Wag The Dumb?

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These are dangerous times for the low-information investor.

A casual glance at the headlines in the final few weeks of the Presidential election would give the vague idea that the economy is showing signs of recovery, but that would be like letting a student with a failing grade to write up their report card.

What you are really seeing is a blatant attempt to cook the books in a desperate bid for an incumbent President to win re-election on a fleeting and false narrative of recovery.

Not to sugarcoat it, but this weak sauce narrative is directly targeted at the willful partisans and the hopelessly uninformed or those too dumb to see the bigger picture.

Unemployment is always a hot button issue for an incumbent administration.  Nixon was perhaps the first in modern times to address unfavorable unemployment statistics by merely redefining those who had been unemployed too long to no longer be counted.  It is similar to grading on a curve where a C suddenly becomes an A.

In October the unemployment magically dropped from the stubborn 8.1 percent level to still horrible but better sounding 7.8 – entirely because of shenanigans in how the unemployed are counted.  Then, the next Jobless Claims report magically dropped and looked to confirm the improving picture until you learn that was only because California’s stats were not included.

If unemployment were calculated as it was as recently as 2008 then the real unemployment figure would be around 11% - and UNDER employment, which includes all the poor saps that are no longer counted, would push that figure well over 14%.  That is the statistical equivalent to ‘These are not the droids you are looking for… move along’.

That’s why the announcement that the growth rate for the economy reported today to have risen from the anemic 1.3 to a ‘higher than expected’ 2% should impress absolutely no one.  First, the Administration had promised 4% growth by this point and we’d need 3% to merely keep employment up with population growth.  But at this point in the Reagan recovery we had growth over 5%, which is a genuinely strong recovery.

That inconvenient truth aside, consider that just about every growth rate or Jobless rate figure has quietly been revised to the negative weeks later after the news cycle has passed.  As an investor, keep your eye on the report card and that includes the upcoming Debt Ceiling limit, expiration of the Bush Tax rates, and the Sequestration of over $500 billion from the Defense budget and the sun setting of the reduced rates on the Social Security payroll tax.  The brutal reality is that any ONE of those issues could throw a monkey wrench in the Lame Duck session after the election, but when you consider today’s bitterly partisan DC environment, as an investor you should be prepared for a hay-maker of a right hook to the economy’s glass jaw.

Good Investing!

David K. Miller

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