Government Conspiracies and Your Money

At "A Dash" we are amazed almost daily by the haughty and high-handed disrespect from Wall Street when it comes to the everyday workings of government.  So many powerful voices are so confident, and simultaneously so wrong.  This is typical when an expert switches subjects from something he really knows about-- stocks, trading, technical analysis, etc.-- to something he knows nothing about.

CNBC stimulates this with their "guest hosts" who are encouraged to offer an opinion on whatever topic comes up that hour.  Of course, some of their journalists are already participating in that way.  Looking to the frequently-cited wise men, Jonathan Berr runs down a short list, but there are many more good candidates.

When we see the errors, it is a "kid in a candy store" feeling.  Start with a bunch of traders, fund managers, and lawyers.  None has ever developed a quantitative model, and many cannot construct or interpret simple tables or regressions with statistical controls.  They have not taken (or do not remember) the beginning classes in government, economics, statistics, or research methods.

These pseudo-experts cite actual data, developed with great care by the strongest experts, as "a work of fiction."  As if they knew the difference!  Why?  Two reasons.

First, they do not like the result they see.  It does not agree with their own daily experience.  They confuse their own compartmentalized view of the world with reality.  It is also a message they can sell to their audience, often a niche group who share their world view.

Second, diminishing the real experts increases the influence of the pretenders.  If these powerful voices can convince most to ignore data, then anecdotal evidence rules.  It is an alternate data universe.

And the pseudo-expert is also the master of the anecdote.

The most prominent media voices support them.  Why?  It is a good story.   There are very few who choose to educate readers rather than to play to their existing biases.  It is a good business model.  Readers can understand anecdotes, but not statistical methods.

There is a symbiotic relationship between media and the pseudo-expert community.

Conspiracy Theory

Taken to the extreme, the pseudo-expert actually suggests that "government" is acting in a conspiratorial fashion.  It is pretty easy to recognize such superficial analysis.  It is the work of people who have seen too many movies and read too few books.

The biggest red flag?  Look for those who discuss the U.S. "government" as if it were a  unitary actor.  This is seen only in a ruthless dictatorship with a small inner circle.  Those who conclude, for example, that the President is "cooking the books" on inflation or employment data make this mistake.  They do not understand that the actual work is being done by a non-partisan senior executive service.  (Those interested in how government decisions are actually made should consult our summary article.)

A Failed Conspiracy

Actually, conspiratorial moves are rare and for good reason.  Even closely held secrets, like the original Watergate plan, have a way of leaking out.  The recent suppression of the global warming report provides a nice example.  Menzie Chinn at Econbrowser, one of our featured sites, discusses the report that the Bush Administration thought was too dangerous to release, now available after four years.

This Washington Post article shows what happens when the echelon of political appointees tries to tamper with the work of those who serve government regardless of the party in power.

This is an important example to remember the next time someone is selling a conspiracy theory that you should not be buying.

Investment Effect

One of the strongest things an investor can do is to discover information that is poorly understood or appreciated by everyone else.  It is especially ironic that the commonplace viewpoint is offered as "contrarian" by those taking it!

Briefly put, one can gain an investment advantage simply by identifying and believing information from the real experts on various economic topics.  How simple!

Where to start?  Here's a hint.  The "government" as represented by the diverse Congressional and bureaucratic interests has no unified position about the measurement of inflation.  Many members of Congress, for example, would like to increase Social Security benefits and labor cost-of-living increases.  They would be happy to see inflation measurements that would aid these constituent groups. The BLS employees have tenure and are not subject to political pressure.

Meanwhile.....

Big-name fund managers like Bill Gross have a strong financial interest in public perception of inflation and the economy.  Like any smart manager, he talks his book.  Should you be listening?

More later on Bill Gross versus the BLS, now in its fifth year, but still playing on a blog or TV station near you.

Comments

[Mike C]

One recurring theme on this blog is identifying "experts" and the "right" experts to listen to. I am a regular reader of Bill Gross's monthly outlook, and I start with the presumption that his expertise in fixed income, bonds, inflation, interest rates, greatly outweighs mine. You imply that he has an agenda, and is "talking his book" and may not be giving a 100% honest opinion and analysis.

You said "more later" so I'll be interested to get a little more meat/substance on why Bill Gross's views should be discounted. You say that Bill Gross has a "strong financial interest in public perception of inflation and the economy". Maybe I'm slow and/or dense and can't connect the dots, but I'm not sure I see what financial incentive he has in advancing a particular viewpoint on inflation.

On the flip side, I'm not sure it is crazy to believe that "goverment" or more specifically certain government agencies or groups of individuals within government may have particular agendas that don't necessarily have to be viewed as conspiracies. I think the entire situation with how we got into the Iraq war, and the interplay between certain government actors with agendas and intelligence analysts is a crystal-clear example of how "government" or at least those with the real power can indeed exercise political pressure on those who do analysis for the purpose of achieving a particular agenda.

[oldprof]

Greg - I am not trying to convince people who already have a strong political or philosophical viewpoint to change, nor could I. There are plenty of customers for that viewpoint.

Your comment implies that I am naive and you are the sophisticated one when it comes to political pressure and the BLS. Since I have worked at the top level of a government policy shop, and have plenty of other friends who have as well, I have some direct experience on the subject. I also know how to read and analyze their work. I have talked with them. In short, I have a strong basis for my conclusion. I also offered you an example of what happens when political pressure is excessive.

Do you have information about government that you want to share, or just your gut feeling that my opinion is "scary?"

I'll write some more about Bill Gross in coming days, and if you read with an open mind perhaps you will discover some holes in his argument.

Meanwhile, I wish I could find the right words to make this point, while accepting that for some, nothing will work.

I do appreciate your comment, since it let's me illustrate a point. I note from your background that you studied critical thinking. If you wanted to put that into practice you would not criticize my argument, not my attitude. Show me some actual conspiracies, government as a unitary actor or the like. Try to actually refute what I said, rather than attacking me personally.

Or read some of the actual work, like the Boskin report. Most of the people who criticize this have never even looked at it. If you haven't, how are you so sure that Bill Gross is right?

And by the way, I know you mean no harm, I'm just saying that the rules of engagement should be based upon facts.

Thanks again,

Jeff

[Greg Feirman]

"The BLS employees have tenure and are not subject to political pressure."

Are you serious, man? If you really believe that, that's scary.

And as far as Gross on inflation, he makes a number of very strong points. For example, using owner equivalent rent instead of home prices and hedonic adjustments have greatly altered the CPI calculation. Using the old methods, the CPI would be much, much higher as John Williams has argued:

http://www.topgunfp.com/bill-gross-cpi-understates-real-inflation/

I'm not trying to be rude here but you criticize others for their combination of arrogance and ignorance but really that is a good description of your mentality, in my opinion.

You're so sure about statistics and "hard data" and who the real experts are. Academic finance is a complete joke based on abstractions and models that have nothing to do with the actual reality of financial markets:

http://www.topgunfp.com/dimensional-fund-advisors-and-the-efficient-market-religion/

Maybe I'm wrong, but everytime I read this blog I feel complete condescension and dismissal of any approach to markets differeing from your "hard data", statistical approach. If that isn't arrogance combined with ignorance, I don't know what is.

[RB]

Reaching beyond one's core competence is widespread. Even the oldprof's favorite experts are not immune to this:
http://scottrothbort.blogspot.com/2007/02/global-warming.html
http://scottrothbort.blogspot.com/2007/02/my-thoughts-on-housing-and-sub-prime.html

[VennData]

Steve, If TIPs are thievery, than short them.

Ironically, you'd be applying the blog host's recommendation, that you take advantage of information that you have that the market doesn't.

And if they're a really good short, why tell anyone? I recommend a back test at this point.

[Chris]

Steve,

Are you saying the amount of money the government "robs" is growing in absolute dollars or in comparison to something like GDP? If it is the latter, I would love to see that data. Could you direct me to it?

Thanks,

Chris

[Steve]

Face facts. The amount of money the Fed, state and local governments rob Americans through taxation, tariffs, and money printing (inflation) grows every decade. And your complaining about some "high handed disrespect from Wall Street?" Notwithstanding Gross's comments, ironically he still favors TIPs even though he rightly points out the CPI is rigged from the start to convince us "inflation is low", pay no attention to how much your cost of living is going up! Even if you believe the CPI is right (ahem), Google a CPI calculator and plug in a dollar from 1914 and see what it is worth today? How would you like your investment portfolio to replicate those results?