- Reader inquires: Do bogus inflation numbers blow up Rickards’ bond thesis?
- Atlanta Fed promises “real” inflation numbers: You can put them to the test
- Bogus corporate profits: Yes, this is a rerun from 1999-2000
- Muni bond investors beware: States jimmy the numbers to balance budgets
- Do startup numbers vindicate Buffett? The 5 fires up the wayback machine…
“Maybe I’m missing something,” writes a perplexed reader.
We didn’t plan it this way, but nearly every item in today’s episode of The 5 has something to do with manipulated numbers — inflation, corporate earnings, state budgets…
Let’s start with inflation, which is what’s left our reader flummoxed: Late last month, our Jim Rickards offered up a mind-bending proposition: Interest rates are near all-time highs and could drop significantly.
He explained that he’s talking about real interest rates, after inflation. He illustrated his point like this…
- In 1980, long-term bond rates were about 13%. But inflation was out of control near 15%. That made for a real interest rate of minus 2%
- Nowadays, long-term rates are in the low 2% range, while we’re experiencing mild deflation. The result is a real interest rate of 3%.
That’s what Jim meant by interest rates being near all-time highs.
“But how,” our perplexed reader inquires, “does that jibe with the inflation figure from Shadow Government Statistics, which you often cite?”
An excellent question. For reference, the most recent reading on the consumer price index (CPI) is minus 0.2% year over year. The Federal Reserve’s preferred inflation gauge, called “core PCE,” is showing inflation of 1.2%. But John Williams at ShadowStats — who calculates inflation the way the government did in 1980 — comes up with inflation of 7.4%.
“Whether I buy into government statistics is irrelevant,” Jim replies. “The fact is Janet Yellen buys into them.
“I’m not sitting here, grabbing a megaphone and saying what Jim Rickards thinks. I’m trying to tell you what she thinks so you can figure out what’s next.
“I understand the flaws, I understand hedonics, I understand the changes, I understand what John Williams is doing. I talk to my mother. She complains about the price of milk every time she comes home from the store. I get all that.
“But so what? Janet Yellen is a 165 IQ egghead who only works with what she works with. So I try to get inside her head so we can be ahead of the curve.”
There you go. Once again, a vivid illustration about the dangers of what we call “just world” investing. If it were a just world, everyone would recognize the inflation numbers are bogus and gold would be well north of $2,500 by now. But it’s not a just world, and gold languishes below $1,200. Beware investing in a just world.
[Ed. note: The beauty of having Jim Rickards on our team is that he gets inside Janet Yellen’s head so you don’t have to.
Anticipating the moves of central bankers is key to the IMPACT system Jim has refined and perfected since late last year. Thorough back-testing has turned up gains of 530% in less than eight months… 848% in less than seven months… even 2,196% gains in as little as 10 days.
The charter-subscriber discount we’ve been offering expires in less than 72 hours. To start putting IMPACT to work in your portfolio, click here.]
“It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions,” says a boilerplate disclaimer about CPI at the website of the Bureau of Labor Statistics.
We prefer our own disclaimer when we report the CPI number: “Any resemblance to your own cost of living is purely coincidental.”
Into this statistical breach have stepped the wonks at the Federal Reserve Bank of Atlanta. Economists Mike Bryan and Brent Meyer have taken the components of CPI and used them to develop something they call “myCPI.”
MyCPI bills itself as your personalized custom inflation rate.
“We created 144 individualized market baskets,” write Messrs. Bryan and Meyer, “that attempt to capture some of the variation that occurs across different demographic characteristics including age, income, gender, size of household, education and whether or not you are a homeowner…
“For example, suppose you are a single female who is over 55 years old, rents her place, has an income of more than $70,000 and didn’t attend college… your myCPI has risen 1.1% over the past year, whereas the official CPI has fallen 0.2%.”
OK, kids, let’s see how honest their numbers really are. It’s a 5 Min. crowdsourced project! We cordially invite you to go to the Atlanta Fed’s myCPI site… plug in your information… and see what numbers the site spits out.
Then write us here at The 5 and tell us whether you think the myCPI number fits your real-world experience.
We suspect the results will be interesting, if not fascinating. Tune in tomorrow.
“Here we go again,” says an email from our investment director Chris Mayer — addressing still more sketchy numbers. I asked him to expand on this tweet of his yesterday…
Chris was reacting to an analysis of 500 major companies performed by The Associated Press. In the words of the AP story, the analysis found “the gap between the ‘adjusted’ profits that analysts cite and bottom-line earnings figures that companies are legally obliged to report, or net income, has widened dramatically over the past five years.”
Indeed, one out of every five companies turned in “adjusted” profits higher than net income by 50% or more.
“It wasn’t supposed to be this way,” writes reporter Bernard Condon. “After the dot-com crash of 2000, companies and analysts vowed to clean up their act and avoid highlighting alternative versions of earnings in a way that could mislead investors.”
“This is reminiscent of that late-1990s frenzy, when people were looking at EBITDA as real earnings,” says Chris.
That’s “earnings before interest, taxes, depreciation and amortization” — in other words, leaving out a bunch of expenses the company will have to fork over sooner or later.
“Back then, too,” says Chris, “there were famously wide differences between GAAP earnings — those figured according to generally accepted accounting principles — and non-GAAP earnings.
“What’s interesting is that most of that stuff used to be kind of a fringy critique of the market. And now we have it out in the open.
“But the market still doesn’t seem to care, at least for now. People want to know the number — and they don’t care about what produced it.”
[Special announcement: Yesterday, Chris took the wraps off Mayer’s 100x Club — the latest phase in his ongoing 100-bagger project we’ve been telling you about for the last six months.
“This study has become an obsession of mine,” Chris says of his quest to unearth those rare stocks that can turn a $10,000 investment into $1 million. “My publisher spent more than $50,000 funding it. I’m also working on a book on 100-baggers, due out this fall.”
As soon as we offer new subscribers access to the club, we’ll let you know.]
Let’s not leave out state governments when it comes to number-fudging.
The Volcker Alliance — a think tank run by former Federal Reserve chief Paul Volcker — is calling out the states for “budgeting and accounting practices that obscure their true financial position, shift current costs on to future generations and push off the need to make hard choices on spending priorities and revenue practices.”
Every state but Vermont requires a balanced budget. But all too often that’s achieved by what the Volcker report calls “sleight of hand.”
The Financial Times summarizes: “Techniques include shifting the timing of receipts and expenditures across years, borrowing long term to pay for current bills, using nonrecurring revenues to cover recurring costs and delaying funding of pension and health care retirement benefits.”
(The Volcker report is food for thought if you believe a balanced-budget amendment to the U.S. Constitution is a panacea. Just sayin’.)
The implications for the municipal bond market? Not good, says Volcker: “There is a hidden agreement between issuer and buyer — neither has had an interest in exposing it.”
Another day of losses for the major U.S. stock indexes. The Dow, which slipped into the red year to date as of yesterday’s close, is further in the red at 17,749.
Bonds are likewise selling off, the 10-year Treasury yield at 2.43%. Gold has regained a bit of ground at $1,177. Crude, ever volatile, is up 3% and back within 7 cents of $60.
The one economic number of the day is one that we assume isn’t bogus — the monthly Optimism Index put out by the National Federation of Independent Business. It bumped up in May to 98.3 — on a par with the index’s 42-year average.
“Improved profit trends accounted for over half the index gain,” says NFIB chief economist Bill Dunkelberg, “a rather unusual but welcomed development.”
“Regarding the rebound of business startups you mentioned yesterday,” a reader writes, “the first thing to come to mind is that this recovery backs up Warren Buffett’s wisdom in the I.O.U.S.A. debate.
“Specifically, that America will simply ‘grow out of it.’ In other words, don’t worry, be happy!”
The 5: For readers who weren’t around in 2008, we should back up a bit.
On Aug. 21 of that year — four weeks before the financial crisis went critical — our executive publisher Addison Wiggin debuted his documentary I.O.U.S.A. It was a live satellite transmission to theaters around the country.
After the movie showing, audiences also saw a five-way panel discussion from Omaha featuring four experts deeply concerned about the future… and Warren Buffett, who gave perhaps the first but certainly not the last recitation of his “Don’t count America out” pep talk.
“Buffett’s comments were puzzling to me,” Addison wrote in this space the day after. “He said at the beginning of the Q&A session that somebody had to play the role of the optimistic Pollyanna… but he went a little overboard. Even though he helped considerably with the trade deficit section of the movie, he downplayed the federal debt and savings deficit. And all but ignored the leadership deficit.
“He kept saying we can grow the ‘pie’ until everybody gets a bigger piece. I share the sentiment… but without strong leadership on the deficits we’re facing, the pie isn’t going to be growing very quickly.”
And indeed, it’s not. Startups are rebounding strongly, yes… but it took nearly seven years to get here, and the current pace of business creation is still lagging the pre-2008 average.
“For the reader trying to send money to his son in India,” writes one of our regulars with another follow-up from yesterday: “I have an account with Scottrade. The Visa debit card works with any ACH system ATM.
“Scottrade does not charge an ATM fee, and none of the banks in the Americas with which I have accounts charges an ATM fee. While limited to under $1,000 per transaction/day, there are no fees, and I can get either U.S. dollars or the local currency at the bank exchange rate. I expect that other financial institutions can offer similar accommodations (but Scottrade has served me well).
“The man’s son was smart to vote with his feet. Consider following him!”
“In regards to the fellow who is no longer ‘qualified’ to send money to India via Western Union,” reads an email from one of our longtimers, “Bitcoin is alive and well, and money can be transferred to virtually anywhere there is an Internet connection.
“And the best part of it is that it can be done almost free.
“By joining the Laissez Faire Club, one can find out most all there is to know about Bitcoin.
“It really is perfect for what the reader had a gripe about.”
The 5: Good point. Here’s the first part of Laissez Faire’s Bitcoin primer.
“Your new website may be more ‘user-friendly,'” a reader writes, “but nowhere does ‘My Subscriptions’ appear!”
The 5: Hmmm…. Did you log in?
Here’s a snappy tutorial video that walks you through everything.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. I just got the word from colleague Peter Coyne, who ably manages our suite of Jim Rickards publications.
Not only does the charter-subscriber discount to Currency Wars Alert expire as of midnight Thursday… but access to new subscribers will not be available after that.
Yes, we’ll reopen it eventually. But if you’ve given any thought to joining up and profiting from Jim’s proprietary IMPACT system, now’s the time to pull the trigger. Here’s where to begin.
