Shadow Stats Give a Truer Picture

by Chris Mayer

“If you asked a bunch of people sitting at a bar what the inflation rate was, you’d get numbers closer to the truth than what the government says in its official numbers.” So said economist John Williams one afternoon over meatloaf and mashed potatoes in a little restaurant within walking of his New Jersey home. I made the trek out here, along with my publisher and friend Addison Wiggin.

We wanted to meet the old fellow, whose work we hold in esteem. Truth seekers like Williams are dear, because lies are so cheap. And because not too many of us are willing to parse through thousands of pages of dry economic reports to get behind the government’s accounting alchemy.

What follows is an update on some of Williams’ latest work and its investment implications.

In a nutshell, here is the story. Government officials, mere self-interested mortals like the rest of us, want to paint the best picture possible. This, they’ve found, tends to win them more elections.

So every administration for years and years has made little adjustments in reported figures for things such as inflation. These little adjustments, as you might imagine, always go one way. They make things look better than they otherwise might. Over time, these little adjustments start adding up. Then you get big differences between what is really happening and what the reported figures say.

Williams has gone back and reversed these adjustments. Take a look at inflation, popularly measured using the consumer price index (CPI). Williams, just using the pre-Clinton era CPI, gets a number vastly different from today’s official figures.

The official numbers tell us inflation is less than 3%. Yet calculating inflation using the same methods of before Clinton took office – which was not that long ago – Williams gets inflation closer to 6%!

The latter figure is nearer to the experiences of everyday people living in this country, who have to pay for groceries, gasoline, insurance, medical bills and more. This is why Williams says that the average person has a truer sense of price inflation than what the official numbers would have you believe.

As I tackled the steamed broccoli, Williams recounted the primary ill of the modern economist. “Something like 80% of economists get their annual forecasts wrong,” said he. “So to be right more often, all you have to do is go against what most economists are saying.” Most economists, because they seem to take the data at face value, have a rosy view of the U.S. economy.

No mainstream economist that I know of makes the case that the U.S. is in a recession. Yet Williams does not hesitate to tack against prevailing sentiment. “We are in an inflationary recession now,” he told us.

Williams ticks off the data that confirm a recession in progress: much weaker than expected housing starts, retail sales and industrial production. Also, a weak manufacturing survey, sluggish annual growth in durable goods orders, rising new claims for unemployment insurance and anemic employment growth.

Williams’ Shadow Government Statistics shows the economy shrinking now, whereas the official government numbers still show positive growth.

We won’t get into all of the details. But what does an inflationary recession mean for investors? Think 1970s. Not disco and bell-bottoms, but rising prices for gasoline, groceries and gold. Think higher interest rates.

Rising inflation basically means your dollar buys less. So as an investor, you want to stay ahead of that inflation number, to keep your purchasing power. If you keep this in the back of your mind, some investments look a lot better than others.

For example, a bond yielding 5%, which is about what a 10-year Treasury pays, looks rather inadequate against an inflation rate of nearly 6% per Williams. Basically, the interest rate on your bond isn’t keeping up with what you are losing to inflation.

Tangible assets tend to do better in environments like this. In the early 1970s, commodities soared even as the economy headed into recession. So long-term investors should look to own real assets – whether oil and gas in the ground, cheap raw land, water rights, ships, rigs or what have you.

Companies that can grow at a rate higher than inflation should reward investors as well, as long as you don’t pay too much for them. Companies that should be able to swim upstream and boost cash flow in a sluggish economy include certain commodity and infrastructure businesses. Also, don’t forget about opportunities abroad (more on emerging markets in the next section).

In short: Buy cheap tangible assets with growing cash flows (“tangible assets that sweat”). It’s been our playbook for a few years now. You’ll find some of my favorites on our list of recommendations. That, and don’t trust the government’s numbers. Ever.

Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital and Crisis – formerly the Fleet Street Letter.