TimingCube - Creative economic statistics - manipulation of economic statistics, real CPI, real GDP, real unemployment

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500

Market Update

Markets moved higher this week, thanks to lower oil prices and good economic news. First, oil prices receded after hurricane Ernesto was downgraded to a tropical storm and it appeared that it would not threaten oil production in the Gulf of Mexico. Stocks responded by moving higher, as lower energy costs help alleviate recurring inflation fears. Markets kept climbing Tuesday after the minutes of the last Fed meeting were released. On Thursday, the July core PCE (Personal Consumption Expenditures) came in at 0.1%, below economists' median forecast for a 0.2% rise. The core PCE is supposedly the Fed's favorite inflation gauge. The fact that it was weaker than expected suggests that inflation is under control and that the Fed might refrain from hiking rates again at its next meeting later this month. This view was comforted by Friday's release of the August employment report. Nonfarm payrolls were up 128,000 as expected, showing that the economy still has strength and might not be slowing down too quickly as once feared. Also, hourly earnings were up just 0.1%, once again suggesting that the Fed is likely to keep interest rates steady for the time being. The bullish implications helped stocks close the week on a positive note.

The Nasdaq 100 and Russell 2000 respectively gained 2.04% and 3.19% on the week, while the S&P 500 finished 1.16% higher. Both the Russell 2000 and S&P 500 closed the week above their respective 50-day and 200-day exponential moving averages (EMAs). As for the Nasdaq 100, it rests above its 50-day EMA and just a fraction below its 200-day EMA. Our current Buy signal remains active.

Trend Timing School

Creative economic statistics

The fact that the stock market is starved for economic data has been very obvious in the recent past. Sure there are times when corporate earnings or major events are in the spot light, but in between what really moves the markets are the seemingly endless streams of economic data. We are flooded with government statistics and hardly a week goes by without some sort of release about PPI, CPI, unemployment rates, GDP growth (remember when it was called the GNP in one of its earlier revisions?), trade deficit, national debt, etc. from the likes of the Commerce Department, Labor Department, Treasury Department and many others. Since we frequently witness clear market reactions to such statistics, we wonder what the numbers actually mean.

It is a fairly well known fact that governments throughout history have been using statistics as a primary "opinion shaping" tool. This is no secret and all it takes is a Google search for "real CPI", "real GDP", "real unemployment" or other such, to find countless articles, sites, studies (many of them dubious, as always on the Internet), which labor with various degrees of success to reconcile the government produced fictional numbers with reality. A good example is "Shadow Government Statistics", the web site of John Williams, a well respected economist, which keeps track of the "real measures".

All the government numbers are subjected to adjustments, exclusions, weightings and other creative manipulations, to which the CPI has been subjected to for years, and as such is probably the best known and documented example. Why mess with the CPI you will ask. The Consumer Price Index is a measure of inflation by measuring the rate of change of the prices consumers pay for everyday items, and higher CPI readings are just one more item nibbling at our confidence. There are other motivations to keep the CPI number down, such as the fact that Social Security checks are indexed to it. John Williams calculates that if one removed all the changes made to the CPI going back to the Carter years, the CPI would be 3.5%-4% higher and Social Security checks would be 70% higher.

There is little doubt that the top government strategists devise highly calculated action plans designed and timed for maximum political impact, but the actual implementation of these plans at lower levels reveals such an honest and detailed disclosure of what they are doing that it is hard to call it cheating. Changes in the way published statistics are arrived at can usually be found somewhere in the footnotes of disclosures and other reports.

Take the unemployment rate as another case in point, which way back when, such as during the great depression when the unemployment rate first appeared, was a pretty cut and dry item. Unemployed was unemployed. Since then, creative accounting has been rampant with the evolving but convenient definition of unemployment as "anyone not in the labor force". Of course the key words here are "labor force", which have been redefined endlessly. For example, the labor force does not include anyone who has given up looking for a job, or people who are off unemployment benefits. Today, by most accounts, the real unemployment rate is somewhere north of 10%, depending on who is counting, but the decline in the August U.S. unemployment rate to 4.7% announced by the Labor Department today looks so much better.

Sometimes the government even believes that a statistic is simply too embarrassing and decides to stop publishing it altogether, such as M3 the top money supply measure (see "Will the discontinuation of M3 data impact your Model?" or "Inflation").

This is by no means unique to the current administration or even the U.S. government. This is a practice commonly used by all administrations and governments. Some just are better at it than others.

Another important aspect to be aware of is the political calendar which highly influences the type of PR that is desired. For example, early in a first term administration is when it is appropriate to flush all the bad news out of the system (and blame the outgoing administration for them). Looking at the present situation, we see the government laboring for over two years to slow down growth and control inflation. Now that there are signs that it has been working, such as the major slow down in real estate and automobiles, there are fears that the government may have overdone it. Going into the mid-term elections, the last thing the administration wants is a recession. In this context, overstating economic growth and understating inflation are perfectly natural goals.

All of these shenanigans are meant to manage the public's confidence in the economy and ironically, since the economy largely rests on public confidence, are really attempts to control the economy itself. There is little doubt that such tactics are effective, and that governments have been shown to use all of the tricks in their tool box to successfully manage public opinion and the economy. So, while trying to influence our perception of reality could be viewed as the lowest form of political manipulation, when politicians say they are really laboring to shape the economy itself, should we take their efforts as admirable goals. The catch is in the timing. Real growth, inflation, employment and ultimately the economy can only be influenced for so long. You can postpone a slow down or recession, but you cannot make it go away. In fact, many argue that the sheer manipulation and the heavy handed tools employed in the process, such as liquidity injections, are only delaying the inevitable and will ultimately make the end result worse than it would have been without intervention.

The funny thing is that for many people the fact that the government doctors economic numbers does not come as a surprise. In fact, the average person probably has a pretty good idea about how much prices are increasing or the state of the job market. So it seems that it is mostly the professionals and institutional investors that are so intent on reading the economic tealeaves as indicators for the future of the stock market. Our trend following Model does not take economic statistics in consideration, but whatever effect these statistics actually have on the markets will be taken into account.

FAQ of the Week

Question: Were there recent e-mail issues with Verizon.net?

Yes. On the occasion of the most recent signal, we received numerous questions/complaints from subscribers who use Verizon.net as their e-mail provider for not having received their signal. We definitely sent e-mails to all subscribers but for some unknown reason Verizon filtered these signal notification e-mails as spam. If you are in this situation we would advise that, in addition to the usual precautionary steps we recommend below, you contact Verizon directly to complain about the situation.

If you have an "unwanted mail" or "bulk" folder of some kind, you might want to check its contents to see if our message was not stored in it by mistake because of some over-zealous anti-spam filtering. One of the most effective ways to prevent this from happening is to include friendly e-mail addresses in your address book. The three addresses from which TimingCube sends e-mails are:

info@timingcube.com
sales@timingcube.com
support@timingcube.com

Please use the "Test e-mail" feature from the bottom of the "Current Signal" page to check the communication channel between you and us.

Warm wishes and until next week.

The TimingCube Staff