"Why the Misery Index Is Higher Than the Feds Let On"
by Eric Fry
by Eric Fry
"The Dow Jones Industrial Average continues its hiatus from doom and gloom yesterday – up more than 100 points so far today on what would be its fourth consecutive winning session. A four-day winning streak may not seem like much, but as The Daily Reckoning faithful will recall, the Dow has fallen for six straight weeks. Perhaps the Blue Chips will fall for a seventh straight week, but so far the Dow is solidly in the black. Sure, the reasons for lightening up on stocks remain just as compelling today as they did last week (and the five weeks before that), but that doesn’t mean the stock market has to fall every day.
Greece is still racing towards an inevitable default, America’s governmental finances – from Washington to Sacramento – are still sickly and the US economy’s performance still continues to disappoint. So, yeah, stocks might drop again tomorrow… But there is “a time for everything,” as the writer of Ecclesiastes observed about three millennia ago…and the Byrds re-iterated about three decades ago. And this week – so far – is simply not the time for selling. Ample time remains for selling stocks, of course,…and also for buying them. But when it comes to buying, you know our view: Stick with the companies that provide indispensable goods and services. Stick with the companies that provide the world’s “must haves,” rather than the world’s “like to haves.”
In previous editions of The Daily Reckoning, our contributing editors have identified a wide range of “must haves” – things like agricultural products, rare earths, water purification processes, innovative medical technologies etc. The Daily Reckoning editors have also tossed in a few “must haves” that might seem like either “like to haves” or “why bothers” to many people. Things like gold, silver and other hard assets. We admit that precious metals are not always a “must have,” but they are when the Chairman of the Federal Reserve considers dollar-printing a “must do.”
These are tough times we are living in, dear reader, even if very few Wall Street economists acknowledge it. Unemployment is high and opportunity is low. To make matters worse, the federal government is trying to make things better. The Obama Administration is borrowing trillions of dollars to “create jobs,” while Ben Bernanke is printing hundreds of billions of dollars to “stimulate growth.” Despite all of this borrowing, spending and printing, there are no jobs and there is no growth. There are however, the mounting liabilities that present and future generations of Americans must attempt to repay. As Charles Munger, Vice-Chairman of Berkshire Hathaway, famously remarked, “”One thing about accounting, the liabilities are always 100% good.”
So here we Americans sit with a rising pile of debt and a shrinking range of opportunity. Unemployment refuses to drop, while inflation continues to climb. We used to refer to the sum of these two economic scourges as the “Misery Index.” Readers old enough to recall the Misery Index will remember it was computed by adding the inflation rate to the unemployment rate. During the Presidential campaign of 1976, then-candidate, Jimmy Carter, popularized this index to indict the policies of President Ford.
By the summer of 1976, the index had climbed to 13.57%. Carter argued that no man responsible for giving a country a misery index that high had a right to even ask to be President. Four years later, under President Carter, the Misery Index reached an all-time high of 21.98%. Accordingly, during the Presidential campaign of 1980, then-candidate Ronald Reagan, remarked: “As a candidate four years ago, Mr. Carter adopted what he called the ‘Misery Index’… He suggested that no President has a right to seek reelection with an index of 12.5 percent. Today, by his own standard, he does not deserve reelection.” Candidate Reagan became President Reagan.
Fast-forward to the present, last week the Drudge Report picked up a CNBC story about how the Misery Index stands at its highest since 1983:
9.1% unemployment + 3.6% consumer price index (CPI) = 12.7% misery index
But the country’s true misery may be much, much higher. “What the story did not explain,” our colleagues at The 5-Minute Forecast observed, “is how the government has gamed both elements of the Misery Index during the last 28 years. People who’ve given up looking for work, for example, no longer count as ‘unemployed.’” The government’s CPI calculation is also a cosmetically enhanced version of its former self. The government bean-counters can make the rising price of a steak disappear by assuming you buy less steak and more hamburger. And so on.
“John Williams at ShadowStats.com still runs the numbers the way they were in those bygone days,” The 5-Minute Forecast continues. “Let’s recalculate…
22.3% unemployment + 11.2% consumer price index = 33.5% misery index
“That compares to a peak misery index of 22.0% in June 1980. If circumstances now feel worse than they did then, if the ‘recovery’ of the last two years seems like a chimera, you now know why.”
Back in the late 1970s, as these two components of our national misery climbed ever higher, investors piled into gold and silver – hoping to protect themselves from whatever additional misery might be coming their way. For several years, misery continued to climb and the precious metals continued to soar. But eventually, Fed Chairman, Paul Volcker, stared Misery directly in the face and declared war. He jacked interest rates up to the mid-teens and tightened the money supply to stop inflation dead in its tracks. The 13.3% inflation of 1979 became the 3.8% inflation of 1982. Economic activity rebounded to such an extent that by 1984, President Reagan was declaring, “It’s morning again in America.” The nation believed him and re-elected him to a second term. By 1986, the Misery Index had fallen to less than 8%. But three decades after Paul Volcker crushed inflation (and subdued the Misery Index), inflation (and misery) are ascendant once again. Gold and silver are also rallying. It is no mere coincidence…
This time around, there is no Paul Volcker at the Federal Reserve to stare down Misery or to wage war against inflation. In his place we have Ben Bernanke, who prefers to coddle Misery, rather than confront her. Far from staring her down, he is doing all he can to make her comfortable and to insure that she will hang around for a while. As long as Misery is comfortable, the bull market in gold and silver will continue. We’ve been telling you for more than a decade to buy gold and silver. We still are.”