-->Statistical Folly
The Daily Reckoning
Paris, France
Wednesday, 12 February 2003
---------------------
*** Bin Laden is back...and his 'extremist blather' is
catching...
*** Gold v. gold stocks...a new find for Australian gold
bugs...
*** Snowbound in New Hampshire...deprived in
Nicaragua...contrived in the U.S. (GDP figures, that
is)...and more!
It seems your editors are having a bit more time than
they'd like to ponder the value of modern
communication...or perhaps not. Perhaps they are simply
enjoying well-earned, albeit involuntary vacations.
In any case, Addison remains buried under snow in the
Northland, while Paris-Nicaragua communications with Bill
have not improved. Bill did manage to get a short note
through to Paris, however (more below).
In the meantime, here's Eric Fry with the latest news from
Manhattan for you...
Eric?
-----------
Eric Fry, reporting from New York...
- Bin Laden is back and Mr. Market is annoyed. The elusive
terrorist - that would be bin Laden, not Mr. Market -
spewed more of his extremist blather across the airwaves
yesterday, which seemed to unnerve investors a bit. The
stock market tumbled yet again, as the Dow fell 77 points
to 7,843 and the Nasdaq lost one point to 1,295.
- Speaking of extremist blather, Senator Jim Bunning boldly
stared down Alan Greenspan yesterday and suggested that the
chairman"go home and retire". Bunning unabashedly blamed
the revered chairman for failing to head off the stock
market bubble. From time to time, the Daily Reckoning has
accused Mr. Greenspan of similar failings, but we displayed
the good breeding to speak ill of Mr. Greenspan only when
his back was turned. Bunning, by contrast, leveled his
criticisms directly at Mr. Greenspan, face-to-face.
- Bunning's harsh remarks were the political equivalent of
the"high and tight" fastballs he threw during his two
decades in major league baseball...Nice pitch, Jim! Several
Daily Reckoning readers have dispatched emails to us
recently asking why gold stocks have been performing poorly
of late, despite a still-strong gold price.
- There is no one-size-fits-all answer to the question. The
bearish explanation is that gold stocks lead the gold
price, both on the upside and on the downside. Therefore,
the fact that gold stocks are heading south indicates that
gold itself is likely to retreat soon. The bullish
explanation is that the gold stocks merely"got ahead of
themselves". Therefore, they're correcting a bit before
launching their next major move higher...In other words,
who knows?
- Markets zig and markets zag, and we suspect that gold and
gold shares will both zigzag their way to higher prices
over the coming years. Therefore, the belt-and-suspenders
sort of gold bull should probably buy both gold shares and
the metal itself. Investing in physical gold can be a bit
problematic, but it's getting easier all the time. A
Strategic Investment subscriber informed editor Dan Denning
that the Perth mint in Australia would soon offer a brand
new gold-based security.
-"Gold Corporation, a statutory authority of the
Government of Western Australia and operator of The Perth
Mint, today announced its intention to issue a new gold
investment product," the company's press release announced.
-"The Perth Mint Gold Quoted Product ("PMG") would be a
gold bullion product tradable on the Australian Stock
Exchange ("ASX") and aimed at Australians seeking a
convenient way to invest in physical gold...The non-
leveraged PMG would be fully backed by gold owned by Gold
Corporation, and its ASX price is intended to track closely
the international spot gold price.
-"The Corporation said a PMG holder would have the right
to exercise the PMG and call for physical delivery of the
underlying gold at any time before the PMG's expiry.
-"A Product Disclosure Statement will be made available to
investors on release of the PMG. Gold Corporation expects
The Product Disclosure Statement to be released by 28
February 2003. Interested investors should read the Product
Disclosure Statement, which will be available at
www.perthmint.com.au on the release date."
- We are not recommending this particular gold derivative,
nor vouching for its safety, or lack thereof. We're merely
passing the information along...
- Most folks know that Nasdaq stocks have suffered more
than their S&P 500 counterparts, ever since the market
bubble burst in March 2000. At last count, the Nasdaq has
lost a stunning 75% of its peak valuation, compared to the
S&P 500's 46% loss. Incredibly, despite the tech-laden
Nasdaq's wicked collapse, technology stocks remain one of
the stock market's most expensive sectors. That's because
earnings in the tech sector have tumbled even faster than
share prices. In many cases, as we now know, the"pro
forma" earnings produced by many a tech company during the
bubble years amounted to little more than"vaporware".
Predictably, the vapor evaporated, but the rich valuations
remain.
- Today, based on the flattering Wall Street convention
known as"operating earnings", technology is still one of
the most expensive sectors in the stock market."The tech
representatives in the S&P 500 are trading at 24 times
expected 2003 earnings, compared with about 16 times for
the index as a whole," Barron's Michael Santoli observes.
"Given that these stocks remain more volatile and therefore
potentially risky, paying a premium for them strikes some
as perverse, a vestige of New Economy exceptionalism."
- Maybe not"perverse"...just stupid.
-----------
*** Lost in the wilds of Rancho Santana, Nicaragua, your
editor managed to send us the following note:
"Has the war with Iraq begun? Is the dollar still worth
something? Has a new bull market been started?
"Still mostly cut off from the wonders of modern
communications here in Nicaragua...we don't know. But as
the days go by, we care less and less.
"So, we promise not to write again until our vacation is
over, next week."
Bill Bonner
STATISTICAL FOLLY
By Andrew Kashdan
Every quarter, we eagerly anticipate the GDP data to see if
the long-awaited investment recovery is finally at hand.
Our patience seems to have been rewarded: real
nonresidential fixed investment enjoyed a 1.5% annualized
increase in the fourth quarter after eight quarters of
decline.
Hoorah! And yet...we must restrain our enthusiasm. The $4.5
billion increase is less impressive than it seems on first
look, which means that the dismal 0.7% rise in real GDP is
worse than it appears.
Before we go any further, we should point out, these are
the"advance" estimates, and may be revised significantly;
the"preliminary" estimates will be released on February
28. There's always a trade-off between the risks of
blabbering about data that may prove to be incorrect and
waiting a few extra weeks until even fewer people care what
happened in the fourth quarter. We've decided to blabber.
Most of the increase in nonresidential fixed investment
came from spending on equipment and software. The largest
subcategory here is technology. However, Northern Trust
economist Paul Kasriel notes the unusual boost from
transportation equipment spending, which increased at a 25%
annualized rate. He then goes on to ask:"With the Arizona
desert becoming a parking lot for excess commercial
airliners, how likely is it that shipments of new
commercial airliners will stay aloft in coming quarters?
And as for light trucks, if demand for them is so strong,
why are their manufacturers continuing to increase the
sales incentives on them? In sum, the strength in fourth
quarter business equipment spending appears to be a one-off
event."
How about technology, then - is the boom back? Well, we're
not partying like it's 1999 just yet. If we look at the
subcategory that includes"information processing equipment
and software," we see that, in real terms, IT spending
increased at an annualized rate of 3.95%. This is a
volatile number, but even so, the growth is significantly
slower than it's been the last few quarters (e.g., the
annualized rate of growth was nearly 13% in Q3). On a
nominal basis, the slowdown is even more severe - fourth-
quarter growth was only 0.9%.
How to explain the discrepancy? Prices in the equipment and
software category (as well as in the technology
subcategory) have been declining, on average, which would
make real sales increase slightly even without a rise in
nominal sales. But the rest of the increase, we must
presume, is due to tinkering to account for quality
improvements, i.e., so-called hedonic price adjustments.
The result: a nominal increase of $407 billion in equipment
and software spending is magically transformed into a $581
billion increase (again, these numbers are annualized). The
$174 billion difference is rather significant when overall
nonresidential fixed investment increased by a mere $4.5
billion. (We have not yet figured out how to adjust our
personal incomes for quality enhancements, but we've got
our best people working on it.)
The difference is noteworthy when comparing short-term
growth in the real and nominal measures, but the impact is
even more substantial in terms of the level of investment.
In other words, investment is really a lot lower. Back in
early 1996, real and nominal measures were approximately
equal. But since then, the difference - or the statistical
bonus added on to the nominal figures - has been climbing
steadily and hit a new record in the fourth quarter.
The last bastion of technology optimism can be found, it
seems, among the statisticians at the Commerce Department.
There might be an argument for attempting to quantify the
effects of quality improvements, but we'd suggest that
doing so makes the statistical investment"recovery"
something of a chimera.
Another of our complaints about the GDP data is that they
count a dollar of government spending the same as a dollar
of real investment (or some other component). Imagine, for
example, the difference between a business spending $1
million to open a new factory and the government taxing or
borrowing to buy $1 million worth of cruise missiles (or
worse, to open a new DMV office). The latter alternative is
essentially what's going on right now. Government spending
contributed 0.86 percentage point of growth in the fourth
quarter, or more than the 0.7% total growth, before
offsetting declines in net exports and gross investment.
(Personal consumption expenditures also contributed 0.67%
in the quarter.)
We can also see the impact of government tinkering in the
durable goods data for December: durable goods orders were
revised lower to a 0.2% decline on top of the 1.3% drop the
month before. Defense orders rose 16.6%, after increasing
by 39% in November, while nondefense capital goods orders
decreased for the year (more on this below).
The die-hard Keynesian will retort that jobs are created
both by government and business investment. But there is a
crucial difference. In the latter case, spending is the
result of actual consumer preferences, or at least those
preferences as perceived by businesses...and the increased
capital also provides for future demand.
So the pundits can call what's happening a recovery to
their hearts' content, and marvel at the power of fiscal
stimulus to boost the economy. But until we see the hard
evidence of an improvement where it really matters, in
business capital investment, count us among the skeptics.
Regards,
Andrew Kashdan,
for the Daily Reckoning
P.S. We don't want to give the impression that the economy
is producing nothing but bad news these days. In fact,
several manufacturing indices have been moving in the right
direction. The widely watched Institute for Supply
Management (ISM) index (formerly the National Association
of Purchasing Management, or NAPM index) remained above the
50 level in January, which indicates expansion, but it was
down slightly from December. In addition, industrial
production growth and new orders for durable goods have
shown nice increases over the past year or so (despite the
downward revision in durable orders for the month of
December).
However, we need to provide a little perspective. We can't
merely look at the shape of the graph and pronounce a
strong recovery. That would be misleading. Both indicators
are just now rising above the zero line, so it's only a
matter of stopping the bleeding at this point. A longer-
term graph would show that both measures have merely
recovered to a growth rate in the bottom of a range going
back to the early 1990s. Of course, any improvement is
certainly better than the alternative, but the upturn is
not yet the self-sustaining recovery that everyone has been
hoping for.
|