Investors have trouble making money in the markets because the information they receive from the government is not a reliable accounting of what is actually going on. The mainstream media then repeats this information, no matter how absurd it is, without critical commentary or analysis.
While financial media reporting has been filled with misinformation this year, there are three major ongoing themes in 2009 that investors especially need to realize do not hold up under scrutiny. These are: The economy is in recovery; Unemployment is a lagging indicator; and Inflation is not a problem. Let's examine why each one of them is not true.
1. The U.S. economy is in recovery.
This is based on the U.S. GDP going up in the third quarter (by 2.8%) and the contention that a reported increase in GDP indicates the end of a recession. This would be the case if the numbers were reliable - they are not - and they didn't turn positive as the result of government stimulus programs - which they did.
There have been a number of changes in how U.S. GDP has been calculated in the last three decades. These changes have caused better numbers to be reported. Consequently, it is now almost impossible for U.S. GDP to be negative. The original numbers published for 2008, indicated an economy doing well, not one that was in the worst recession since the 1930s. After an extensive revision of GDP numbers in mid-2009, the much reduced GDP number for 2008 was still positive - a theoretical impossibility - and absolute proof that the U.S. GDP numbers are unreliable and should not be believed.
Even with the extensive manipulation of the GDP figures, if you removed the impact of government stimulus programs for autos and housing and other forms of government spending, there still wouldn't have been a positive number in the third quarter. This game has been played before in Japan. Government spending brought the country out of recession in 1993, 1997,1998,1999, 2001, 2004 and 2009. Did they have a septuple dip recession? No, they have had one long two-decade recession masked by government stimulus programs - the modern version of a depression when Keynesian economic policies are pursued. The Japanese learned that an economy that does well solely due to government stimulus is not an economy in recovery. The U.S. should pay attention to this lesson. So far, it hasn't.
For a fuller discussion of the recent U.S. GDP numbers, please see my blog post Mark to Model GDP.
2. Employment is a lagging indicator.
It would actually be more correct to state that GDP is a leading indicator of economic recovery (if things go right, that is). The lag of employment to GDP only became very noticeable during the minor recessions in the early 1990s and 2000s and was a result of statistical 'adjustments' that made GDP look better so that it gave premature readings of economic improvement. In the major recessions in 1973-1975 and the double dip recession in 1981-1982, unemployment bottomed the quarter that GDP turned positive. It did not do so in the third quarter of this year. If unemployment was a lagging indicator, the lag should be much greater after major recessions than it is after less serious recessions. This is not the case and is a major contradiction to this viewpoint. What has actually happened is that statistical 'adjustments' made by the U.S. government to improve unemployment calculations have lagged the 'adjustments' made to improve the GDP numbers.
For my blog post on the latest U.S. unemployment figures please click here.
3. Inflation is not a problem:
This oft repeated mantra from the Federal Reserve will prove in the future to be the biggest lie of all. Their argument that low capacity utilization prevents inflation is not true based on historical analysis. Nor are there any cases in the past when governments have 'printed' large excess quantities of money as the Fed is doing now and inflation didn't follow. The Fed's own figures also indicate that massive future inflation is possible. The Adjusted Monetary Base, a measure of future inflation potential, has gone up more in the last year than it has in the entire preceding 50 years. The rise of the Adjusted Monetary Base in the 1970s, when U.S. inflation reached 15% on a monthly basis at its height, is a mere blip compared to the current vertical rise.
The Fed has hinted that it will be able to take care of any potential inflation problem. This is the same Fed that didn't realize sub-prime loans were a problem almost up to the moment they started to bring down the financial system, and the same Fed that was claiming in the spring of 2008 that it thought it could prevent the U.S. from sinking into a recession. Unfortunately, the recession had begun months before. The Fed was unaware of it, however. The Fed will also be unaware that inflation is a problem right up to the point where every dog in the street knows about it.
For a thorough debunking of the inflation news, please see my blog post.
Lack of honest government statements to the public about the economy is nothing new. Governments almost always try to hide the bad news. More than once in history, manipulation of the economic numbers has evolved into outright fabrication. It is also common for the mainstream economic community to support the government's view with fanciful obfuscations. When things have gotten to this point, the situation is already very bad and likely to get much worse. As usual, things will not be different this time. They never are.