Wednesday, July 24, 2013

More Perception and Reality

More about perception vs. reality in a recent week’s news cycle. I discovered a quote by economist Laurence Kotlikoff that describes another way what I said last time about the stock market. “They (stock traders) have got some form of nonsense in their brains. They’re not really trading on the basis of what the fiscal realities are; they’re trading on the basis of how everyone else trades. Because they can’t lose their jobs if they lose money collectively, with everyone else. They can lose their jobs if they lose money alone.”

On another cable TV show, a Harvard economist opined that unfunded liabilities are not the same as debt. Seriously. Perception: Unfunded liabilities are a technical, legal or accounting term that we don’t need to worry about. Reality: Can you say Detroit? Chicago? America?

Apparently the Harvard economist skipped English and accounting on the way to his doctorate. Look up debt in the dictionary and what will you find? Liability. Look up liability and you will find debt. Imagine borrowing fifty grand to be paid back ten years later and pledging your house and autos to secure the loan. If you don’t start putting back money now to repay, that’s an unfunded liability and at the end of ten years, the bank will take your house  and you will also be afoot if you don’t have the money to pay it back. 

When we used to do seminars together on tax exempt bonds, my old friend CT McCarley used to talk about the unfunded liabilities of cities (specifically Detroit and Chicago) as well as states across our great country and warn about consequences . When I asked him when his dire predictions would come true, he said, “I don’t know, but there will be a tipping point and I think it will be around 2003-2010. He missed it by three years for Detroit. I wonder what he would say about America’s unfunded liabilities if he were alive today. Detroit and America's politicians want to spend money during their terms in office, make promises (unfunded liabilities), then pay it back or renege during the term of some future politician. The future is now for Detroit and politicians don't like it.

Economist Laurence Kotlikoff (see above) says that America’s unfunded liabilities are $222 trillion and that they went up by $11 trillion last year alone. Bill Archer and Chris Cox say it’s closer to $87 trillion. Almost everyone agrees it’s a least $47 trillion.  Why the difference? Most folks don’t know how to calculate the present value of future obligations. Kotlikoff does.

One of the most respected financial advisors in America recently advised buying gold in his newsletter. Last week, less than a month later, he said that gold was a fool’s play. I asked about the contradiction. He said investing is done by the hour now, if not by the millisecond.

When I connected with him years ago, that statement would have drawn nothing but scorn from both of us. It flies in the face of almost everything either of us has ever written or advised. Yet, perception is everything. The early perception was that gold was right. The later perception was that it was wrong. Neither notion has much to do with supply and demand or economics. Gold prices are almost entirely driven by perception.

Another cable TV host recently lamented that women are now the primary breadwinners in 40% of families as compared to about 10% in the sixties. He was lambasted by his female colleagues who saw this as excellent news signaling great advances for women. That’s partially true, but when you delve into the numbers, you see that it’s more of a loss for men than a gain for women.

The stats are skewed because in more and more families, women are the only breadwinners. Men are absent, too lazy to work, work only in crime and thus are not included in the stats, or can’t find work. Many of the primary female breadwinners’ families are at or barely above poverty levels. Also, a lot of women chose not to work in the sixties, skewing the numbers. Now, most of them have to work. Perception: Great news. Reality: Bad news.

How about unemployment rates? Don’t like the result when we calculate it by the method we used for decades? Change the method. Just consider that people not looking for work are no longer unemployed. (How do they know they’ve stopped looking?) Even though more people are out of work, the rate goes down (Q:How do people survive who simply quit looking for work? A: They milk the government benefit system).

Perception: the economy is recovering and unemployment is dropping. Reality: Real unemployment remains in double digits and workforce participation is at historic lows. There are more people on government subsistence now than in the workforce. But perception wins.

Statistics don’t lie. Really? That’s partially or even mostly true only if you know how they were calculated and understand them in relative terms. A recent headline said that interest rates rose 35% in six weeks. Makes you want to run to the bank and buy a CD until you discover that the 35% came when the change in yield on a ten year treasury increased from 1.7% to 2.23%. That created perception that rates were skyrocketing.

Folks say that low interest rates are what fuel the housing market. However, the market was just fine when I financed my home at 15% and refinanced it at 11%. But it is almost certain that that perception might put a damper on home sales if the interest rate soars to say, a whopping 5 or 6% (about the historical average) on a home mortgage. 

Be diligent. 

1 comment:

kay Francavilla said...

As usual, Jim is spot on!. Too bad we can't get someone with your brain who truly understands economics and finances to run our country!.