How to Read the Headlines in an Election Year

You'd be dumb to expect a neutral flow of news and policy in election year. You just won't get one.
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Those of us who comment on matters of business and economics often find ourselves in a strange double-bind. The issues we're commenting on may be among the most pressing, most urgent, most tangled matters in the national journey -- but, to 90 something percent of readers, they're dull. Not only dull, but slightly painful, like running complex calculations in your head first thing in the morning.

The result is that news coverage of these urgent matters often misses the lead. For example, you probably read that joblessness in the U.S. is finally on the way down. And you read that, because a Bureau of Labor Statistics (BLS) put out a press release which said just that.

Except that it didn't. Forgive me for a moment: I'm going to have to use some numbers here, but bear with me, because it matters. According to the BLS, joblessness in the United States is down to 8.3% today, following an increase of almost 250,000 in non-farm payroll. Given that joblessness was over 9% a year ago, the country looks to be coming slowly back from a truly terrible recession.

And those facts are true, but hopelessly misleading. The same press release also reported certain adjustments to the data ensuing from the recent census. To be precise, it said: "The adjustment increased the estimated size of ... the civilian labor force by 258,000 ... and persons not in the labor force by 1,252,000."

What? The BLS is claiming that joblessness has fallen because it's just kicked 1.25 million people out of the labor force? Don't get me wrong: I believe the BLS. I do believe that the jobs market is currently so dispiriting, so hostile to endeavor and success, that one and a quarter million people have indeed exited the market. And that right there is the headline. Not 'joblessness falls', but 'hopelessness grows'. It's terrible news and almost no one reported it.

There's a broader point here, especially in the presidential election year. Yale Hirsh of the Stock Trader's Almanack has developed a theory of a Presidential Election Cycle, whereby you get strong stockmarket returns in election year, followed by worsening returns as reality hits. That theory has a ragged record empirically speaking. (It coped fine with George Bush senior and two terms of Clinton, but Al Gore couldn't get it to work in the 2000 election year. The theory supported Dubya's re-election in 2004, but no amount of electioneering could prevent total wipe-out in 2008.)

All the same, the theory makes a point. You'd be dumb to expect a neutral flow of news and policy in election year. You just won't get one.

Neutral bodies such as the BLS will be pressured to bury bad news about 1.25 million dispirited Americans in favor of reporting good news about the 250,000 who have found work. The Fed will come under acute pressure to flex its policy to suit political ends. And the evidence is that that pressure works. A careful study of the 'political monetary cycle' suggests that Fed Policy does turn expansionary prior to an election, notably when the Fed chair has links with the incumbent party.

It's easy enough to see the effects of just such a cycle building today. U.S. joblessness is at frighteningly high levels. More than a million people have left the labor force in despair. There is an almighty crisis swelling in Europe. The solidity of bank balance sheets remains deeply questionable. These things are beyond any reasonable dispute ... and yet the stockmarket has risen some 25% since October. Countless companies are seeing their stocks hit 52-week highs. Facebook is contemplating an IPO which could see it valued at as much as 100 times net profits -- and, indeed, some 25 times revenues.

It's not that the news is all bad. It never is. Facebook is a terrific company. The last quarter of 2011 was a good one for the U.S. economy. But 100 times net profits? A 25% increase in stock values? Asset prices have been bid so high that the cost of a ten year loan to the US government is less than 2%. Does anyone truly think that is an acceptable return for the risk of lending to a borrower agreed on all sides to be hideously overborrowed and boasting no plausible repayment plan?

These things make no sense at an economic level, but they don't have to. It's politics that matters. The Federal Reserve has done everything it can to pump money into the economy. It's expanded its balance sheet by $2 trillion. It's lent huge amounts -- more than $1 trillion -- to numerous banks, from the most gilded names on Wall Street to some of the creakiest credits in Europe. Worse still, it didn't even tell Congress that it had chosen to do so. Meantime, it's started to act like some discount-goods warehouse, offering 'low rates for ever'. Further quantitative easing is expected soon.

Naturally, if you pump all that money into financial markets it has to go somewhere. That's the only logic currently supporting the stock and bond markets. And the logic is insane. Recent financial history has been full of bubbles and financial crises. The dotcom crash. The subprime bust. The Eurozone crisis. The Asian financial meltdown. Property crashes galore.

There's no mystery to these events. You can inflate bubbles as hard as you like, but at some point they'll burst. The bigger you've inflated them, the worse their termination will feel. And right now, policy-makers, turbo-charged with electoral zeal, are pumping harder than they've ever pumped before.

Most commentators are happy to accept the headlines they're given. Jobless is down - rah, rah, rah! The stockmarket is up -- way to go! But this is an election year. When you get the headline, you might want to flip it round. The real story, likely enough, will be the exact reverse of the one you're reading.

Mitch Feierstein is the author of Planet Ponzi, available from Amazon.

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