For the last several weeks, I have informed readers that financial data provided to investors is, all too often, outdated or derived from a flawed paradigm. Much of the pessimism that dominated the thought behind many analysts' predictions throughout the summer reflected the opinion that a falling housing market would evaporate a substantial amount of consumer liquidity that was available to homeowners during times when home values were on the rise.
Investors who accepted this scenario were slow to accept the fact that increased wages, falling gas prices and increased corporate spending helped fill the void left by a declining housing market. Now, however, these investors face another problem: whether it is too late to climb aboard the stock market express.
Nothing has changed; investors are still fed erroneous data. The case in point is the Labor Department's continuous proclamation that unit labor costs are accelerating while productivity is waning. They inform us labor costs grew 5.3 percent from the previous year. According to the Labor Department, this number represents the most rapid growth since 1990. If this were true-if wages were mushrooming while labor output was declining-then corporate profits would more than likely be tanking. However, as we are all aware, they are not.
S&P 500 companies, according to Business Week, reported that third quarter earnings are expected to finish at more than 18 percent above the previous year. What's more, 73 percent of these companies announced higher than expected earnings. Contrarily, not all U.S. corporations are making profits. Although the service sectors are up, the manufacturing and construction sectors are down.
Therefore, it should be tediously obvious at this point that we can no longer trust, let alone rely on, the Labor Department for our investment decisions. The Labor Department was designed to measure corporate mass production between the 1920s and 1970s. By the 1980s, U.S. manufacturing was replaced by foreign production. Thus, the service sector quickly began taking manufacturing's place.
However, the Labor Department failed to recognize this transition. Consequently, it is imperative that investors crosscheck data they are provided in order to make well-informed decisions about their investments. Thus, when you are told unemployment is rampant, and at the same time, you see "help wanted" on almost every corner, there is definitely something inaccurate and misleading about what you are being told. Unemployment is the lowest it has been in 20 years.
The past several months were election months. Politicians deceived voters into believing the economy, as usual, was in jeopardy and that they were the economy's only means of salvation. Furthermore, the media only served to re-affirm their fabrications. This is one of the most prosperous times in recent history for the service sector. Both the manufacturing and construction sectors, on the other hand, are witnessing their worst times in recent history.
Another source of investor anxiety is the Chinese central bank's recent reiteration that China will relinquish its dollar holdings and diversify its currency reserves. They will move out of dollars and into other types of reserves, namely an Asian Currency Unit (ACU). Moreover, what makes this so scary is that China currently holds $1 trillion in its foreign reserve. It is said that China's investment accounts for 45 percent of its GDP. However, most analysts believe this rate is unsustainable in that, according to the Economist.com, they fear "overcapacity will result." They add, "Sooner or later, it is argued, a sharp slump in capital spending will also drag down China's long-term growth rate."
Statistical detective work by the Economist.com "suggests that this number cannot be right; correctly measured, investment is considerably lower, and therefore less alarming, even if it remains bigger as a share of GDP than in most other countries." According to the Economist.com, China's official figures are riddled with inconsistencies. For example, China's data implies "that overall economic growth is an incredible 17 percent compared with the merely astonishing 10 percent that it is currently running at. But it is more than likely the reported rate of investment to GDP is way too high."
When the Economist.com does the arithmetic and crosschecks other sources asserting China's key economic data, it becomes evident that a 45 percent GDP investment rate is way overstated. The more correct figure is 37 percent. In the December issue of Kenneth Coleman's Investment Tracker, I will provide for you credible documentation supporting the latter figure, as well as a chart that compares this figure with other major industrial nations. For now, let's just say the Chinese economy is in no immediate danger of imploding, thus causing their central banks to sell off hundreds of billions of dollars on the open market.
Barring any idiotic exploits by the new Democrat-controlled Congress, the U.S. economy will continue to gain momentum. It appears there is nothing else at this time that will stop it. I will explain more regarding the political ramifications for our economy over the next year in December's issue. Meanwhile, whether it is too late for investors to climb aboard the stock market express, the answer is no! STAY TUNED!
Kenneth Coleman
