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Today's Commentary: 05.16.05
American Innumeracy

If ignorance is bliss, then American innumeracy is a glass of warm milk. Innumeracy is the mathematical equivalent of illiteracy. This numerical ignorance has become more widespread and the frightening fact of the matter, we all tend to accept, even embrace the shortcoming.

Our mathematical vulnerability apparently begins at a young age. At age twelve, according to GirlsOnTech.org, a site designed by the Girl Scouts of America to encourage young girls to pursue math and science courses, young women are more apt to turn towards other less technical pursuits than ones where numbers play a key role. Boys don't seem to fair well either as is evidenced by our lowest ranking to date, 17th place in a global competition in computer engineering. The competition, held for the last 29 years by the Association of Computing Machinery, was won by the Shanghai Jiao Tong University of China.

The constant flood of financial data that is available, all with relevant numbers to support whatever conclusion is needed, has left many investors with a feeling of inadequacy. One report discounts another only to be supported by yet another economic news flash. It shouldn't come as a surprise that our leaders, the ones we look to for guidance from Washington to Wall Street to the office of the CEO offer us little hope of understanding. Judging from their actions, our innumeracy is actually welcomed.

There is a veiled hope that we will continue to misunderstand relevant data, despite some of the best interpreters in the business, many of which reside between the pages of the best financial publications. If we were able to grasp of what the administration is doing fiscally, what Wall Street is doing behind closed doors, and what corporate America is seeking to achieve at the expense of our numerical ignorance, our epiphany might bring this current house of cards down.

The Bush White House seems to be growing less sure of themselves in terms of fiscal understanding even as they plow ahead with their programs of change and reform. Starting with the trade deficit and working backward to the budget deficit, this administration has shown their own brand cunning in the face of our economic innumeracy.

While the talk of China's revaluation of their currency, the yuan, has led to the threat of turning trade between the two nations into an embargoed state, the Asian nation has steadfastly refused to change their monetary policy. Currently, their currency is pegged to the dollar to keep their products attractively priced for Wal-Mart shoppers around America. Citing China's monetary policy as prohibitive simply hides the real reason the White House insists on change. As one gentleman I spoke with the other day suggested, the slightest rift between the two nations will leave many of the box stores shelves empty.

The depths of our problem with China lies in our own ability to do the math. The Bank of China has been accumulating our debt at a rate of $200 billion a year. Should that shift in any way, should China decide to back off their accommodative purchasing of our debt or should they decide to revalue their currency, the domino effect would hit the average consumer hard and fast. Interest rates on the short end would jump dramatically, possibly as much as two hundred basis points of where they have been residing for the last several months. Not only would the fixed income markets reel from the move, the artificially low mortgage rates would begin a slow and steady rise to the 8% level. That increase would negatively impact a housing market that has helped finance much of the last three years worth of growth.

It is difficult to understand what the big picture is in the administration's efforts ot change China's policy. The strongly worded suggestions that China revalue their currency does not have the mechanical support needed in the American marketplace to push for such change. They purchase our debt and we continue to increase our indebtedness. Sounding the "no fair" alarm repeatedly makes us sound churlish and petulant all while we continue to borrow money as if their were no tomorrow.

Unfortunately, that tomorrow is coming soon. It can be found with the expected reintroduction of the 30-year long bond. It is as close to an admission that borrowing to grow the economy as the President has done, while economically sound when accompanied by spending restraints, is not working.

Canceled on Halloween of 2001 in the face of surpluses as far as the eye could see, the prohibitive cost of that bond would have helped this administration in more ways the one avoid the fiscal crisis we are in today. Deemed too costly for this White House's plans for economic rejuvenation as it spent its way through that surplus and into significant and long term deficits, the long bond would have forced restraint. In its absence, the President was permitted to create a deficit so large that it is beginning to worry the average American even if they fail to grasp its importance or even how big it really is.

The 30-year bond was also the favorite investment of pension managers. When it was eliminated, many pension funds were forced to look for some other hedge against a possibility of underfunding their already vulnerable plans. The 30-year bond offered more volatility and higher yields making the note a darling among Wall Street firms. Without it, many pension fund managers were forced into short term bonds at a time when there was no good place to invest. That in turn added to the increased actuarial shortfalls.

Innumeracy crept into Wall Street circles last week and they collectively shuddered on the rumor that hedge funds were in trouble. That rumor sent the markets in search of some sort of guidance, someone to say it wasn't so. Looking to cover their short positions as disgruntled investors pulled their assets from the funds citing poor management, it exposed numerical shortcomings in a place where numbers are the lifeblood.

What should the average investor think when the numbers confuse Wall Street? Two things actually come to mind. First, we should all be thankful that the mutual funds industry has been kept out of the short trade. Envious of their loosely managed brethren in the hedge fund business, mutual fund managers have whined that they could do much better for the average investor if they we allowed to employ similar investment strategies.

Those hedge fund managers, many lured from the mutual fund industry by offers of huge compensations, were found shorting GM, now at junk status, which pulled the whole market down as brokerage houses called due their loans as their rich clients bailed. Hedge fund managers worried aloud whether they would be able to cover their positions and we wondered aloud whether high pay showered on these investment gurus still equals savvy.

The second thing is less about the traders who derailed an already weakened market than it is about the why of it. This market is under pressure from too many numbers that suddenly seem as if they rush past in a blur only to be replaced by something contradictory.

Consider for a moment the confidence number published by the University of Michigan. The drop off in how we feel about ourselves showed the surveyors that we were growing seriously melancholy about spending. The plunge in sentiment may have had something to do with the price of oil as April saw runaway speculation dominate the news but I'm not so sure.

Inflation has crept into the marketplace as the excluded numbers on food and fuel in the core CPI - don't want to confuse us anymore than we already are - rose considerably. A trip to the supermarket and the gas pump became a sobering experience.

Even as were judged less confident about the economy, numbers were reported that supported an opposite conclusion. Retailers showed April was flush higher sales numbers and increased inventories. While it is easy to suggest that this is good news for the economy, when goods cost more, spending less for necessities is difficult and that in turn makes us glum.

Corporate America is moving about in the shadows of this environment hoping that no one will notice what they are doing. Or that no one can do the math.

Two things are important to note here as well. The first is the enthusiastic return to corporate stock buyback programs. Companies always buy their stock at the top of the worth range and in doing so achieve a reprieve from paying dividends while getting the company just a little closer to illiquid. Less shares on the market has the effect of raising the price which creates the illusion of growth.

Secondly is the effect of this maneuver on a company's P/E ratio. Earnings are improved on a per share basis and this maintains the veil of profitability a little longer. Also at play is a generally worrisome attitude that inflation is going to be a fact of life in the near future and should that infect the global market, the dollar would rise pushing us closer to a financial crisis.

Are we able to understand how all of this math affects us when it seems to be good and bad and seemingly all at the same time? There is little likelihood that we could comprehend everything we need to even if we choose to. The Bush administration is hoping this lack of bearing is true.

Pushing to make his tax cuts permanent when the reason for them and the benefits they supposedly provided have not only worn off but proved to be less the stimulus they were sold to us as. Reforming Social Security, indexed and/or privatized is proving ill-fated considering the costs. The White House hopes that they can dazzle us with conviction and confuse us with numbers and we are likely to acquiesce.

Wall Street is hoping you don't notice that stocks are still half of what they were worth in the run up to the bubble burst in 2000. Add to that, the continued trough that stocks have languished in since and are likely to for the foreseeable future. This means that something needs to be done to soothe the average investor who is better off just spending the afternoon at the movies rather than searching for good news stocks that aren't trading beyond their range. And if those hedge fund managers would stop adding their brand of incomprehensible mathematics to the mix, we might be able to deduce a sum of our fears.

Corporate America is hoping that simple math is just as elusive to their shareholders. Companies ripe with profits have created those balance sheets with cost cutting measures such as slashing numbers in their labor force while raising their prices to the achieve those outsized gains. The next step is a jettisoning of troublesome pension plans. If shareholders do the math they will realize that these steps are artificial attempts at creating shareholder value without increasing shareholder value through growth.

So as our innumerical existence expands we will be asked to absorb even more arcane statistics designed to enlighten us and hopefully enrich us. But like so many math lessons before, once you miss the point of it, nothing makes sense.

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