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Lies, Damn Lies, and Statistics

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Dear Professor Succo,

The release of the U.S. Producer Price Index has been delayed indefinitely...."BLS staff are working to resolve unexpected difficulties in calculating the index this month," the bureau said.

I have always laughed at the market's reactions to government numbers. I mean you get one number that comes in x or y above or below consensus and a few billion dollars fly around Wall St. for the next few hours. I have always hoped that the bulk of it was gambling, i.e., traders taking a position before the number and the subsequent reaction, and not high paid, intelligent, money managers changing their entire long term strategy based on a government report; probably a little of both. However, you can't ignore it, as silly as it is, because the reactions can be so volatile.

But this PPI thing is becoming comical. I mean what does it take for people to realize THERE IS NO PPI? There is no set of standards for measuring it, it is not consistent. Are we supposed to believe that it cannot be calculated in today's world of computers? It's a joke. Yet people still trade off of it like it is valid information.

I would think:

1. Someone would write an in-depth article debunking what is happening at the BLS to appear in The Economist, The Atlantic Monthly or some Finance Journal. I have yet to see anything that could explain, in terms I can understand, how the numbers are calculated. Everyone has commented on it, but no one has really gotten to the bottom of it. To my knowledge, the BLS isn't keeping this a secret. Do they post the formula for how this number is calculated? Surely this is public knowledge.

Imagine a world with no BLS statistics, because people finally came to realize the calculations had become so complex they were useless! This should be suggested to some hungry financial writer.

2. People will begin to lose confidence in the US Government figures in short order and this could snowball into further lack of confidence issues.

We already all know this, so perhaps I am giving people too much credit. But they keep delaying reports because they can't calculate the numbers? Along with all the other deception going on, it seems to me it is just a matter of time. The problem is figuring out when the levee breaks.

I am sooooo riled up! I just called the BLS and asked for the formula for calculating the PPI. This should be fun.

James Karn



Mr. Karn is justifiably frustrated and concerned about the situation. The actions of the BLS seem coordinated to confirm the Federal Reserve's stance that there is no inflation.

The government cannot run a negative real interest rate policy and allow signs of inflation to exist. Can you imagine how the markets would respond to a rapid rise in rates of 200 to 300 basis points?

We find the statistics, or lack thereof, completely devoid of reality based on a simple rule: garbage in, garbage out. We have commented many times on the variables used by the BLS as being not only irrelevant, but disingenuous.

Last Friday when reporters asked a BLS official about the effect their "birth-death model" assumptions have on the employment numbers, his response was, "Analysts can believe whatever they want about the birth-death model".

This is hardly a satisfactory or comforting response to a serious question. It is merely a placation.

By far the biggest factor in changes in the employment numbers are "seasonal adjustment" the BLS makes; these are almost completely subjective.

CPI and PPI growth numbers are calculated simply by taking a weighted basket of goods and services determined (by the BLS) to be representative of the necessary costs to consumers and producers and comparing those baskets month to month.

These month to month comparisons do not belie the trend, but if you do the comparison year over year (any month to last year's month), the problem reveals itself. These comparisons often show a doubling or sometimes even a tripling. This strongly suggests from a statistical nature that the numbers are incorrect.

Import prices were just released and showed a much higher increase than expected and indicate a 7% year over year rise. PPI is strongly correlated to this number and a rapidly rising PPI would cause high consternation not only among traders, but long term fundamental investors in bonds and stocks.

The BLS has been calculating these numbers for thirty years, but all of a sudden they can't seem to come up with them.

Perhaps they are in-between a rock (the administration) and a hard place (The Fed).

The bearish case is that there are great imbalances being created, with the correction constantly being deferred. The unwind of these imbalances must eventually occur and when it begins, there will be nothing that the Fed or the administration will be able to do about it.



No positions in stocks mentioned.

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