Numbers and Facts, how can truth be misleading?
I’ve been more interested lately in tracking some of the numbers of our economic reality. Some of the historic references on items such as GDP growth, inflation, unemployment, cost of capital (or interest rates). I’ve also been reading more about calculation of various of these statistics.
A few interesting observations from others.
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1. The calculation formulas and frequency. David Kelly of JPM discusses the differences and frequencies as well as composition of PCE and CPI. A very insightful commentary on a particularly important set of facts that are part of our everyday life. Understanding how these have changed over the past several years will give you some insight on why the rates are as stated.
2. The unemployment rate in comparison to the participation rate as well as the net immigration number. Again — understand the math- if you reduce the participation as well as the calculation of the populace — how this number may appear better than lived experiences. Also google job huggers and gig economy to understand some demographic trends as well as AI influences. Underemployment is also not calculated — those that found work but are paid less or working less are not part of the unemployment calculation.
3. Cost of capital or interest rates — this cost and how it impacts cost of financing from cars (used cars and costs), cost of homes (lack of inventory from locked into lower mortgage or no ability to afford a 7% mortgage. Another impact item is the cost to carry balances on your credit cards — this new reality is that lack of savings buffer and minimum payments are adding to our debt nation.
I’ve spent a lifetime discussing some of these numbers as well as the interpretation of various financial calculations. I have also mentioned end point sensitivity is used consistently to magnify or distort the factual calculations. For example, how many times have we observed 2019 as a starting point for recent numbers mentioned above. To be fair, economic cycles have changed after many years of atypical monetary policies so reviewing history can also be a bit misleading especially when cherry picking start dates for calculation. Factually, the period after the 2008 financial crisis to that 2019 date was a rare time in US/global history when interest rates were low. Why do we strive to recover this low interest rate environment — real assets (real estate) as well as stocks (with use of leverage and low cost) experienced a rare run of larger rates of investment returns from history. For example, we typically calculated a long term inflation average to real estate. Recent calculations with spiked inflation from 2019 or in the period from 2010 to 2019 show the impact of these unusual deviations fromaverage rates of return.
In the end, as investors or consumers, we can review calculations and the underlying changing components or calculations. Understanding the numbers takes more work and investigation. Unfortunately, with short attention spans and research by “tweet”, this is unlikely in today’s rapid fire information exchange. We should hesitate to simply use the cliff notes of calculations to come to our conclusions on the economic reality.
