Debtor's Prison

Greetings fellow inmates,

We have often stumbled upon the site Shadow Government Statistics, which provides alternative data measurements to government statistics on some of the most important economic indicators. The site has some proprietary methods that claim to be much more unbiased and thus more reflective of the real economic underlying. The premise is certainly compelling; governments systematically tweak the methods through which certain statistics are measured in order to further political aims. It is certainly true that there have been many publicly-known changes in the methodology behind certain official statistics, some of questionable soundness. Shadow Government Stats has calculated what certain indicators would be like if the aforementioned tweaks had not taken place.

There are many examples, across all administrations, of politicians engendering a modification to data methodologies that have injected a bias towards a more politically palatable result. Payroll data is one such example, as definitions have changed over the years to not include certain segments, like “discouraged workers”. These “discouraged workers” were first defined by JFK as those which have lost the WILL to look for employment. This has always struck us as particularly inane in our study of economics. Clinton then proceeded to take them out of the count for total unemployed, greatly downward-biasing unemployment figures. Another salient example is the Fed’s decision in 2006 to discontinue reporting M3, which is a broader measure of monetary assets than M2. ShadowStats has kept track of M3, and reports it frequently.

Ultimately, the main idea is that government methodology for gathering statistics is inherently flawed because political motivation enters the fray. More importantly for us however, is that these flaws can be ascribed to flawed or biased statistical methods. ShadowStats claims to have undone the biased methodologies and gathered data that more accurately reflect the real economy, not the rosy-colored one. Certainly, his argument is very compelling, as is his series of writings. We HIGHLY recommend you read his section of Primers.

Whether or not John William’s statistics are “real” versus the “fake” government ones does not matter at the moment. We do not have access to the premium content on the website since after all they don’t allow us prisoners credit cards in jail. Those of you with contraband credit cards (shame on you!) could, if so inclined, become a member in order to better assess the truth behind these Shadow Stats. While we are convinced that there are inherent methodological flaws in official figures, we are not certain that ShadowStats have corrected for all these flaws in a correct way. However, this possibility certainly begs some attention. The prospect of pervasive and massive government intervention in economic data that produces such a gross misrepresentation of real economic health is certainly one that is foolhardy to ignore. What we are saying is take this data with a grain of salt, but also take the official government data with a grain of salt. Then ask yourself “what if this is true?”. What repercussions would it have for your capital and investments. This is what we’ll do as we consider four of their most prevalent indicators.

GDP figures are greatly underestimated according to ShadowStats. In fact, if we believe this alternative calculation, then we have been in a recession since 2000, with only a tiny period of actual growth. Moreover, there has been a secular longer-term downward trend since the highs of the early 80’s. The current plummet is taking it to new lows, as we saw yesterday in A Macroeconomic Update. Imagine how different the story today would be if the Shadow Stats are actually true and publicly known? A decade-long recession...consistently and accelerating decline since 2004...never-ending misery that has gotten much much worse in time. Try to trade that!

This is perhaps the most obvious chart. As mentioned previously, the methodology behind labor statistics can be clearly seen to shift when a different sector of the population is excluded from the count, and when sampling methods actively select out certain inner-city segments for example. Notice that even the BLS reports a more stringent count, called U6, than the normal, cited figure (U3). Even this other official figure provides a drastic upward revision of unemployment. If we believe the Shadow Stats, unemployment is now at 20%, versus official figures of 8.9%. Imagine if unemployment is actually 20%. Would we be hearing talk of “green shoots”? Hells no. Would we be in a depression by now? Hells yes.

This M3 chart is one of their most famous ones. Ostensible, the Fed stopped keeping track of it in order to mask the true inflationary barometer it provided. We think it must be this, plus a variety of other sneaky motivations, we all know Uncle Benny. To us, it shows us nothing we have not come to expect. M3 is a broader measure than M2 and, correspondingly, M3 growth has declined along M2 growth. M1, due to its closer proximity to the monetary base, which has seen a GARGANTUAN growth, has risen sharply. This discrepancy is what is known as a liquidity trap: all the money injected at the base of the money supply fails to make it’s way “down the economy” and thus the larger monetary aggregates.

Wow, CPI has certainly diverged from its original reporting methods. The basket of commodities (and the weightings of each) measured in the CPI has changed many times in the past two decades, nearly always creating a downward bias. Notice that CPI is also used to report real GDP¸ which equals nominal GDP divided by CPI; thus a lower CPI also leads to a higher reported GDP. Of course, low inflation and high GDP are both political darlings. The ShadowStats lists current inflation at close to 6.5%, versus a -1.0% for the official figures. We are a little afraid of what will happen with this indicator once superinflation comes about, which is defined as 25% annualized inflation.

What we hope to leave you with is a very deep distrust of government statistics. Again, we do not advise you to simply start using ShadowStats as the final word pending the verification of their methods. However, do think about how much your own perception of risk is dependent on data fed to you by entities that have a vested interested, and the power, in changing methodologies in order to produce a skewed result. Once you fully realize this, you’ll begin to care as much as we do about the provenance of the data and the soundness with which it is collected and constructed.

May your capital be safe and your investments prosperous!

MAAA