Ignoring Reality Doesn’t Help Anyone… Least of All Our Portfolios
The latest policy being implemented by Governments around the world consists of simply making data points up when reality doesn’t conform to their wishes.
The best example of this is China where the PMI measure erupted from the lowest level in 12 months (47.7) to 50.1. This represents the single largest month over month change for the data point in three years.
This means China’s economy is now expanding rapidlyafter facing a liquidity crisis, systemic unrest, and economic contraction over the last six months.
The only problem is that this data point is totally bogus.
The fact of the matter is that Chinese economic data is absurdly gimmicked. Indeed, back in 2007, no less than current First Vice Premiere of China, Li Keqiang, admitted to the US ambassador to China that ALLChinese data, outside of electricity consumption, railroad cargo, and bank lending is for “reference only.”
So what is China’s electricity consumption signaling? That the Chinese economy is growing at best by 2.9%… nowhere near the 7.5% the Chinese Government claims.
This same issue is playing out in the US today.
We continue to hear that the US economy is in recovery and that sharp economic growth is just around the corner. The problem with these claims is that:
- The US’s GDP growth number is gimmicked to make growth look better than reality (the BLS deflates our GDP by an amount that is even lower that the Fed’s ridiculous CPI measure). Real GDP growth is negative 2%.
- Unemployment simply ignores people who stopped looking for a job (thereby lowering the percentage of people “unemployed”). Real unemployment is north of 20%.
- Our inflation measures don’t count the actual cost of living in the US by any stretch of the imagination (somehow the rise in home prices, rents, food, and energy costs don’t affect CPI). Real inflation is 8%.
China and the US are the two largest economies in the world. If both of them are in fact growing at much lower rates than is commonly known, the odds of the world economy growing significantly are minimal.
Indeed consider the latest round of numbers from corporations with business in these countries.
- Apple just reported a 14% drop in Net Sales for operations in China.
- Yum! Brands (owns Taco Bell, KFC, etc.) saw a 7% drop in sales in China.
- Cosco Shipping (China’s largest shipping group) saw its first half net loss triple.
- Anglo American, a mining group producing coal, iron ore and precious metals with large exposure to China, saw a 34% in pre-tax profits in the first half of 2013.
- Wal-Mart saw same store sale in the US decline 0.3%. This is the second quarterly same store sales decline at a time when aalysts expected them to rise 1.0%
- Target just posted a 13% drop in profits based on a slowdown in consumer spending.
- Consumer spending, adjusted for inflation, was up just 0.1% in June.
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