The core inflation rate, however, which excludes volatile food and energy prices, only rose 0.2%, easing fears that rising commodity prices would feed into more widespread inflation

But can the government’s inflation data be trusted? John Brown in The Daily Reckoning doesn’t think so…

Perhaps, the greatest area of concern about statistical manipulation is the measurement of inflation, or Consumer Price Index (CPI). By manipulating this single statistic the government can miraculously transform rising prices into economic growth.

The Department of Labor has set so-called “core” inflation, excluding food and energy, at 2.2%. Even “headline” inflation, including food and energy, is published officially at only some 4%. The problem is that these figures bear very little relation to the reality of price increases experienced on Main Street, which some estimate to be in excess of 10%.

Statisticians assign different weights to the elements comprising the CPI that are often not reflective of the spending habits of ordinary citizens. For example, housing maintenance (including heating oil), a major expenditure, is given only a small part in the Index’s makeup. In addition, the re-pricing of items such as automobiles to allow for added “hedonistic” features such as enhanced “value for money” is wide open to varying judgments. How these statistical decisions are made is really anyone’s guess. But it is absurd to assume that the government’s overwhelming interest in reporting low inflation does not influence the final numbers.

The financial consequences for investors can be severe. For example, the Dow Jones Industrial Average Index, against which many investment returns are measured, closed at a nominal high of 14,093 on Oct. 12, 2007. The media reported it as a sign of good things to come. On May 23, 2008, the Dow closed at 12,480 – off a bit, but apparently not too bad. But if that day’s close is adjusted for the official CPI, then it’s not worth 12,480, but only 9,856 when compared with its previous market cycle high, of 11,723, in the year 2000.

Worse still, if adjusted for the more likely but still conservative inflation rate of 8%, the recent close of 12,480 becomes the equivalent of only 6,742 in the year 2000. What looks like a nominal gain of some 757 points or 6.4% is, in fact, a real loss of 4,981 points or some 42% over those eight years!

Villains are created, emotions are stirred, and then the simple solution is offered. And the people think, “What idiots we were not to think of this idea before. Yes, surely if we kill all the Jews or Christians or Muslims or Buddhists or Hindus or the Red Indians or yellow-skinned or white-skinned or brown-skinned or black-skinned people the world will be a better place. Such a simple solution.”

Politicians and rulers appeal to the emotion of hatred. Societies that breed on these motions end up soul-less and eventually die. Historians are left to uncover and catalogue the mass graves and scarred hearts. A man in love does not appeal to the emotion of hatred. In fact, quite the opposite. The beautiful young lady casts a halo of possibilities to the impossible.

His income may be small, her spending habits may be large, but – when you are in love – it does not matter. Eating at expensive restaurants every day and shopping in the well-lit malls may not be affordable, but the person in love ignores it. This is only the courtship period, he consoles himself. Visiting her family and seeing her immersed in a life of luxury does not deter him. His love – their love – will see them through.

She will change, he thinks and we will move to a more modest lifestyle. He must have some hidden wealth to keep us going, she thinks, as she clings on to her lifestyle. Meanwhile, they cling to each other. And they cling to hope. When the lights are on, they are in love. When the lights are switched off, they swim in emotions of hope and optimism for the future.

But one day, the lover boy wakes up. He has bills to pay. Conquering his weakness for his love, he begins to suggest that they eat out less often, at more modest places. How about some home cooked meals? Very soon, love evaporates. Other emotions set in. The bills are still to be paid.

And the peasants wake up. They have no one left to kill. They have knocked out all the people they were told were their enemies. But they are still poor. The rulers are still rich. They begin to think of who the real enemies are. They think rationally. And a new emotion sets in.

So there is nothing surprising when investors use their emotions to make money. After all, we use our emotions to vote, to fall in love and find our life partners. So why not use our emotions to make money. Emotions are the reasons we have failures. “Life”, said the divine Buddha “is suffering.” It is these emotions and expectations that we have which cause that suffering.

But who cares what the late Buddha has to say. We all need our quick fix. We all have our dreams. If someone walks in and sells you a dream, you will grab it. You will buy it. You will then preach it for him. Your greed will take you in that direction. Buddha or no Buddha, you have chosen the path.

Markets, they say, are ruled by fear and greed. And they are. Everyone wants to make money. A lot of it. And not work for it. So when the TV news channel tells you to tune in for the “expert’s best buy or strong recommendation”, everyone stands around waiting. With great expectations. Emotions are charged. Greed rules. Salvation is soon to be upon us.

And the expert gives his view. They give you a name of a hot stock. And it rises. Money has been made. The expert becomes a guru. More followers flock to him for counsel. His calls get more outrageous. More bold.

In a “bull” market – which, by definition means that everything you buy is going up – all the calls of the great guru will always rise in value and give profits to his followers. The guru becomes a mega guru – the TV channels beg for his presence. And then the tide turns. For reasons out of the guru’s control, the markets turn sour. There are more sellers than buyers. More people have fear, they wish to sell. The number of people who are greedy declines, there are fewer buyers.

When there are more sellers of anything and less buyers, the price of that product will always decline. The same logic of demand and supply applies to the price of a share.

The followers lose money. Sometimes they lose all their money. The mega guru’s views are no longer hailed by anyone. But the TV channels have to keep their 24×7 electronic bombarding of our brains. They analyse the history of the guru. What did he say, what made him right, what did he get wrong? The analysis is meaningless. It merely helps the TV channel fill in another 30 minutes of garbage to numb your senses. Meanwhile, they look for another guru to present to their viewers. Surely there must be some guru who can make money for all of us when markets are going down?

The internet makes everyone vulnerable to deceptively easy ways to make money. And the invitations to get rich pour in via email. Of the 500 million people with internet email ids, you have the honour of being discovered as a “badly needed friend”. Someone in Africa – who was the wife of some deceased leading politician – writes to you. “I know you will help me”, she writes,” recover the money that my late husband left for me in a bank account in Switzerland. Please send me your bank account details”, she urges you.
“I can use your bank account to get the money out of there and then share those millions with you”, she writes with honest simplicity. “By the way”, she asks innocently, “can you also send me your credit card details?”

The email promises you the impossible. It appeals to your emotion of greed. Just like the guru’s hot tips appeal to your desire to make millions and do no work for it. There is a sucker born every minute, said the legendary circus master, P T Barnum. The gurus know that. The brokers know that. The 24×7 TV channels know that. That is why the TV channels have to always chatter and promise you something. They have to appeal to the greed in you.

Emotions are more powerful than rational thinking. Emotions are more powerful than a calculated risk. For every fool who accidentally made it rich by being a sucker, there will be hundreds with tales of woe – those who lost all they had. For every fool who accidentally made it rich by being a sucker, there will be many more people who followed a simple disciplined approach to investing. That is why you will never find a disciplined investor who is poor. The disciplined investors leave their emotions out of investing. The disciplined investors know that making money is hard work.

Keeping emotions out of investments is hard work. But who wants to work hard these days? There is so much money to be made every where. So much easy money. Look at the geniuses on Wall Street. They lost billions for the banks and finance companies they work for but they got their rewards and their personal profits.

Maybe people are waking up from these illusions. They are poorer, we suspect. And hopefully wiser.