We could talk on about other oft-cited indicators and their manipulation: PMIs, CPI, M1, GNP and a host of other acronym-laden economic numbers that are alternatively paraded before the public or swept under the rug depending on what story the latest figures tell about the state of the economy.
The New York Times tells us that the Labor Department's new jobs report “Shows Resurgence of Hiring but Has Downbeat Notes.” Confused? Good. You should be. Once you read the article you discover that what is meant by this curiously oxymoronic mix of “resurgence” and “downbeat notes” is nothing other than a sign of what we've been writing about for years, i.e. the total manipulation of the statistical data to show that black is white, up is down and “resurgent” is “downbeat.”
In this case, the trick is one we've identified before: the unemployment rate fell to its lowest rate since the Lehman Collapse—a respectable-sounding 6.3%—on the back of an additional 288,000 jobs that were added to the economy in April...but a startling 806,000 left the labor force, bringing the labor participation rate to its lowest levels since 1978. Translation: the unemployment rate is a figure that does not reflect the labor force reality, and that reality includes a whole lot of unemployed people who are not looking for work and who are not classified as “unemployed.” Sadly, even the BLS had to admit it is “puzzled why so many unemployed people are not looking for jobs.” As the Times fails to admit (but ZeroHedge points out), it's even worse: the only age group that gained jobs in April was those over 55; those under 55 lost a combined 259,000 jobs last month. And to make matters even worse, the unspoken truth behind all of these numbers is that they are merely preliminary results, and are routinely revised months later in statistical corrections that are barely reported on at all.
So take the much-ballyhooed jobs report for what it's worth: next to nothing. If it does have an impact on the real world, it will only be due to the hype effect. In the wake of a “good news” event (like this jobs report is being reported as), consumer and business sentiment can buoy, thus causing people to open their wallets a little further or go into debt a little deeper, or bosses to hire new staff on the basis of those increased expectations. In this way bull markets tend to keep growing and hiring sprees tend to keep going until the disconnect between the cooked numbers and the reality on the ground becomes too great.
But if this latest payrolls report is not nearly so meaningful as the economic lamestream media is suggesting, how can we get the pulse of the economy? What other measurements, signs or indicators should we be looking at?
GDP figures come to mind, and not only because the US Q1 GDP report was released this week. Of course GDP numbers, too, are highly manipulatable and highly manipulated, and since so much emphasis is placed on them bad numbers have to be spun away quickly. Such is the case with the latest US GDP figures, which came in far under expectations at a pathetic 0.1% for the first quarter. The explanation for the dismal performance? The weather, of course, because we are now expected to believe that economists have somehow forgotten to take into account snow days and cold snaps when thinking about how the economy will perform in the winter. We are also expected to forget that cold weather actually increases economic activity in some sectors (by increasing heating costs, for example, which in turn increased real GDP growth by 0.7%) and that one of the strongest growth sectors was (of course) government spending, which accounted for another 0.7% of real GDP growth.
The figures are little more reliable around the world. As we've outlined a number of times in these pages, leaked documents show that the current Premier of China, Li Keqiang, admitted privately back in 2007 that the country's GDP figures were “manmade” and not to be used for economic calculations. Of course, we didn't need any sort of leaked documents in order to discover this fact; China's provincial GDP data famously consistently fails to add up to the national total. But still, it is good to have it in black and white from one of the top politicians in the country.
So if GDP numbers are similarly unreliable, how can we judge the overall economic activity of a country? Interestingly, Keqiang suggested that he himself used three alternate data points to gauge his province's real economic condition: electricity consumption, rail cargo volume and bank lending. Think of what such a rubric would tell us about the economy of the Eurozone, where credit creation hit a new all-time low earlier this year, or the implications for the world economy that shipping indexes from Baltic Dry to Capesize to Supramax are all falling. But of course, this is exactly the type of data that the central banks don't want you thinking about, at least not while they're officially pushing the “recovery” line.
Another GDP alternative is “PPP,” or purchasing power parity. As the World Bank helpfully explains:
“PPPs are used in producing a reliable set of estimates of the levels of activity between countries, expressed in a common currency. A PPP is defined as the number of units of B’s currency that are needed in B to purchase the same quantity of individual good or service as one unit of A’s currency will purchase in A.”
OK, I was joking about 'helpfully,' but perhaps this explanation is (slightly) more helpful:
“Purchasing Power Parities show the ratio of the prices in national currencies of the same good or service in different economies. For example, if the price of a hamburger in France is €4.80 and in the United States it is $4.00, the PPP for hamburgers between the two economies is $0.83 to the euro from the French perspective (4.00/4.80) and €1.20 to the dollar from the U.S. perspective (4.80/4.00). In other words, for every euro spent on hamburgers in France, $0.83 would have to be spent in the United States to obtain the same quantity and quality—that is, the same volume—of hamburgers.”
In other words, PPP helps us not to gauge an economy in isolation, but to compare it to other economies around the world. Since it provides a common currency standard for comparing prices between countries it can help to get at the hard-to-measure pricing advantage that developing nations have over developed nations in domestic goods. Unfortunately, it doesn't take into account the corresponding disadvantage that developing nations have in purchasing import goods, which are not priced in domestic currency but contingent on exchange rates, and completely fails to reflect the overall poverty of a nation. Thus, newly-released PPP figures show India has leapfrogged over several countries, including Japan, to become the world's third largest economy. However, it is not really the third largest economy, especially when the raw PPP number is divided among India's population of nearly a billion people. That yields a per capita PPP ranking of 127th in the world, which perhaps more accurately reflects the average economic clout of the average Indian citizen on the global stage.
We could go on to talk about other oft-cited indicators and their manipulation: PMIs, CPI, M1, GNP and a whole host of other acronym-laden economic numbers that are alternatively paraded before the public or swept under the rug depending on what story the latest figures tell about the state of the economy. But what about some of the other harbingers and signals that can be used to gauge where the economy is headed?
Earlier this year we talked about a strange parallel that was developing in the DJIA chart of 1928-1929 and 2012-2013, which seemed to be culminating in a 1929 style crash that would hit sometime in Q1 2014. That didn't happen, obviously, but the chart did make the rounds at the time. We've also discussed the “Hindenburg Omen,” the technical analysis pattern that supposedly predicts stock mark crashes. It's very tech-y, involving the NYSE 52 week highs and lows, the 10 week moving average and a negative McClellan Oscillator, but suffice it to say it has been historically reasonably successful in predicting a move of more than 5% to the downside within 30 days of its appearance. Last year there were at least two “confirmed” omens (two or more omens in a 30 day window), one in June and another in August, but again the big correction failed to materialize in the expected time frame. Either something is wrong with these predictors or something is wonky in the economy these days that is causing previously reliable indicators to become meaningless. Given the amount of tinkering in the economy by the Plunge Protection boys and the statistical manipulators and the high frequency traders these days, my money is on the latter.
Wolf Richter over at the Testosterone Pit has uncovered his own harbinger of economic destruction: a margin-debt reversal after a record-breaking spike. As he points out on his own blog, the stock market crashed the last two times this happened, in March 2000 when margin debt hit 2.66% of GDP before an April decline and subsequent dotcom crash, and July 2007 when it hit 2.6% of GDP before an August decline and subsequent housing crash. Now in February of this year margin debt hit an all-time record high of 2.73% of GDP before a March decline. So are we about to see a crash? And if so, where? Richter is pointing to the housing bubble 2.0 and noting that home sales are slipping and inventories rising in six previously hot markets, so perhaps we're already seeing the leading edge of such a crash. The real worry, of course, is the bond bubble, the largest (and intentionally inflated) bubble in history as even the Bank of England admits. Once rates start spiking, it's time to get your escape plan in order.
Yet another ominous indicator comes from a different, and somewhat unlikely source: Thomas Piketty, the darling of the 21st century Keynesian/Marxian crowd. He's the author of the viral economic superhit (is there really such a thing, or are we just being told that there is?) Capital in the Twenty-First Century. He points to rising income inequality in the US to make an argument for a host of new income and wealth taxes that he believes will get the economy back on track (along with a revamped governmental bureaucracy), hence the Keynesian/Marxian approval. However, as a compelling article by Hunter Lewis on the Mises Daily blog notes, the 100 year chart of US income inequality from 1910-2010 does not show a steadily rising degree of income inequality, but in fact two significant spikes where the top 10% of income earners accounted for 50% of the national income. One such spike occurred in 1929, right before the crash, and the other in 2008, right before the crash. Perhaps worryingly, the number is now spiking toward the 50% level again, another potential indicator of a coming downturn.
So with all of this dark, ominous news, is there any ray of sunshine in the economic world? Any indicator that points to good times ahead? Never fear, Business Insider has found one! Thoroughbred sales! As silly as it sounds, BI is noting that sales at Keeneland, the leading thoroughbred horse auctioneer, tracked the recessions of 1990-1991 and 2008-2009 accurately and provide a convincing proxy for investment in nonresidential real estate (minus one year). The causal mechanism, they say, is confidence related. Thoroughbreds are a big ticket speculative investment, and no one wants to take on the burden of buying one during a downturn. So rising sales means a rising economy (or so the theory goes).
So what does the thoroughbred auction indicator say these days? Apparently there's nothing to worry about, everyone! Median prices at this year's April auction hit an all-time high of $200,000 per horse, a 30% spike from last year, so let the good times roll!
I'm not exactly betting the farm on the horse sale indicator myself, but I have to say I do trust it quite a bit more than I trust the chimps running the Fed, so here's to hoping we're in for a good year!