Lies, damned lies and statistics

Benjamin Disraeli was one of England’s most notable prime ministers. Around the English-speaking world he may be most remembered for a funny, but true, statement he once made.

He quipped that there were three types of lies: lies, damned lies and statistics.

It’s the latter lie I want to focus on.

The statistics we hear, and “what the numbers say,” are incredibly vague. We hear about unemployment, payrolls or inflation and we generally take them at face value, assuming that they’re pretty straightforward measurements.

And when a number comes out, the news tells us the markets are “reacting” to that. We figure the market pros know what those numbers mean, even if we have trouble sorting through all the data. We let the markets decide.

But that has never been a good strategy, because, as we’re all painfully aware, the “market” is people making decisions, and people will go until things break. It’s never been about sustaining a long-term growth trend. It’s about exploiting a sector, blowing that bubble until it bursts and then finding the next market to inflate.

Worse, the statistics we’re told matter don’t really matter more than others that are buried, especially in an election year. In a major election year it’s in the best interests of Wall Street and Pennsylvania Avenue to put lipstick on the economy.

The politicians want people energized to go vote and the markets get to look like mighty free market engine of the U.S. economy. And so they not only choose the statistics they want to share and pay attention to, but they also find ways to build them so they suit their purposes.

One classic example is this site’s comparison of the Consumer Price Index and the government’s version. Basically, it takes the current government version of inflation and compares it to the how it was calculated before 1990, and before 1980. By comparing the methods you see vast differences in what the “real” inflation rate looks like — it’s four to seven times higher using the old ways of calculating inflation than the current model shows.

To drill down a little more, let’s use the Mylan EpiPen controversy. The EpiPen was discovered using U.S. government research and was available for a very reasonable price — initially. Then Mylan bought it. It moved its headquarters to Ireland to avoid paying U.S. taxes and raised the price 548 percent over the past eight years.

There were no R&D costs to recoup and an expanding market for EpiPens due to lobbying the government to have it on hand at government schools… you get the idea.

I’m not bringing this up to debate corporate taxes or drug companies’ greed. It’s bigger than that. And it’s bigger than EpiPens.

In the healthcare sector there are two measures of inflation. One is consumer based — how much individuals are paying for healthcare out of pocket. The other is corporate based — how much insurance companies paid for healthcare claims by their customers.

In the Mylan case, the cost was shifted from the insurers to the customer, so much of that price increase  (as well as scores of other medications, treatments and surgeries) was passed on to the consumer, which would be a rise in inflationary costs for consumers.

But the Federal Reserve doesn’t look at the consumer based model. It looks at healthcare inflation from the corporate side. And there, costs aren’t going up quickly because they’re shifting their costs onto consumers.

This is simple example of how the government supports big business at the expense of its citizens.

Other examples are in home sales, office space and consumer spending. Healthcare is not unique. It’s a simple illustration of how the current U.S. government is set up for corporate interests, not individuals. The “people” that matter are corporations, not citizens.

One other stat worth mentioning here: in July investors sold more of their hedge fund assets than they have since February 2009. And it was the second straight month of outflows. These are Wall Street’s elite insiders. This is a troubling sign.

And it’s one of many warning signs that the stock market — and the bond market — are on thin ice here.

Stay away from all stocks here. Small caps (stocks with a market cap under $2 billion) are on a roll here but that’s simply because large cap gains are exhausted. It’s not a sustainable rally.

Here you look for safe ports in the storm. If you own what I call “Century Stocks” — stocks that have been around for more than 100 years — or precious metals like gold and silver, or both, you’re in a much better position to weather the next correction profitably.

— GS Early

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