Can You Trust US Economic Data? Eight “Out Of The Box” Investment Insights - Peter Diekmeyer

This morning, Canada released GDP data which showed the economy shrank by 1.6% on an annualized quarter-over-quarter basis during Q2. While economists forecast a 1.5% drop, those “projections” were made after the quarter was already over. Six months before it started, almost everyone was saying that things were going to be fine.

Canada isn’t alone. As our old friend Larry Summers has pointed out , “not a single post war recession was predicted a year in advance by the Fed, the Federal government, the IMF or a consensus of forecasters.”

In short, while astute investors need to take into account the official line, they also need to go “outside the box.” Following are eight creative insights from economic and investment thinkers, almost all of whom operate outside consensus silos.

A 23% unemployment rate? John Williams of Shadow Statistics believes that US government has long been presenting misleading economic data. Much of this originated in statistical agencies rejigging calculation methodologies which started in a big way in 1994 during the Clinton Administration. The upshot, says Williams, a gold fan, is massive hidden inflationary pressures.

Headline inflation, for example, which is currently running in the 1% range y/y, would be between 3.5 and 7 percentage points higher using previous methodologies, he notes. Worse, lower official inflation numbers reduce the COLA increases that governments pay pensioners, which in turn amounts to de facto defaulting. Apartment building owners in rent control districts where increases are tied to headline inflation results are also hard-hit because they aren’t allowed raise their prices to match rising costs.

Understating inflation also enables the US government to overstate real GDP, which is calculated by subtracting the inflation rate from nominal GDP. As for headline unemployment, which is currently under 5%, Williams estimates that it could be as high as 23%, if calculated using previous methodologies or by polling ordinary people on how they regard their existing status.

Did the US economy shrink by 40%? Jon Hellevig of the Awara Group thinks that the economies of all of the major western nations have been materially shrinking for some time because statisticians fail to account for the effects of debt increases in GDP calculations.

Consider: if America borrows and spends a trillion dollars in a year, and its economy grows by a trillion dollars more that year, would the country really be ahead? Hellevig, - who admits that calculations in this area are complex - says no. Furthermore, if you believe that America needs to pay back the trillions that it borrowed between 2009 and 2013, then Hellevig estimates that its economy actually shrank by more than 40% during that time.

Could the Dow fall to 1000? In January 2009, Ian Gordon, head of the Longwave Group, put out a paper suggesting that the economy was heading into a massive deflationary spiral and that a DJIA collapse to 1000 was not out of the question. Central banks, which cut interest rates to zero and printed more money than they had in history, must have read Gordon’s work. They did everything to stave of the decline, even at the cost of setting the stage for worse down the line.

However, Gordon’s argument that bubbles always revert to their initial starting points provides food for thought as does his suggestion that gold provides a good way to preserve purchasing power.

Gordon’s other interesting idea - inspired in part by the thinking of Nicolai Kondratiev - that the economy moves in very long waves also continues to haunt. Gordon notes that the gradual deaths and retirements of those who witnessed the previous calamity (in this case the great depression) sets the stage for the next one – because the collective memory fades.

What if major economies collapse simultaneously? David Stockman, Ronald Reagan’s former budget director - who left in part because the Gipper wasn’t conservative enough - has been one of the most consistently creative economic thinkers.

Stockman’s particularly important insight is that while credit growth has long been outpacing GDP growth in individual countries, in the past on a global basis, that happened at an unequal pace. This left some stability in the system. Thus the West’s economic collapse in the 2008 recession, and Japan’s in the early 1990s were mitigated by demand increases elsewhere. Now it looks like all major economies are tapped out. What happens if the entire world heads down the pipe at the same time?

Can the Fed print its way out of one more jam? Harry Dent of Dent Research is one of the most colorful and creative economic thinkers, due in part to his ability to draw on a wide variety of data sources, theories and trends, particularly demographics.

Dent argues that the Boomers, who are past their peak spending years, are pushing enormous deflationary pressures on the economy. The Federal Reserve will not be able to print its way out of this one, says Dent, due to the fact that most of the new credit in the system is created not by the monetary authorities themselves, but by banks through the fractional reserve lending system.

Will the IMG bail out America with “world money?” James Rickards, one of the most widely known out-of-the box thinkers, has a knack for making headlines with predictions such as $10,000 an ounce gold and stories about his work for the CIA and during the Long Term Capital Management bailout.

Rickards’ most unique insight, which is little talked about elsewhere, is that governments (including America’s) might try to traverse another bubble-bust cycle, in part by drawing on the International Monetary Fund to create trillions of dollars of Special Drawing Rights (a de facto global currency) to reflate the system. If that occurs – and if the past is any guide – we could well see another stock market crash and a subsequent massive rebound as the new liquidity produces another – presumably even bigger – super-bubble.

A debt collapse worse than 2007? On paper, William White, the chairman of the Economic and Development Review Committee (EDRC) at the OECD is about as “inside the box,” as you can get. That’s what makes his warnings - which include an upcoming debt collapse worse than 2007 – so eerie.

White, in 2012 paper for the Dallas Fed , predicted almost all of the problems and instabilities associated with ultra-loose economic policy, ranging from a credit upswing to resource misallocation. In that paper – and this is what classifies him as an honorary “out of the box thinker” – White even quotes the great Austrian economist Ludwig von Mises, something that no mainstream economist would ever do.

We don’t know what the economy is going to look like in five years. Marc Faber, publisher of the Gloom Boom and Doom report, is a great favorite on mainstream media due to the headline-grabbing title of his newsletter, predictions, pithy quotes and sense of humor. But Faber’s main contribution is his focus on medium to long term investing, and his admission (which few others will confess to) that forecasters don’t have a clue where we are heading.

Faber’s solution: a portfolio balanced roughly between stocks, bonds, real estate and precious metals, that will hedge against most eventualities.

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.