How Much Should We Make of the "Misery Index?"

The financial media have recently trotted out a popular economic barometer from the 70s called, "The Misery Index." It's a relatively simplistic indicator that represents the sum of unemployment and inflation.

In the 70s, "Misery" regularly traveled in the high teens, gaining strength during the Carter administration and peaking in 1980 at nearly 22. Inflation and unemployment were enormous by 1980.

In the Volcker/Greenspan Federal Reserve, however, the Fed whipped inflation in the 80s and 90s. Moreover, as the burgeoning service sector offset manufacturing job losses, unemployment wasn't too miserable. Indeed, it had appeared that the U.S. government and the U.S. Fed had terminated "Misery."

Today, however, a "Kathy Bates-like" media has brought Misery back to the front pages. Indeed, the media appear determined to revive the series.

Still, it makes me curious about the comparisons that have been served up so far:

1. Another "Great Depression?" Unemployment at 5.5% today versus 25% in the 1930s? Negative growth for years in the 1930s versus today's positive economic output on the goods and services that we produce annually? That one has seemed a bit of a stretch.
2. Worse than the "Savings and Loan Crisis?" Thousands of banks went under in the S&L debacle during the late 1980s/early 1990s. Today's failures? 3 so far. As mind-numbingly troublesome as the credit crunch has been, the comparison appears awfully skewed.

What about the latest comparison to the oil shocked, inflation plagued 70s? The "Misery Index" registers in at 9.4. Yes, it's higher than it was last week. It's higher than it was last year... and higher than the 7.9 average for 2001-2007.

But 9.4 is nowhere near 22. It's nowhere near anything that we witnessed at any point in the 70s. Even the fears regarding the current oil crisis fail to take historical lessons into account. (Read more about Oil ETFs and "June Gloom" investing here.)

What should we make about Misery then? Not too much. In fact, we should be equally inclined to give credence to the tongue-n-cheek Forbes Tax Misery Index. One could compare the highest-taxed nations versus the lowest tax nations and discover correlations there as well.

Two of the highest taxed nations/political entities? Sweden and Belgium. Meanwhile, in 2007, iShares Sweden (EWD) and iShares Belgium (EWK) returned -4.73% and -4.72% respectively. In contrast, the European Monetary Union (EZU) turned in 15.45%.

Two of the lowest taxed? Hong Kong (EWH) and Russia (RSX). The former picked up 37% in 2007, while the latter picked up 37.5% from its inception in May 2007 through year's end.

I'm not suggesting that it makes sense to invest in a country based solely on its tax structure. However, I am making the point that both the "Misery Index" and the "Forbes Tax Misery Index" do not predict future stock prices. In brief, they are overly simplistic.

Can we find a correlation between unemployment/inflation and stocks? Yes. Can we do the same with interest rates? Sure. Might we even be able to show a relationship between business-friendly policies (e.g., taxation) and stock assets? I am sure that we can.

Nevertheless, even a beginner's course in statistics drills the notion into your head... correlation does not mean causation. In fact, it is the current real estate bust and the "wealth effect in reverse" that are largely responsible for market woes in 2008. Stabilizing home prices and rising home sales hold the largest sway today... on the "when" cash will return to stock assets.

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Comments

[The Divagator:]

Ask Mikhail Khodorkovsky if Russia is a "low-tax nation."

2008 Jun 10 09:46 AM

[Edward Janeck:]

The author is wrong. If you look at the numbers closely. Inflation and Unemployment are figured in a different way than they were figured when the "misery index" was popular. Bill Gross say inflation is unstated by 1%. Other economist say unemployment is understated by 2% compared to the early 80s. But I would bet that inflation and interest rates are going higher, not lower. I will tell you why @
theinvestingspeculator...

2008 Jun 10 10:05 AM

[DoMore Rese...:]

Please do a better job of understanding the subject before you go to the trouble of writing it.

See the below article for something at least well thought out

"Hedonically-Adjusted, Well-Spun, Nominal Misery Index" at
See bigpicture.typepad.com/

2008 Jun 10 01:00 PM