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# binve (< 20)

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December 06, 2009 – Comments (33)

No TA or FA in this post, just opinions. Which, as you will see, is the basis for all economic analysis. And I would like to confront this topic to show why any economic analysis (DCF modeling for a stock, relative currency valuations, M0,MZM,M1,M2,etc. trends and projections, TA, Elliott Wave Counts, even GAAP accounting) are all by their very nature subjective. That there is, in fact, no purely objective basis for any economic valuation

The Fallacy of "Purely Objective" Analysis

I am a Mechanical Engineer. I work in the Aerospace Industry. My main jobs are to perform thermal and structural analysis of aerospace vehicles. If anybody has a very grounded understanding of objective analysis methods, I believe I would qualify.

For a valid analysis or to make an analytical argument, you need indisputable facts:

F = ma, my'' + cy' + ky = F(t), Q = k*a*delta T, Q = emiss*Fij*sigma*A*(Ti^4-Tj^4), etc.

These provide a basis, under a wide range of conditions, to analyze a physical system to describe performance or to compare performance between to designs.

So engineering is a cut and dry analytical endeavor, right? .... WRONG! I am about to show that even in something as analytically based as engineering, there are still very subjective decisions that are made.

Here is a *very* simple example:

A part needs to transfer 30 Watts on a Spacecraft from an instrument to a heat sink. There are two designs: Design A gives a 10 C rise across the joint, Design B gives a 5 C rise across the joint.

Therefore Design B is better, right? .... Not necessarily.

Point 1) Lowering the operating temperature of a component is desirable in most designs - so B is better
2) Lowering the gradient across joints reduces the overall thermal distortion of a structure - so B is better
3) The part removes the heat by conduction. Conduction is proportional to Area. Area is proportional to mass, so in this case Part B weighs twice as much as A. On a spacecraft, mass is at a premium - so A is better
4) From a integration standpoint, larger parts typically reduce access to surrounding components - so A is better
5) Based on cost part B is more expensive (larger part / more raw material) - so A is better
etc., etc.

The point is, for any design all analytical decisions have a system impact, and some are very far reaching (mass, mass properties, cost, schedule, integration, etc.) and not all of these have the same weighting. In fact some are not even objectively based at all. What might be the "best" is often a compromise between a lot of disciplines. Sometimes leaving an inefficient part in the system is often the best choice if it is already designed, because redesigning a more efficient part leads to more overall work, cost and schedule.

There is no "Purely Objective" Analysis when it comes to any economic valuation

So I assert that valuations are subjective. And perhaps you don't agree, and you assert that there is an objective basis for valuing everything. Your assertion is also an opinion. At the end of the day, that is all this, or any discussion, is: a contest of opinions. Which I will demonstrate (hopefully successfully) in this post.

I have heard a lot of "well the only thing you are backing up your argument with is opinions". This is a true statement. However, the implied fallacy, is that there is some magical objective alternative argument. And I posit that it does not exist.

Lets first tackle GDP. GDP is an objective measure right? I mean a bunch of government economists pore over tons of data, they sum everything up, account for all the pluses and minuses and *voila!* you have GDP, right? ... Not so fast.

Hedonics and Substitution: There is something called the GDP "Deflator" in which the consumption part of the GDP is not fixed from year to year, rather it tracks habits (people can't afford sirloin so they switch to chuck roast, etc.). For another take on these, read this article. Hedonics is even worse, much worse in fact. It states "what is the value of the "quality" of improvements in the price of the product". So an economist massaging consumption data gets to say how much "quality" this product or class of products has on the population, and how that gets accounted for in consumption data? Does this strike you as an objective valuation tool? It sure doesn't to me.

Now couple this with the CPI. Most of the hedonics and substitutions that are negatively accounted for in the GDP Deflator are positively accounted for in the CPI! And not even necessarily in the same proportion! And I am sure I will get some flames from economist-types for the validity of this approach. But the bottom line is that this is a "judgment call" as to how much these improvements should be weighted. Which is by definition subjective.

Lets tackle something a little less controversial. Accounting practices.

I mean okay, the economy is big and complicated, but balancing the books for a company is clean cut, right? ... Not so fast.

For anybody who has looked at a balance sheet (and I have looked at many) there are are all kinds of ways that some transactions can be accounted for. Take "goodwill" and "intangible assets" for example. And many accounting sites already acknowledge these are Judgement calls

Let's further take the term Generally Accepted Accounting Principles. They are "Generally Accepted", except nobody generally accepts them!! Every company that reports earnings has a book worth of statements as to why GAAP accounting really doesn't reflect the nature of their business and they come up with non-GAAP reporting.

Again I ask you, does this sound purely objective?

The same thing can be applied to Technical Analysis and Elliott Wave Counts. Both TA and EW take patterns, support/resistance, trendlines from the past and try to project them out into the future. Is there any purely objective way to accomplish this? Patterns are unfolding and are by definition incomplete. The beginning of a patten could be bullish or it could be bearish. And it depends on an analyst's interpretation to say where the outcome will be bullish or bearish.

I have written so many rants along this line, that all analysis is an opinion, that I stopped writing it everytime and just started linking to it

Okay, I am dancing around the issue. Let me just come out and say it

Economic valuations are by their very nature subjective because of the fact that not everybody agrees what something is worth!!

Here is the best current example of this. Have you ever watched the HGTV show "Real Estate Intervention". Basically it shows homeowners trying to sell houses in the DC and surrounding areas in today's market. And it is an "intervention" because people need to sell, their house has been on the market for months, and they have a crisis.

And it inevitably boils down to Mike Aubrey (the real estate expert on the show) showing the homeowner in question the active and sold comps and explains why their house is overpriced for the market. And inevitably the retort back is something like "I am not going to give my house away" or "It is worth more than that"

.... wrong. A house is worth what the market will bear.

Same for stocks, bonds, gold, wheat, baseball card, CDSs, CDOs, etc.

Sometimes these have a seemingly straightforward basis for valuation. But I argue it is an illusion.

A house was a "sure investment" just a couple of years ago and now when people go to sell them, they are worth much less. Did we magically double the surface area in the United States in the last 4 years? And so now land is worth half?

No. It is because the biggest driver of what something is worth is not some impervious objective calculation. It is social mood.

Any analysis that does not take social mood into consideration is BS, as far as I am concerned.

This is what make opinions and nuanced observations of the economic climate and social mood so valuable in economic debates so useful. And it is what makes retorts such as "you are basing your argument solely on an opinion" completely worthless.

.... at least that is my opinion :)

#### 33 Comments – Post Your Own

#1) On December 06, 2009 at 3:35 PM, adanlerma (< 20) wrote:

well binve, my honest opinion is - WOW

what an article!

exceptionally well written with tons of good examples; though i am more famiiar wtih mike aubrey than whatever that heat transfer thing was ;-)

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#2) On December 06, 2009 at 3:37 PM, Teacherman1 (< 20) wrote:

Thanks for sharing your opinion. I was able to follow most of it, but not all.

As for the accounting part, as long ago as it was, I still remember my professor making the statement at the beginning of the course, "Accounting is an ART, bookeeping is a Science".

We all have opinions and are entitled to them, we just need to remember that they are opinions and just because someone doesn't agree with us, doesn't mean their's is any less valid.

Good post.

Foolanthropy on.

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#3) On December 06, 2009 at 3:39 PM, SkepticalOx (98.32) wrote:

There is a difference between mere "opinions" and a subjective analysis with empirical evidence to support it. We have too much of the first kind and not enough of the second kind on the internets :P

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#4) On December 06, 2009 at 3:47 PM, binve (< 20) wrote:

adanlerma, Thanks adan, I appreciate that! Yeah, I figured real estate on HGTV was something everyone could relate to :)..

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#5) On December 06, 2009 at 3:51 PM, binve (< 20) wrote:

Teacherman1, Thanks

As for the accounting part, as long ago as it was, I still remember my professor making the statement at the beginning of the course, "Accounting is an ART, bookeeping is a Science".

Nice! I like that. The thermal engineering corollary would be "Thermal System Design is an art, heat transfer analysis is a Science"

We all have opinions and are entitled to them, we just need to remember that they are opinions and just because someone doesn't agree with us, doesn't mean their's is any less valid.

Awesome statement! I couldn't agree more. I really believe it, but I don't always follow through :( (sometimes heated arguments get, well, heated) :)

Foolanthropy on!..

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#6) On December 06, 2009 at 3:54 PM, binve (< 20) wrote:

SkepticalOx, Exactly man :) I agree that there is too much of the first kind and not enough of the second.

But what I am trying to show is that when somebody presents an analysis and argument of the second kind, I inevitably here someone say "buy your argument is based only on opinion" as if there is a third kind (a purely objective analysis) as an alternative. And my point is that there is no third case when it comes to economic issues.

The second kind is the best you can do..

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#7) On December 06, 2009 at 4:06 PM, devoish (64.87) wrote:

Very nice post.

Any analysis that does not take social mood into consideration is BS, as far as I am concerned.

What is the "social mood" going to be in five years? That is a much tougher call than whether or not Google will be earning a profit in five years.

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#8) On December 06, 2009 at 4:17 PM, binve (< 20) wrote:

devoish, Thanks.

I agree, these are very difficult questions to answer regarding social mood.

However, I would counter that the ability for google to generate profit in 5 years is related to the social mood. The social mood is the biggest driver in generating a farvorable climate for stocks to generate profits or not.

I am *not* saying that individual company valuations are worthless, I am simply saying that they are only part of the picture, and I am not convinced they are even the biggest part...

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#9) On December 06, 2009 at 6:09 PM, devoish (64.87) wrote:

binve,

We could also argue that google's profit will help drive the social mood.

And we would both be correct.

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#10) On December 06, 2009 at 6:33 PM, binve (< 20) wrote:

devoish, Touche :)

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#11) On December 06, 2009 at 8:04 PM, Tastylunch (28.51) wrote:

There is no "Purely Objective" Analysis when it comes to any economic valuation

agreed but there are certainly degrees of objectivity. And the differences are sigificant enough to be measurable and fairly reliable.

I do find TA to be very useful but I do not find most of it as objective in general as standard FA.That does not mean it's less powerful but I do think it's much harder to use well.

I think most would agree that observing a Head and Shoulders pattern is much more subjective  than calculating the NCAV of a company,to use two extreme examples. :)

I think there's a reason so many growth investors use TA, both have more subjective components that work pretty well together.

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#12) On December 06, 2009 at 8:08 PM, rexlove (99.56) wrote:

Nice post binve. Being a mechanical engineer I can follow your bit about heat transfer. Although I must say the HGTV example is easier to relate.

I've always argued on this site that the market is as much subjective as it is objective. I hate it when people post on this site and write things like the "the S&P PE ratio is over 100 - therefore it is due for a crash". They don't take into consideration a whole slew of other factors. Like the perception of improved future earnings.

That's why investing with a mechanical strategy has so many pitfalls. After all - if it were so easy wouldn't there be a lot of people who made billions in the stock market?

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#13) On December 06, 2009 at 8:10 PM, Tastylunch (28.51) wrote:

oh and this

Economic valuations are by their very nature subjective because of the fact that not everybody agrees what something is worth!!

is why I bother to invest in the market at all. Otherwise Malkiel probably would be right.

nice article Binve, as usual I find us generally in agreement just differing in degree. :)

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#14) On December 06, 2009 at 8:20 PM, binve (< 20) wrote:

Tastylunch, Hey man. Thanks :) I agree with everything you said.

I do find TA to be very useful but I do not find most of it as objective in general as standard FA.That does not mean it's less powerful but I do think it's much harder to use well.

Agreed.

I think most would agree that observing a Head and Shoulders pattern is much more subjective  than calculating the NCAV of a company,to use two extreme examples. :)

Very much agreed.

However, these points are a side topic to the real point of the post. Which is that any economic analysis (looking at EV ratios and trends, FCF analysis, from a valuation perspective, or chart patterns from a TA perspective) no matter how rigorously done, has a degree of subjectivity to it. And as such, is based in part on an opinion of the analyst.

I am trying to contrast this to many statements on Caps I have read recently that say to the effect "well the only thing you are backing up your argument with is opinions".

There are *many* places on Caps very recently where this rebuttal is used. And I am simply illustrating the faulty implicit logic, that if one uses an opinion and an analysis it is not a good enough argument, because there is some further "purely objective" argument (one where there is only facts and no opinion / interpretation) to be made.

My point is that no such thing exists.

The best anyone can do is perform an analysis based on available facts, interpret them, account for the social mood surrounding those facts as much as possible to come up with a basis for an argument.

There is nothing "stronger".

At the end of the day, all arguments are based on opinion, and there is no way around it. So I am pointing out the faulty logic in discrediting an argument based on opinion...

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#15) On December 06, 2009 at 8:23 PM, binve (< 20) wrote:

rexlove, Hey rexlove, thanks and we are agreed :) Any analysis based on one fact (or more often the snippet of a fact) is erroneous at best and misleading at worse. There are always multiple effects operating on any economic system. Thanks!..

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#16) On December 06, 2009 at 8:24 PM, binve (< 20) wrote:

nice article Binve, as usual I find us generally in agreement just differing in degree. :)

LOL! Thanks man :) I would expect nothing less :)..

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#17) On December 06, 2009 at 9:54 PM, Ecomike (< 20) wrote:

Excellent article, and I agree. Only comment I can even think of is that TA of stock indexes for instance is an analysis of a sum of opinions, or an opinon of opinons.

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#18) On December 07, 2009 at 2:40 AM, uclayoda87 (28.49) wrote:

"From a Certain Point of View"

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#19) On December 07, 2009 at 10:22 AM, lemoneater (57.05) wrote:

Good use of analogies, binve, proper heat transfer for the job at hand and realistic home pricing for the local market same difference! Knowing how to make good judgment calls is a crucial skill not just for engineers, but for everyone.

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#20) On December 07, 2009 at 2:46 PM, eldemonio (97.51) wrote:

Good post binve.

The problem with objective analysis is that very rarely does analysis take place without first forming a hypothesis.  I believe that most tend to focus on data that only supports their original hypothesis, while ignoring all of the data that disputes it.  You can see this same thing happening daily on the CAPS blogs.  Very few actually post anything that addresses both sides of an issue.

The scientific method makes us very close minded - I guess that would be my opinion.

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#21) On December 07, 2009 at 6:49 PM, binve (< 20) wrote:

Ecomike, Thanks man. I can't argue with your statement :)..

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#22) On December 07, 2009 at 6:50 PM, binve (< 20) wrote:

uclayoda87, Awesome! Perfect man, thanks :)..

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#23) On December 07, 2009 at 6:51 PM, binve (< 20) wrote:

lemoneater, Thanks!!..

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#24) On December 07, 2009 at 6:52 PM, binve (< 20) wrote:

eldemonio, Thanks bro! I agree man.

Off topic

Were talking about Stone beer awhile back and you had recommended their IPA.

I recently got hold of some: Awesome! But I also got their Ruination IPA: AWESOME!!!

Good call man :)..

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#25) On December 08, 2009 at 11:10 AM, eldemonio (97.51) wrote:

Stone brews some pretty tasty beers - glad you enjoyed them.

Modus Hoperandi from Ska Brewing in Durango, CO is a super fantastic IPA.  I don't know if you can get it in your area, but maybe you can ask Santa to hook you up.

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#26) On December 08, 2009 at 11:40 AM, binve (< 20) wrote:

Hey man, thanks :)

Modus Hoperandi That's awesome! No I don't know them, but based on the name I will be checking them out :)

Another fantastic Colorado brewery is Odell (Fort Collins I believe). They have a 5 Barrel Pale Ale, that is incredible. It is exceptinally hoppy, but not in an assertive way. No piney hops, but very floral hops (a lot of Hallertau and probably Liberty). You can smell it from feet away.

It is really one of the most pleasant beers I have ever had :)

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#27) On December 08, 2009 at 11:44 AM, whereaminow (< 20) wrote:

This post made me smile. Great work, binve.

David in Qatar

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#28) On December 08, 2009 at 11:50 AM, binve (< 20) wrote:

Thanks David! I appreciate that man!!

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#29) On December 08, 2009 at 11:59 AM, outoffocus (22.87) wrote:

For anybody who has looked at a balance sheet (and I have looked at many) there are are all kinds of ways that some transactions can be accounted for. Take "goodwill" and "intangible assets" for example. And many accounting sites already acknowledge these are Judgement calls

Probably the biggest judgement call on financial statements depreciation.  You put depreciation in, then you take it back out, then you put it back it and you shake it all about.  You do the hokey-pokey then you turn yourself around. Thats what its all about.

I'm sure other accountants will agree with me that we go through alot of trouble over this arbitrary number, which in its very nature, is just an estimate.  But anyway, I digress.

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#30) On December 08, 2009 at 12:31 PM, binve (< 20) wrote:

outoffocus, Another excellent example! I am not accountant, but there is enough about the concept that I understand and see its subjectivity. Thanks :)..

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#31) On December 09, 2009 at 2:22 AM, lucas1985 (< 20) wrote:

@binve,
"That there is, in fact, no purely objective basis for any economic valuation"
It seems to me that you've fallen in a logical trap. We can make objective decisions based on imperfect/incomplete knowledge. Objectivity isn't 100% certainty.
Take for example a DCF model; it's mathematically sound but its output will depend on the inputs. Can you choose any discount rate or there are observational constrains which generate upper and lower bounds in rates?

"The point is, for any design all analytical decisions have a system impact, and some are very far reaching (mass, mass properties, cost, schedule, integration, etc.) and not all of these have the same weighting. In fact some are not even objectively based at all. What might be the "best" is often a compromise between a lot of disciplines. Sometimes leaving an inefficient part in the system is often the best choice if it is already designed, because redesigning a more efficient part leads to more overall work, cost and schedule."
So, you weight the physical realities, the economic costs, the expected workload, etc before making a decision. Some of the weightings may be a little subjective but is this enough to call the analysis a subjective opinion?

"Lets first tackle GDP. GDP is an objective measure right? I mean a bunch of government economists pore over tons of data, they sum everything up, account for all the pluses and minuses and *voila!* you have GDP, right? ... Not so fast."
The question is: for all of the flaws in GDP (subjective preferences, exclusion of non-monetary transaction, improper accounting of natural capital and societal costs, etc), do you think that it's not an useful proxy for economic activity?

- Imperfect Knowledge Economics by Roman Frydman and Michael D. Goldberg

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#32) On December 09, 2009 at 9:16 AM, binve (< 20) wrote:

lucas1985, Good comments! But I have to disagree with a few of them.

It seems to me that you've fallen in a logical trap. We can make objective decisions based on imperfect/incomplete knowledge. Objectivity isn't 100% certainty.
Take for example a DCF model; it's mathematically sound but its output will depend on the inputs. Can you choose any discount rate or there are observational constrains which generate upper and lower bounds in rates?

If you were to do a DCF analysis with an input spread of values, vs. just an input value, then you are doing a probabilistic analysis. Good, nice and objective. So then you say that "the odds are, we are somewhere within this range" again, nice and objective.

But at some point, you have to pull the trigger. You are (presumably) going to use this model to say "this stock is under/overvalued therefore I will buy/not buy". This is bordering on subjective.

The line gets even murkier when somewhen then makes a blog post saying that the stock is over/under valued. Will they take several paragraphs to explain the probablistic nature of the analysis, or will they just post the DCF curve they used to make their decision? At some point a public analysts just needs to make a call and go with it.

And like I was saying to Tasty above in comment #14

"The best anyone can do is perform an analysis based on available facts, interpret them, account for the social mood surrounding those facts as much as possible to come up with a basis for an argument.

There is nothing "stronger".

At the end of the day, all arguments are based on opinion, and there is no way around it. So I am pointing out the faulty logic in discrediting an argument based on opinion"

So, you weight the physical realities, the economic costs, the expected workload, etc before making a decision. Some of the weightings may be a little subjective but is this enough to call the analysis a subjective opinion?

Ahhhhh.... But I am pointing out that in the real world a) This does not happen and b) it cannot happen

a) It does not happen. I am going to stick with my engineering example. All the sub-system lead engineers present the pros and cons of the part change in the example. The Program Manager hears all the arguments and decides to go with Part A. Not for any purely technical reason, but because the VP of Engineering came down that morning and reamed them out about program costs and so the Program Manager is trying to save money now and deal with the technical ramifications later. Let me assure you this is *not* atypical

b) It cannot happen. Lets say there are not cost and schedule constraints and the decision can be made based on on technical merits. And for this part decision, it boils down to a compromise between thermal, structural, design and integration. The problem is while the first 3 are very analytically based, the 4th, integration, is less so, but it is no less important!! Integration needs to worry about tool access, danger to other components while installing / unistalling, etc. And much of this is "risk" based, which is very analogous to the probablisitic DCF example above. So at the end of the day, the Program Manager must weight technical results against integration risk.

And what I am pointing out is that this isn't a simple "stick all your variables in a risk matrix calculation and voila your answer gets spitted out" type exercise. I have seen programs loose weeks on the floor for bad integration decisions made up front. But focusing solely on integration can compromise the technical integrity up front. It is a fine line to walk and my point is, there are a lot of gut judgement calls that get made in this process, many of which are subjective

The question is: for all of the flaws in GDP (subjective preferences, exclusion of non-monetary transaction, improper accounting of natural capital and societal costs, etc), do you think that it's not an useful proxy for economic activity?

That was not the question nor point of this post. Of course reporting GDP is useful. But is it purely objective? I argue no.

Another more charged point is that GDP and CPI have an inherent conflict of interest.

The government is incentived to overreport GDP growth. There are many political reasons for this (administration during an election year wants the economy to seem strong, etc.) and because there are part of the GDP reporting process that rely on judgement calls, like I illustrate above, they are subject to manipulation. I am not arguing that they are, just that a reasonable person can see the increased potential for lack of objectivity

Same thing with CPI. The higher CPI is, the more the government needs to increase Cost of Living Adjustments. So in this case the governement has a direct monetary incentive to under-report CPI, which as has hedonics and substiution built in. In fact the CPI is more susceptible / sensitive to these "adjustments" than GDP is...

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#33) On December 12, 2009 at 11:06 AM, binve (< 20) wrote:

Getting back to the point of "non-objective" government statistics and statistics gathering, here is a great excerpt from John Mauldin's latest public market commentary:

Lies, Damn Lies, and Government Statistics

We are going to look at the unemployment numbers of last week, along with the unemployment claims that came out yesterday. But first, I want to quote a section from Dennis Gartman's letter this morning. It illustrates why we have to be very careful how we use government data. Too often, we think the data is straightforward math and simply draws on the underlying data sources. The reality is that it is anything but. To wit:

"A PROBLEM AT THE VERY HEART OF DATA GATHERING: Recently in Washington a rather large number of economists from academia and from government met to try to hash out a problem with data gathering that has become more and more serious here in the US and has more and more distorted how we value the American economy itself. At heart is how imports into the US are accounted for.

"For example, when a part for perhaps \$100 is imported from China and is used in an American automobile ... something that happens more and more and more often these days ... the stats show that the finished car is American-made because it was assembled here in the US and in the process the US GDP is raised by that same \$100 when in fact it should have been deflated by that figure instead. In the process, American workers who might in the past have made the part in question are no longer doing so and are obviously made redundant, hence a job or jobs is lost.

"The unemployment data then 'finds' that unemployed worker and accounts for him or her, but the car that is assembled does not, and when it is produced and sold and its value makes its way through the system, it appears that productivity has risen ... and rather dramatically so, when in fact it has not. As one of the economists attending that meeting said,

" 'We don't have the data collection structure to capture what is happening in a real-time way, or what is being traded and how it is affecting workers. We have no idea how to measure the occupations being 'offshored' or what is being 'inshore.'

"Or as the Assistant Commissioner for International Prices at the US Bureau of Labor Statistics (and how "politburo-like" is a title like that?!!) Mr. William Alterman, said regarding this problem

" 'What we are measuring as productivity gains may in fact be nothing more than changes in trade instead.'

"This is not an insignificant problem, for as the US has become more and more international in its trading scope the data has become more and more important. Back in the 1975, imports into the US were only 5% of our total economic activity, but in recent years that has swelled to 12%, excluding imports of energy. Thus, many imports into the US are being, and have been, and will continue to be, valued as though they were manufactured here in the US, when indeed they were manufactured abroad and merely assembled here in the US.

"In autos, in computers, in appliances, this is a large and growing problem, but this is a problem too in the areas of services. For example, when an accounting firm out-sources some of its number-crunching to an accounting firm in India, for example, and then bills a client here in the US in US dollar terms, the work is done abroad but billed here and the work is recorded as having been done in the US, adding to US GDP when clearly that is not the case. It happens too, these days, more and more often in medicine, when patient files are sent to India or somewhere else abroad for diagnosis and the patient is billed here in the US as if the 'work' had been done here. GDP rises here in the US when it really should have been accounted for in India; productivity goes up; GDP goes up, when in reality neither has happened. ' Tis a conundrum."

The Problem of Seasonal Adjustments

Yesterday we were told that initial unemployment claims were up slightly to 474,000 on a seasonally adjusted basis. That is down 78,000 from the same week last year. The four-week moving average is almost exactly the same. On a four-week-average basis, initial claims are down about 10% from last year.

Let's look under the hood. The non-seasonally adjusted number (NSA) is 665,000, down almost 95,000 from last year, which is good, but still a very large number. The actual average had been over 550,000 for the last three weeks.

Everywhere the headlines said continuing claims are plunging. And they did. But what really happened is that the drop was not from people getting jobs but from people rolling over to the extended benefits programs. The states by and large pay for the first 26 weeks, and that is where we get the continuing-claim reported number from. (In some parts of the US hosever, you can get unemployment insurance for up to 99 months, paid for by the federal government.

There are 5.16 million on the continuing-claim rolls. But when you add in the extended benefits rolls, it increases to over 10 million. Average length of unemployment is now over 26 weeks, and the median length is over 33 weeks!

It was reported that the unemployment rate dropped to 10% from 10.2%. To get that number, they had to shrink the number of people looking for work by 98,000. Basically, if you have not looked for work in the last four weeks, you are said to be "discouraged" and are taken out of the unemployment statistics. If you add back in the discouraged workers, the rate goes up to 10.5%. And it is worse than that. If you have not looked for a job in 12 months, you are taken off the rolls altogether.

Here is one of the reasons that the unemployment number is going to remain stubbornly high through 2010. Let's assume a modest recovery of 3%, which is maybe enough to get jobs back into the 150,000 range. As people go back to work, that 0.5% of discouraged workers starts to look for jobs and they are now counted as unemployed. That small number of 0.5% is 750,000 people that will be (should be) added back into the unemployment numbers!

Let's use Krugman's 100,000 jobs a month needed to keep up with population growth. (Studies are all over the place on this. 100,000 is the low estimate and 150,000 is the high.) That means we need 1.2 million new jobs next year just to keep the unemployment rate at 10%. And another 750,000 jobs to go to the discouraged workers who will want to start looking. Close to 2 million jobs will be needed to keep the unemployment rate from rising.

And the current business climate says that is not going to happen.

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