WALL STREET GIBBERISH, 2002 FOURTH QUARTER NEWSLETTER

In this issue, my target is the all too frequent practice of finding a way to exclude data that do not support oneís position. Unfortunately, the government sometimes does this in some of its official statistics. Probably the most widely known and reported example is the so-called "core rate" of inflation. The Bureau of Labor Statistics in the Department of Labor publishes the widely followed Consumer Price Index (CPI) each month. One of their variants, which supposedly measures the core rate, excludes the changes in food and energy from the CPI calculations. Why? Because these two categories may fluctuate in either direction by fairly large amounts from month to month. The thinking is that these large changes are not representative of the "true" trend in consumer prices because they may be caused by events such as unusual weather patterns or turmoil overseas.

The problem is that consumers are not likely to stop eating, heating and cooling their homes, using electricity in various ways, or driving their cars. They will have to pay for these items, so the changes in prices will certainly affect their cost of living. During periods when food or energy prices generally rise or fall, the core rate of inflation can easily paint a misleading picture of the overall trend in consumer prices. Good and unbiased analysts and commentators will take such into account, but many talking heads would rather try to make their point than provide thoughtful insight into what the data really mean.

One such example is due to a Merrill Lynch economist, who shall remain unnamed here, who didnít think the 2% year-to-year change in the CPI as of November was low enough to make his point that inflation was quite low and that we should be worried more about the threat of deflation. He noted that if we exclude the items with the largest year-to-years gains (insurance premiums, tobacco, hospital services, and tuition), "the US inflation rate would already be running below the one percent level." While these items as a whole do not compose a large part of the index and are less significant components than food and energy, most consumers are affected by some, if not all of these. I suspect if these categories show changes that support this economistís viewpoint, they will not be excluded in the future.

I am amused by the desire to ignore unpleasant facts or happenings. Athletic coaches, who hardly matter from a Wall Street perspective, canít seem to refrain from pointing out that if a few things had gone differently, then the game or season would have been much better for them. I am waiting for one of them to carry it to the logical extreme and say "if it werenít for the games we lost, we would be undefeated!"

I did not think that could be topped, but it has, and in a much more serious context. The Washington Post quotes former Treasury Secretary OíNeill commenting on nuclear power plants as saying "if you set aside Three Mile Island and Chernobyl, the safety record of nuclear is really very good." Or as the old joke goes, other than that Mrs. Lincoln, how did you like the play?

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