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Lies, Damned Lies and Statistics

Everyday we’re subjected to various interpretations by the usual Wall Street “talking heads” and television squawk box personalities regarding the economy and where it’s headed. Leading indicators, lagging indicators, coincident indicators – zigging, zagging, sagging and flagging - do we really need them to make our heads spin even faster.

I’m not sure about anyone but myself, but in many instances (when out shopping) I seem to be receiving far less in terms of quality and quantity, but it’s costing me a whole heck of a lot more. I’ve been reaching further down into my pocket too when paying at the checkout line. But, to listen to the government and our think tank economists tell us, “inflation has been conquered and is under control – it’s at a sustainable level where it will inflict no harm” – Ha, Bah Humbug!

We understand that these political and corporate pundits are sharing predictions with us reaching out six months hence, but what about the here and now – today please.

What if the percentages for the CPI (inflation) that we’re being force fed aren’t really true. Are we just possibly being viewed as crash test dummies or tomorrow’s foie gras? What about the Unemployment Rate – am I sitting at Ming’s and it’s a choice from Column A, B, or C. Last time that I looked 5,000,000 jobs accounted for back in 2007 – vanished in a matter of months. These were white-collar jobs held by a well-educated and stable male population 50+ years old.

While discussing this topic with some friends I was reminded that Ben Bernanke, Chairman-Federal Reserve Bank, made a prediction in 2007 that the United States was not headed into a recession. In addition, he shared that the stock and housing markets would be as strong as ever. That in itself should make you realize that today without a trusted advisor at your side, it’s every man, woman and child for themselves – and unfortunately, the lifeboats are riddled with holes.

Because the pundits’ predictions are often unreliable – purposefully so or not – it is important to develop your own understanding of the economy and the factors shaping it. Paying attention to economic indicators can give you an idea of where the economy is headed so you can plan your finances and even your career accordingly. This leaves it up to you to enlist a professional to help with the heavy lifting. Together with your own personal financial advisor you can develop a comprehensive goals-based financial life plan. Haven’t we all been taught that history often repeats itself?

There are two types of indicators you need to be aware of:
  • Leading indicators often change prior to large economic adjustments and, as such, can be used to predict future trends.

  • Lagging indicators, however, reflect the economy’s historical performance and changes to these are only identifiable after an economic trend or pattern has already been established.
I believe in the Efficient Market Hypothesis – the definition of which as shared in Investopedia is, “An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.”

There are many arguments for and against the EMH, and that’s what makes the world go round and round. I’ve been more interested of late in the Lagging Economic Indicators – specifically CPI (Inflation), and the Unemployment Rate.

Unemployment Rate
The unemployment rate measures the percentage of employable people in a country's workforce who are over the age of 16 and who have either lost their jobs or have unsuccessfully sought jobs in the last month and are still actively seeking work.

The formula for unemployment rate is: Unemployment Rate = Number of Unemployed / Total Labor Force

It is important to distinguish between the percentage of people who are unemployed and those who are simply not working. Some people may be in school full-time, working in the home, disabled, or retired. These people are not considered part of the labor force and are therefore not included in the unemployment rate. Only those people actively looking for a job or waiting to return to a job are considered unemployed. The Bureau of Labor Statistics takes 41, yes 41 pages to tell us about two key numbers: The monthly change in nonfarm payroll employment, and the unemployment rate.

Recently those numbers stood at 7.8%. Little do many of us know that the BLS has specific criteria for someone to be considered unequivocally unemployed. A major worry for me is that although the unemployment rate appears to be improving, the participation rate is drifting downward, and has continued to do so for some time now. The participation rate only pays attention to those either working, or looking for work. Non-participants such as the underemployed or discouraged worker are not counted. Recent U-6 unemployment rates declined to approximately 14% - U-6 being the “real” unemployment rate. It measures everybody considered unemployed plus a lot of others who are falling through the cracks. That points to upward of 16-18,000,000 unemployed individuals in our present workforce of just over 100,000,000.

Consumer Price Index (CPI, or Inflation)
The Bureau of Labor Statistics produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. For “All Items” unadjusted over the past 12 months ending February 2013 this figure increased to 2.0%. But the real question is whether or not the CPI is truly indicative of the actual rate of inflation. The problem is that inflation only shows up in the things that we actually buy. Consider that your main costs are food, energy, education, and healthcare, and then inflation is a great deal higher than 2.0%. It all comes down to the Bureau of Labor Statistic’s mix of items in the calculations and whether or not you buy into their concept of substitution i.e., steak vs. hamburger. The bottom line is that we can have the official inflation rate at a low level – even falling for certain items – while the amount that you spend out of pocket is rising!

At the end of the day this is very bad news for investors. Those investors who buy into the government’s data that inflation is only 2.0%, when it might be 5-8%, may be making investment decisions that are almost guaranteed to erode the purchasing power of their money over time. This is especially true with low-yielding investments such as CDs, Treasuries, etc.

Once again we can blame our U.S. Congress that embraced the view that the CPI should reflect changes in the cost to maintain a constant standard of living. The end result is that the CPI has been moving toward the cost of living index (COLI). The overall result tends to result in a lower CPI. No doubt that these methodological changes and the switch from a COGI (the CPI is a Cost of Goods Index) to COLI as a purposeful manipulation that allows our government to report a lower CPI. The government’s CPI for inflation is only 2.0% over the past 12 months. Listening to other well known and respected economists utilizing different methodologies tell us that inflation is between 5-8%. That’s a huge difference!

First and foremost this column is not about our nation’s politics, nor is it about my own ideologies. I’m afraid that we’re reverting back to the mean – that terrible, nasty, bone-chilling mean of late December 2007 when things began to go pear-shaped. Like the Lotto, you must be in to win. Although, you now have available some of the most savvy, professional, and fiduciary-minded financial planners that have recently experienced first-hand a Great Recession. Either you prioritize your time now to adjust and re-set your portfolios for the long-term, or you’re in for a below average retirement. With God’s blessing, we’ll all be around for decades longer than our predecessors– one race you’ll never win without the aid of a personal financial planner is the race to the top. You’ve conquered almost everything to ensure a good life with your family and friends. It’s time to seek input and suggestions from a trusted professional – in the end, it’s all about you, and from a financial planner’s perspective – that’s what we do.

Surround yourself with an army of trusted professionals:
•Private Client Attorney
•Life Insurance Specialist
•Tax Attorney
•Personal Financial Advisor that works for a Registered •Investment Advisor (RIA)
And finally as I have always shared with my family, friends and clients - “Trust, but Verify.”

Author’s Note: Please consult with your CFP®, Financial Advisor, CPA and/or Estate/Tax/Eldercare Attorney when discussing your financial needs and developing the appropriate personal/business financial plan.

John Politi is a Financial Advisor with Main Street Financial Solutions located in Harrison, NY. John provides comprehensive and customized, Fee-Based financial planning, consultation and investment advisory services for individuals, families and businesses. Since 2011, John has volunteered his time as the Executive Director of the New York City-based Jewelers for Veterans Foundation, a 501(c)(3) non-profit, dedicated to connecting US Military Veterans with training, education & employment in the jewelry industry. John holds an MBA in Financial Management, MBA-Advanced Certificate in Health Care Management, Series 65 (Investment Advisor Representative), and successfully completed the Financial Planning Certificate Program at the Lubin School of Business, Pace University. He is a Board Director for the Financial Planning Association-Greater Hudson Valley, NY, an active member of the American College of Health Care Executives, and the 24KT Club of New York. John welcomes your input and can be contacted at, , or telephone (914) – 517-7574, facsimile (914) 517-7577.

AT: 05/21/2013 05:01:43 PM   LINK TO THIS ARTICLE

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