I know that everyone does not think like I do, but somehow I am always surprised by how so many people just do not get math.
For thirteen years I drove the same car. It was a great car and I loved it. Nothing lasts forever though, and I finally had to replace the vehicle. I had been thinking about what car I would buy so it did not take long. I called the dealer, they told me about the current deal option and it sounded good, so I went to test drive the car. The car drove beautifully and I told them I would take it. The salesperson came back with the numbers and just as I had feared they held little resemblance to what I had been told over the phone. In a strange way it was reassuring to know that nothing had changed in the car buying process over the last thirteen years. I informed him that this was not what I had been told and he explained that the difference was taxes and fees, which had not been included (in fairness to the auto industry the representative on the phone had indeed said, “plus tax and fees”). So I did the math. The extra amount they were going to charge me was twice the disclosed amount for taxes and fees. My poor salesperson was dumbfounded. It took me almost twenty minutes to explain the math to him. Of course he had to speak to his manager, as they always do. They corrected their “mistake” and I got the deal they had advertised, plus the actual taxes and fees.
My wife was with me, and she went from being embarrassed (it is no longer customary to negotiate with car dealers) to shocked once she understood that I wasn’t really even negotiating, just correcting their bad math. She then was mad. These people are crooks! Well, the nice gentleman who helped me get my first new car in thirteen years was not a crook; he was just bad at math and very trusting of his mysterious manager.
It is not all that surprising that a car salesperson might struggle with math, but when the chairwoman of the Federal Reserve does much the same, it is a little curious. In her testimony to Congress Janet Yellen said that the economic experts at the Fed have been surprised that the housing recovery has slowed. I am sure that part of the surprise may be that rising interest rates make homes more expensive and therefore reduces demand. I say surprise, because the Fed has to maintain institutional surprise about there being a relationship between interest rates and housing, otherwise they would have to take partial blame for the housing bubble and financial crisis, and that will never happen.
However, that is not even the biggest mathematical error. There are half as many people in Generation X as there are Baby Boomers; half the people, but just as many houses. Math. Housing is not coming back to 2005-2006 levels for a generation – not until the Baby Booms kids finally move out of their parents’ houses and have jobs that pay enough to support mortgages of their own. This brings us to another seemingly simple piece of math that eludes so many.
This week Wall Street seemed surprised that Walmart isn’t doing all that well. They are even more shocked that industrial production is not growing faster. After all, unemployment is down to 6.3 percent. Once again, it is math: the rate has dropped primarily because there are fewer people in the workforce today. More people are either retiring or giving up on work than are finding new jobs. If fewer people are working, Walmart will sell less, industrial production will be down and housing is going nowhere fast. It is just math.
We keep repeating the same pattern: the economy is slugging along at 2 to 2.5 percent growth while expectations keep going back and forth from boom to bust. Most recently expectations were for boom and now everyone is disappointed. Before you know it they will be calling for a recession. The reality is we are still stuck in the same old “new normal” – and there are too many factors keeping us there for that to change anytime soon.
That isn’t all bad for investors. Bond rates are fluctuating in a range between 2.5 and 3 percent; equity valuations are still reasonable; and the most attractive places to be, large dividend-paying companies, do not require huge economic growth to be profitable. One can choose whether to see the glass as half-empty or half-full. I have a car payment for the first time in many years, but my kids are no longer embarrassed to be seen in my car. That’s math I can live with.
Chuck Osborne, CFA