Wednesday, August 10, 2022

'Sparkling Poverty' Stinks Just as Much

By Dan Ferris (View Archive)

Editor's note: For the next two days here at Empire Financial Daily, we're turning things over to our friend and colleague Dan Ferris over at our corporate affiliate Stansberry Research...

As regular readers know, Dan is the editor of Stansberry's Extreme Value newsletter, which focuses on buying world-class businesses trading at steep discounts. He also hosts the popular Stansberry Investor Hour podcast and contributes to its Stansberry Digest e-letter.

To kick things off today, Dan discusses the problems with the messaging from the Fed – and plenty of government officials – regarding whether we're in a recession...



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The recession talk ratcheted up toward the end of last month...

On July 21, the White House published a blog post on the topic. It began the post with the common definition of a recession – two quarters of falling real gross domestic product ("GDP"). But then, the spin cycle started...

The blog post quickly jumped to the point that we're not likely in a recession even if the common definition is met. (And for the record, that happened last month when the official data showed a 0.9% contraction in U.S. GDP during the second quarter.)

U.S. Treasury Secretary Janet Yellen chimed in recently. The former Federal Reserve chair also said we should ignore the definition of a recession.

From there, the White House's spin cycle kicked into overdrive...

President Joe Biden added to the noise. Fresh off a bout with COVID-19, he boldly proclaimed, "We're not going to be in a recession."

White House economic adviser Brian Deese told CNN that debates about the definition of a recession aren't necessary. I agree. But then, he lost me with more spin...

Deese tried to justify his claim by saying we've never had a recession when the economy was "creating 400,000 jobs [per month]" as it did during the second quarter.

But the definition of a recession doesn't say anything about "job creation." So you can't wish it away simply by citing job creation.

It was a clear attempt to front-run the news that we're now in a 'common definition' recession...

Gee, it's almost like these political officials knew it and couldn't accept it.

So instead of trying to fix it, they did the only thing they know how to do...

They tried to gaslight us into believing otherwise. They simply played with words while millions of Americans pulled their belts tighter and braced for whatever comes next.

Before we go any further, let's get something straight...

The common definition of a recession as a contraction in real GDP lasting at least two quarters is arbitrary. I'm not arguing with that point.

First of all, why measure it in quarters? Why not days, weeks, or months? The obvious answer is because the government reports GDP growth quarterly. So it's easy to analyze the data that way.

But why two quarters? Why not one or three? After all, if it were three quarters, it would be easier for all the blathering government cronies to deny we're in one for longer.

I'm honestly not sure how the two-quarter definition came about. But it's here. It's far from perfect. And yet, it's widely accepted and easy to understand.


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Widely accepted, (usually) simple definitions are mostly better than new, complicated ones...

Simple definitions become commonly accepted for a reason. But it's not what you might think...

It's not just because they're simple to understand. The real reason matters less than their simplicity and ease of use, which generally helps them gain widespread acceptance.

Author Nassim Taleb covered this point in his must-read 2012 book, Antifragile. He advocated for accepted traditional definitions by comparing traditional weights and measures with the metric system...

Naturally born weights have a logic to them: we use feet, miles, pounds, inches, furlongs, stones (in Britain) because these are remarkably intuitive and we can use them with a minimal expenditure of cognitive effort – and all cultures seem to have similar measurements with some physical correspondence to the everyday. A meter does not match anything; a foot does. I can imagine the meaning of "thirty feet" with minimal effort. A mile, from the Latin milia passum, is a thousand paces.

Taleb similarly explains the origins of other measurements – like the stone, inch, furlong, and pound. And finally, he concludes...

There is a certain nonrandomness to how these units came to be in an ancestral environment – and the digital system itself comes from the correspondence to the ten fingers.

In other words, measurements based on everyday experiences are easily and widely adopted. If it isn't based on something in our daily lives, it's harder to accept...

For example, the meter of the metric system was originally based on the shortest distance from the North Pole to the equator. That isn't part of anyone's culture or everyday experience.

Sure, the meter has lasted as a unit of measurement for hundreds of years. But it will never feel as right to us humans as a foot or yard does. They're more recognizable.

(I can hear the keyboard cowboys already. They're pounding away about how I'm just an ignorant American. And they'll tell me how much more efficient the metric system is... while failing to acknowledge the efficiency of a simple metric that achieves widespread use.)

OK, it's reasonable to ask at this point...

Whose everyday experience led to the traditional definition of a recession?

Again, I don't know.

But quarterly reporting has been around for a long time. That's good enough for me. The fact that the common definition is simple and widely accepted is all I need to know about it.

Frankly, the government making it more complex than needed is suspicious. And it feels like a prelude to manipulation for political purposes.

If you don't believe me, just look at the amount of space in the White House blog post devoted to two different concepts...

The common definition took seven words, "two consecutive quarters of falling real GDP." The National Bureau of Economic Research ("NBER") occupied four of the remaining seven paragraphs.

Now, tell me again how four paragraphs are more useful than seven words? And really, what else do you need to know? It's like this Internet meme I saw recently:

This is not a recession because it doesn't come from the Récession region of France. This is just sparkling poverty.

Imagine if the White House said something like that.

But like Juliet might've said to Romeo, "That which we call a steaming pile by any other name would still stink up the place just as much."

As often happens, what was not said is more important than what was said...

Nobody in the government or at the Fed is talking about real families suffering. These folks are paying a lot more for rent, food, fuel, and basically everything else than this time last year.

Instead, our elected representatives and their allegedly brilliant appointees are playing word games with definitions. Does that seem like the best use of our tax dollars?

More people need to learn about "Wittgenstein's ruler." Then, maybe politicians would lose some of their ability to make up convenient stories...

Wittgenstein's ruler is another idea from Taleb. It's named for Austrian philosopher Ludwig Wittgenstein. From Taleb's book Fooled by Randomness...

This mechanism I also call Wittgenstein's ruler: Unless you have confidence in the ruler's reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler. The less you trust the ruler's reliability... the more information you are getting about the ruler and the less about the table.

Economics is especially vulnerable to Wittgenstein's ruler...

Economists less often measure reality. Rather, they're measured by reality for making bad predictions.

Researchers Spyros Makridakis and Michele Hibon published a paper about economic forecasting methods in 1979. In the paper, they explained...

Simpler methods perform well in comparison to the more complex and statistically sophisticated [methods].

Then, Makridakis and Hibon ran a series of five economic forecasting competitions over the next several decades. After the third one, which ended in 1999, they said...

Statistically sophisticated or complex methods do not necessarily provide more accurate forecasts than simpler ones.

So the more economists use their convoluted methods to make predictions that never come true... the more you know they're on the wrong side of Wittgenstein's ruler.

Just days before the country goes into a recession by the most accepted measuring stick, the political class comes out in full force to try to tell you the measuring stick doesn't work.

That seems like more than a coincidence. But the problem is...

It's all too clear that they aren't measuring reality. Reality is measuring them.

And reality finds them lacking in anything needed to solve our collective woes.

Regards,

Dan Ferris
August 10, 2022

Editor's note: Dan says we're watching one of the biggest market bubbles in history burst in front of our eyes. The warnings have been mounting for years... Except the bubble this time is much, much bigger... And investors could be in for a decade or more of negative returns from here.

Already, the markets have been ugly this year. But Dan says things could soon get much worse... and the time to prepare is right now. That's why he just put together an inflation-protection strategy that you can set up in minutes to help you sleep at night. Get the details here.