and government officials to just tighten their belts like we are all doing without whining, complaining or threats.  For the past couple weeks it has sounded like you are taking candy bars away from six year olds.  These people are addicted to spending your money and the power that comes with it!

We are adjusting our household budgets because we have 2-3% less and the government should have to do the same.  Oh wait, I forgot.  The U.S. Senate doesn’t have a budget.  They haven’t had one for four years.  This means that every payday you send your taxes to someone who doesn’t have a budget.  They just grab the money and spend it! And when they don’t have enough money, they borrow more.

What About Now?

How is the economy doing in Q1, 2013? Let’s look at a few “different” economic indicators.

Non-Tradition Consumer Spending Economic Indicators:

Coupon Index - People are trying to stretch their money by using more coupons.  This is logical but according to the Internet Coupon Index (from Coupon.com), coupon usage has spiked just as it did right before the Great Recession began in December 2007.  Not a good sign.  Indicator: Negative

Restaurant Performance Index – This was actually up in January after four months of decline.  This is surprising since many restaurant related stocks are not doing well.  In my locale, the restaurants that survived the recession are busy but new restaurants are not opening.  This means capacity is still less than the 2008 level.  Indicator: Negative but improving.

Retail Advertising – I have noticed a reduction in Sunday sales flyers, coupon magazine thickness and junk mail in 2013.  Retailers are cutting back on spending and so are their customers. Indicator: Negative

Charitable Contributions – These are reportedly down, but it should be expected that people would cut spending here first.  However, it will be a very positive sign when giving increases.  Indicator: Neutral

Gambling – The new Ohio casinos are reporting that revenue is considerably under forecast.  But all the factors listed above for charitable contributions apply here.  Indicator: Neutral

Some Unusual Economic Indicators:

The Hot Waitress Index – This indicator says that the waitresses are more attractive during economic downturns since these women turn to restaurant jobs when they cannot find jobs in other fields.  I have previously stated that this indicator (if accurate) is only relevant in New York, Los Angeles or other big cities with entertainment industries.

However, I have noticed that there are more guys working as waiters than normal.  This is probably the result of the lack of factory and other higher-paying industrial jobs that would be more attractive to this demographic.  If this is true, as the job market improves, the ratio of waitresses to waiters should increase. Indicator: Negative

The Stripper Index – This indicator says that “gentlemen club” spending is one of the first cuts made in an economic downturn.  Reportedly more clubs are closing than opening around the country.  Conversely in Canada, where economic conditions are much better, clubs are having problems recruiting enough “entertainers”.  The obvious solution would be to export U.S. strippers to Canada.  I don’t think this will happen because President Obama says there is a shortage of meat inspectors in the U.S. due to the recent spending cuts.  And you know how picky Canada is about imported beef.  Indicator: Negative

Bottom Line: The Q1 GDP forecast of 1.2% still appears to be solid.

Model T Update:

The S&P 500 Index is at 1518, 2% below the Model T peak prediction of 1550.  Because the Model T’s track record has been between +/- 2%, the high of 1530 in February may well have been the peak.  Unfortunately the Model T does not take into account sequestrations or a possible government shutdown in April.

A possible scenario would be that another budget compromise in March results in stock market gains in April and May.  This could boost the S&P to 1550 or more and would then set the stage for a major correction.