So where are we now in the 19th month of the recession/depression? Perhaps not where we expected we’d be. The Dow finished its best gain for July since 1989. The index was up 8.6%. The S&P 500 also had a good month. It finished up 7.4%. 

Boosting stocks, of course, was “better-than-expected” news about US GDP. This was typical second derivative stuff: the pace of decline slowed, but the figures were still heading in the wrong direction. According to the Commerce Department, US GDP shrank “only” 1% year-on-year in the second quarter, 0.5% less than forecast. And this was taken as reason for optimism!

The problem is the Commerce Department also revised down its reading of first quarter GDP to 6.4% from 5.5%. It will revise down the last quarter’s numbers, too. As underground economic number cruncher John Williams of ShadowStats.com points out:

The second-quarter GDP “improvement” was only in terms of relative quarter-to-quarter growth (1.0% contraction versus a 6.4% contraction in the first quarter), and was needed badly for political and financial-market hype. Keep in mind that this “advance” estimate is roughly 90% guesstimate (only two of three months of trade data are available, for example), and it is the most heavily politicized of the major economic series.

The feds are clearly playing the optimism game. Expecting the truth from these guys is like expecting a Michael Jackson comeback tour – it ain’t gonna happen.

This is not a good time to be asleep at the wheel as an investor. And by asleep at the wheel we mean sucking up the manufactured optimism and hype of Washington, Wall Street and the mainstream financial press.

The only real way to protect yourself as an investor is to educate yourself. There is literally no substitute for this. Challenging as it may seem to some readers, that means getting down and dirty with the shadowy world of economic data.

Some of you will immediately want to switch off at this point. Don’t. What follows is critical to your financial future, because it allows you to differentiate between good, murky, and unreliable economic data. (Hat tip, Chris Martenson of ChrisMartenson.com)

Into the good bucket I put all sources of data fitting the following important criteria: The data itself is not statistically massaged before release, it is not ’sampled’ but rather tallied up in its entirety, and it squares up nicely with other good sources of data.

Good Data

• Sales tax data
• Income tax data
• Truck tonnage moved
• Port shipping container traffic
• Air transport
• UPS, FedEx, and other major shippers’ volume
• Corporate Revenues (just added to list )

Into a bucket of lesser importance goes the murky data. This data is based on sampling, usually conducted by self-interested parties (National Association of Realtors data for example), or is seasonally or statistically adjusted, and/or does not square up with other, better data.

Murky Data

• NAR home sales data
• Continuing claims
• Retail sales data
• Trade deficit reports
• Corporate Income (just added to list )

Into the final bucket goes the utterly unreliable ‘data’, so bad that I need to use quotes around it. This ‘data’ is modelled or otherwise manufactured out of thin air with no accountability, does not square up (at all) with good sources of data, has massive errors in methodology that have never been explained … is self-referential (e.g. LEI or ‘leading indicator’ data), and/or has been proven repeatedly in the past to be consistently biased for political or self-serving gain.

Unreliable Data

• New home sales data
• Employment data (due to the Birth-Death model)
• All survey data
• Leading indicator data
• GDP (just added to list )

To be clear, we’re highly sceptical here at Notes of the rally on Wall Street. In our opinion, it stinks. That’s why we recently sold all our long positions in US stocks.

The reasons for our suspicions are pretty easy to follow. Sooner or later investors are going to wake up to the fact that the economy and corporate profits are in the ditch.  And there’s only so much optimism you can squeeze out of “better than expected” but still thoroughly crappy results.

As we said here at Notes last week, earnings forecasts are routinely “low balled.” The reality, no matter which way you look at it, is that corporate profits are down 31% from their already recession-ravished levels of a year ago.

Does this mean we may miss out on the beginning of a genuine bull run? Absolutely. But we’d rather miss out on the first 20% of a bull run than get suckered by a collapsing bear market rally.

Let’s be clear about this. We don’t expect a genuine reversal of this secular bear until the unemployment picture improves. No jobs = no spending = no profits. The government can ‘stimulate’ all it wants. But it can’t force people to spend money they don’t have.

As our favorite analyst, David Rosenberg, pointed out on Friday, and as we warned Notes readers last week, the US stock market is now following a near identical pattern to the 1929/1930 bear market rally. The correlation between the two chart patterns is a staggering 80%.

The 1929/1930 rally lasted just over 100 days from the 1929 trough before taking a dive. We are now at the same distance from the March 9, 2009 low of 666 on the S&P 500. If history repeats itself, we are in for another stomach churning leg down.

Investors shouldn’t be surprised that equities rally in a secular (long term) bear market; they often do. As Rosenberg puts it, “The problem with secular bear markets is that they are quite often punctuated by sharp upward spasms that can last months or even quarters.”