Can Government Data Be Trusted? Plus, Yeti and JNJ.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

The Federal Reserve is more inclined to cut rates if the data is poor. And in fact, it was the fact that these revisions in the latest report were so poor that has induced the market to believe now that the Fed may cut in September and that it may may cut again in December. In fact, it's not inconceivable that it cuts 3 times this year.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Terry Wiseman. He's a strategist at Macquarie Group and the author of a recent report titled "How Do You Play the Data Integrity Mess?" He's going to talk to us about the recent firing of the head of the Bureau of Labor Statistics and what it means for investors. We'll also talk a little bit about Johnson Johnson and hear from that company's chief financial officer, Joe Wolk. And I'm going to say just a couple of words about Yeti and what I'm calling peak chug. It's a water bottle thing. Listening in is our audio producer Alexis Moore. Hi, Alexis.

Hey, Jack.

I'm back after a couple of weeks off through the magic of podcasting arts. I know you kept the episodes flowing here, so maybe people didn't know I was away. Um, I want to talk to you about cars. Help me diagnose a problem. I've already fixed it, but I'm driving the car and every time I hit the brakes or I hit the gas pedal, I hear a metal bong. Sounds like a bell noise. It's coming from underneath the driver's seat. I can feel it and I can hear it. What do you think it is?

I think it is a child or even an adult has left something in your car that shouldn't be there.

You're exactly right. You're an automotive genius. It's, it's one of these giant water bottles. That's what happened to me recently, but I knew what it was. You slide the driver's seat all the way forward. It means one of the kids have left or both of the kids have left these empty water bottles underneath the seat in the back. And I say bottles, but of course, If you've seen these things recently, they're giant metal tanks. If we do a weekend of youth sports in the car, what's left in the car, it looks like spent oxygen tanks on the final ascent to Everest back there. It's just massive bottles. I'm a Gen Xer, so all of this is foreign to me. When I was a kid, we had an elaborate hydration system that involved just drinking water before you left the house. And then if you were at school, you could maybe slurp out of the, uh, water fountain. Or if you were outside of a friend's house playing sports, you could just grab the garden hose. How so many of us survived to adulthood without carrying around 32 ounces of filtered, chilled water in double-walled, combat-grade steel, I don't know. But that is standard loadout today for a kid on the move. And sometimes 32 ounces isn't enough. One of my kids asked me for something bigger recently, so I went on Amazon. I found Thermos brand plastic jugs. They were 64 ounces and they were discounted. They were on sale at $20 down from $25. And for my son, that was fine. And for my daughter, it was deeply uncool. So we had to go to Dick's Sports. And if you've been to a Dick's Sports recently, you might have seen that the endless rows of insulated drinkware now dwarf the displays for actual sports equipment. It's basically a hydration store at this point. And it turns out that Yeti recently introduced a 64-ounce Rambler with chug cap.

What is chug cap?

I don't know, but it costs $65, so it must be something special. Now, I wrote something favorable in Barron's about Yeti years ago in 2019. The stock at the time was under $22, and not quite 3 years later, it topped $100. And now it's back to $32. That's after a 10% drop this past Thursday on a poorly received quarterly report. Sales fell and management blamed a, quote, more promotional drinkware environment. Now, Yeti is a company that it'll turn 20 next year. It got its start making these rugged coolers for anglers. That's people who fish and other outdoorsy types. But today, more than half the business is drinkware, and I'm wondering if customers have reached peak chug. One of the biggest boosters for Yeti stock on Wall Street is Jefferies analyst Randall Konik. We've had him on the podcast. He was a big believer in the stock back in 2019 before its run-up. He remains a believer today. He points out that in the recent report, management trimmed its sales guidance for the year but raised its profit guidance, and he views that as a sign that the company is navigating the drinkware spill well. Inventory fell. That's a sign that the sell-through at the stores has been stronger than the wholesale orders. In other words, customer demand is still okay. The company is launching 30 new products this year. It already has a lot. Does tote bags and camp chairs and dog beds and skillets and flasks. I think that's pretty much everything I'd need to go off the grid. Probably a microphone, right, Alexis?

Just yell it to the trees.

Tree casting. Free cash flow for Yeti is healthy and management is buying back stock and the valuation is down to 12 times next year's projected earnings. Does that make the stock a good buy here? I don't know. I get very nervous about saying that about a stock that's on its way down. For now, Wall Street is predicting a return to growth in drinkware next year. I'm not so sure about that. I'm pretty sure that I top-ticked the market in Ramblers with chug caps. I mean, is there someone out there who's going to pay more than I did? I hope not. But if you believe in the Yeti brand, maybe the stock is back to looking affordable. And that is Yeti. How about a few words about Johnson Johnson? I don't, I don't do segues that make sense. I like to keep it awkward. If you haven't thought about Johnson Johnson in a while, I don't think you're alone. I characterize the company as too big to ignore but also too dull to dwell on, at least maybe until recently. If you've held the stock over the past decade, you've made 129%. Sounds good. But it's less than half the return of the S&P 500 index. And earnings for the company have hovered around $10 a share for 5 years now. We don't have time to put on the old-timey music and hear me go through a whole history of the company, and that's a bummer because it's an interesting one. It dates back to shortly after the Civil War. It was founded by 3 brothers: Robert Wood Johnson, James Wood Johnson, and Edward Mead Johnson. I don't know why it's not called Johnson Johnson and another Johnson. There was a big push after the Civil War to introduce more sterile conditions for surgery, and the Johnson Brothers got their start in ready-to-use sterile surgical dressings. The company invented Band-Aids. They had a cotton buyer whose wife kept cutting herself in the kitchen with a kitchen knife, didn't quite need surgical dressings, but she could use something quick and handy, and he invented these adhesive strips with a little bit of gauze on them. Voilà, Band-Aids. But recently, consumer products had been a drag for the company. So 2 years ago, it ripped off the Band-Aid and the Listerine and the Tylenol and the Neutrogena, and it spun off something called Kenvue, and that raised more than $13 billion. So today, J&J just does drugs and medical devices. It recently had a stock market value of $416 billion. That makes it number 20 in size among publicly traded U.S. companies, is number 2 among drugmakers behind Eli Lilly. But as I said, the stock has been a snoozer for a long time. So why did it jump 6% in a day last month after the company reported second quarter financial results? That always catches my eye. I don't really care so much when companies beat earnings expectations. That just means that Wall Street did a poor job forecasting. But when the stock jumps in response, that's a sign that it was genuinely surprising for investors. In this case, it was an upside surprise. Also, why is J&J solidly beating the stock market so far this year? It's returned over 20%. It's not because healthcare overall is doing well. Healthcare is slumping. The iShares US Healthcare ETF was recently down about 6% for the year. So Johnson Johnson to me is starting to look I'll call it borderline pre-interesting, and it's pretty cheap at about 15 times earnings, and it's got a dividend yield of over 3%. That's full-on interesting. Johnson Johnson is coming off a big patent cliff for one of its drugs, but it's also in what CFO Joe Wolk calls a pivotal time in the company's history.

He says it's entering a new cycle of growth. One of the things that you typically notice with a pharmaceutical company and we're pharmaceutical and medtech, which I think positions us very uniquely. If there's a big loss of exclusivity on a product that's about to occur, investors tend not to jump on that train. And we had a product known as STELARA, which treats psoriasis as well as inflammatory bowel disease. It totaled about $11 billion last year, and we were facing loss of exclusivity here in the US in the beginning of 2025. I think investors were skeptical. Can this pipeline that you've talked about that's going to treat bladder cancer, lung cancer, continue to have solutions for psoriasis and inflammatory bowel disease. Can they deliver? And what we're seeing year to date is not only is it delivering what we said, it's delivering beyond what we said.

To Joe's point, the company last quarter posted its first $15 billion revenue quarter for its pharmaceutical unit, and that's despite losing $1.2 billion year over year in STELARA sales. The rest of the portfolio grew 15%. There were actually 13 other drugs that grew sales by double-digit percentages. The company's ambition is to be the top player in cancer by 2030, with sales of more than $50 billion there. It's also focused on central nervous system conditions like schizophrenia and depression tied to bipolar disorder. Earlier this year, it agreed to pay $14 billion for a rising drugmaker there called Intracellular Therapies. The company has done other deals that have added heft in cardiac devices. Management views that as an area of unmet need and fast future growth. So drugs are growing, devices are growing. Bulls on the stock are still in the minority on Wall Street, but one of them, Jason Bedford at Raymond James, predicts that this past quarter was the low point for the company on organic sales growth. He expects growth rates to pick up from here, and that's reflected in consensus forecasts on Wall Street. Remember I said the company was stuck at around $10 a share in earnings, but the consensus has that pushing over $15 by 2030. Those estimates have recently been pushing higher. Johnson Johnson has exposure to litigation around talcum powder and ovarian cancer. Joe blames that on class action advertising and the tort system.

The talcum powder situation, I think, is really a byproduct of the tort system we have in place here today. We do a lot of things great in the United States. Tort law is not one of our best and finest moments. We like our hand going forward. We're going to continue to operate our business. It has not prevented us from investing in R&D at disproportionate levels relative to our peer set. It's not stopped us from increasing our dividend for 63 years.

It's not stopped us from M&A. It's always difficult to figure out how exposure to something like this should factor into a stock's price, but JPMorgan, which rates J&J stock at neutral, calls the talc exposure, quote, highly manageable. It also writes that it will likely continue to be overly reflected in its stock valuation until there's more clarity. And that is J&J. We covered a lot of ground so far. Cardiac devices, drinkware, Alexa's fixed my car. It's time for a quick break. And when we come back, we'll hear from Terry Wiseman at Macquarie Group about the Bureau of Labor Statistics and jobs numbers and inflation data and data integrity. Hold on, let me say that with more gravitas.

Data integrity. We'll be right back. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data.

So you have the right ingredients to help you shine. Morningstar, where data speaks. Welcome back, Alexis. How are we going to do this? I want to talk about the BLS firing. I don't want to talk about politics, but it's hard to talk about one without the other, and I'm starting to break out an itchy rash just thinking about it.

I think you need to take your Zyrtec, and we're going to play this conversation that has already happened, which I think is very interesting.

Yeah. Maybe try some deep breathing as well. Some deep belly breathing. That sounds reasonable. Here's the thing. So there's this group that's part of the Labor Department. It's called the Bureau of Labor Statistics, and that's where our job numbers come from, and that's where our inflation data comes from. And I did some real sniffing around the BLS years ago because back when the inflation numbers were very low, there used to be people who said the numbers are rigged. They couldn't possibly be that low. Inflation's out of control and they're just not telling us. There was even a fellow who published a regular newsletter where he would give an alternate set of government data. He'd say, no, inflation is not what the government's telling you. It's actually up here. And I talked to a lot of statisticians at the BLS and the head of the department at that time. And my takeaway was that these are just career math nerds who are doing their best to measure the economy. There are a lot of choices you have to make about how to measure something like prices broadly for an entire economy. The BLS puts out not one set of price data, but many. You can choose which one you want to follow. It explains all of its math choices clearly. And I was convinced back then that the numbers coming out of the Bureau were not politically motivated. I asked at the time about political interference, and the BLS head told me back then that there had been some lawmakers who had tried, but the Bureau was able to resist and The numbers were the numbers. I found that case convincing back then. Now, recently we had a weak jobs report and a huge downward revision in jobs numbers for past months, and the president posted on social media that the numbers were rigged and that it was politically motivated, and he fired the head of the BLS. And I personally haven't seen any credible evidence since then that the numbers are rigged or politically motivated. I have heard and read plenty of arguments that If the revisions were that big, that means the estimates were that wrong and whoever was in charge should have been fired. There is a problem with falling response rates in surveys that the BLS depends upon, but there have also been studies that have shown that on the whole, the BLS isn't becoming less accurate in its estimates. There were big downward revisions in this latest report, but that's not representative of what's been happening in recent years. And of course, there have been sweeping government layoffs. Staff at the BLS is down. The Bureau is having to do more with less. So that's where things stand. If you're a beginning investor and you're wondering, why are we talking about this BLS? I want to hear about my stocks and bonds. There's definitely a connection. We have a central bank that sets core interest rates. The two key inputs that it uses to decide where interest rates should be are employment and inflation. The level of interest rates it sets has a big influence on the bond market and bond prices. And bond prices in turn have a big influence on stock prices. So if you're someone who doesn't accept at face value that the BLS had become rigged and politically motivated, if you think instead that the firing of the BLS head might be politically motivated, then you might be wondering about who's going to run the BLS next and how they're going to manage the production of data, and most importantly, whether investors will view that data as reliable. That could have a big impact on the value of your investments. And I'm going to leave it there because the Zyrtec is working, but I'm starting to itch a little bit. So, let me bail out there and bring in Terry Wiseman from Macquarie Group. He'll tell us about what could go wrong and what investors should make of it. We definitely don't want to be alarmist here. We just want to understand the stakes. Financial markets seem to be taking this in stride. That's a good sign. Let's get to some of that conversation now. So here's what I guess investors are wondering, and, and I think it was one of the things that you addressed, so you can help us out with this. The president certainly said that it was politics, right? He said the, the numbers are rigged. I haven't seen evidence of that. Members of his administration came out and defended his view, but where does that take us from here? I'm trying to think forward. The BLS, this is not only where we get our labor statistics from, this is also where we get our inflation statistics from. Statistics from. It's very important for investors, for the bond market, and in turn for the stock market, for everything. And so I'm imagining a world where we have a new head of the BLS. Like, let's say we, we get good news down the road on either one of these numbers. Investors might be saying, is it really good news? Or let's say we get bad news, then they're going to say, well, it must really be bad news.

But that's also bad, right? And I think, I think what you're responding to here, what you're, you're sensitized to, Jack, is the inherent and internal contradictions of this process, right? Let me give you one contradiction. President Trump would like the Federal Reserve to cut rates, and the Federal Reserve is more inclined to cut rates if the data is poor. And in fact, it was the fact that these revisions in the latest report were so poor that has induced the market to believe now that the Fed may cut in September and that it may cut again in December. In fact, it's not inconceivable that it cuts 3 times this year. And you would think that would be exactly what the president would want. But he only got there by virtue of poor data that came out from revisions that in principle he's unhappy with because they make him look bad maybe, or they make the economy look bad. So you, you can't always have it both ways. But I wanna stress here that what is different about the episode emanating from Friday is not the fact that the president has bemoaned the process of data collection or the results or the revisions themselves being large. Because President Trump has been complaining about the data for about more than a decade now. If you go back to some of the public statements that he was making before he was even contemplating running for office, you'll find that he did not like the data, believed that the government agencies were already politicized. So he was complaining about this in 2012. He was complaining again about it in 2016. When he was running, and he was of course complaining again about it in 2024 coming into the election as well. So this is not new. What is new is that he's now in a position of power to do something about it. Obviously firing the head of the BLS is a way of acting upon his impulses, or at least his inherent view that there is something wrong with these agencies and that, you know, just changing the person who's running the show is a way of fixing this. If you take this all at face value, what he wants is accuracy. Do we really believe that? Um, probably not. What I think he wants, which is more consistent with his appointments, generally speaking, during this administration, is someone who is loyal. And it's not clear what loyalty means yet, but at least let's agree that what he wants is someone who's loyal. And I mean politically loyal here. And so it doesn't necessarily mean that that person is going to understate the CPI indefinitely or overstate employment indefinitely. It could be the reverse depending on what the White House might want to illustrate or show at that point.

But I think what we will get is someone who is loyal in that regard. I could think of two things that could go very wrong, and I don't know that either will, but two possibilities. One is that we get someone who does inject politics into the numbers of the reports. I don't even know how you would do that. This is a big organization, so I'm, I'm, I don't even know how that's possible, but let's just put that out there. But also you get someone who does a genuine job of reporting the numbers, but the public doesn't believe this person because of the way they, they came into the position. So I, I don't know if either of those would happen, but those sound worrisome to me for, for investors.

Well, they are both conceivable. And let me tell you, you know, you, you highlight a good point. You say, how is this possible in a bureaucracy made up of statisticians and people who are data-oriented, how is it possible that the data could be fudged with? I, and I understand that's a, that's a fantastic point, right? Just because you run this agency doesn't mean you're gonna get involved at a level of detail that will allow you to tweak, let's say, a data point. Because to do that, you have to tweak the underlying sample that that data point is derived from. And that seems inconceivable for someone who's at the top and not dealing with that data on a daily basis. Let me offer a possibility here. I don't know if you recall, but several months ago, Commerce Secretary Howard Lutnick had said that we should redefine GDP, think about it differently. When we report growth, we want to omit certain things that we don't think should be in GDP. And I think he, he was making a reference to the government sector at the time because he felt that what should be reflected in GDP is what the private sector does and what private individuals do. So here's a way where you can have the head of an agency redefine an indicator in a way that's favorable to whatever goal they're trying to achieve politically. So you're not changing the data, you're not screwing with the report, you're not fudging the number, but you're changing the definition of something so that under the new definition, the data that you do collect when you collate it and put it together looks better. And by the way, This is what was done in Argentina in 2007.

They changed the way they defined inflation in a way that resulted in less inflation. Let me point out the obvious, which is that policymakers don't get to tell the bond market how to respond, right? They can change the, the headlines. Maybe they can even change the numbers and the way the numbers are reported, but they don't get to tell investors whether to like it or trust it or not. Which leads me to, I guess, the big question here, which is, is there anything that investors should be doing different because of this? When you look at this and, you know, you're someone who focuses a lot on rates and what investors should do with their money, is there anything that we should do to sort of safeguard ourselves from potential coming changes here?

Well, yes, absolutely. I mean, those changes have not come yet. This is all within the realm of speculation, obviously. And I mean that in the, in the colloquial meaning of the term speculating, because we're speculating about what the changes might be at these agencies. But it's important to keep in mind, and I think this is what you were alluding to before, that the BLS— and by the way, it is a very important government statistical agency, not just because it collects and produces the, the employment report, but also because it, it is involved with the CPI and the PPI.

The CPI, as most people know, stands for Consumer Price Index.

The inflation numbers, in other words. The inflation numbers. Now, just by way of caution here, the Federal Reserve does not target the CPI when it talks about targeting inflation. It targets another concept of the price level called the Personal Consumption Expenditure Price Index, or the PCEPI, which is typically reported in the month later than the CPI. So it comes out less and it tends to have a little less impact on the markets, even though it's what the Fed references in its inflationary, but only because it comes out later. And because the CPI comes out first, it has the most impact. And there are some components of the CPI that are used to construct the PCEPI, but not all of the CPI is used to construct the PCEPI. In other words, the PCEPI may have different weights on different items within the basket, and it may call its data, may collect its data from other sources than the CPI does. But some pieces of the CPI do go into the PCEPI. Now what's important about the CPI is that if you think that it will be manipulated, or if you think that it will be redefined, it's almost certainly going to be redefined in a way that makes it lower, not higher. In Argentina, it was in a downward direction, right? And then every other country that has been accused of fudging their inflation numbers, they have fudged it in a downward direction. We're going into further and further realms of speculation here, but let's say that we did underreport CPI, and because of that, it had maybe a marginal effect on PCEPI, which the Fed references, or the Fed simply, you know, even though it doesn't target CPI, it looks at it and uses it in part in its decision-making. Well, then you can see how it would start to cause some problems here for policymakers. It would also cause problems for any assets, if you will, whose compensation structure or whose cash flow structure is linked to the CPI, including, by the way, the wage negotiation process in the US tends to reference the CPI. And of course, we also have inflation-protected securities that the government issues that also reference the CPI, not the PCEPI.

Just to touch on that point, and, and hopefully we're both getting way ahead of ourselves here. That's, I know part of your job as a strategist is to think about what possibly could happen. But you mentioned TIPS. These are the treasuries that investors buy when they want something that is indexed to inflation. So if you thought that there was something that was gonna happen where inflation would run hotter than everyone was saying, then maybe you think, well, let me buy TIPS and then I'm protected. But the TIPS are adjusted according to the numbers that come outta the BLS.

So maybe you're not protected. That's right. You're effectively shortchanged because the reason you buy it is to protect yourself from inflation. Right? You want to make sure you're holding an asset that tracks the index of prices that you pay for your goods. And of course not, you can't personalize a bond to do that. Everyone buys a different basket of goods, but you can approximate what people buy with the CPI's basket. And of course then you can approximate level of prices that they're obligated to pay when they buy that basket. Now, of course, if the government or any government, and I don't mean to single out the US here, is redefining the basket of goods and services you buy to ensure that it comes out lower and distorts it in such a way that it's not representative, let's say, of what people are buying, then you will get shortchanged because you will hold a bond whose principal value goes up, but not by as much necessarily as the things that you are buying. And you will not effectively keep up, if you will, with inflation. That is a risk. And I would venture that if people start thinking this way about these changes, well then they're not going to want to hold these TIPS. They certainly don't want to hold, you know, the ones that mature during the period in which you believe that the fiscal agencies may corrupt the CPI calculation. But again, we're in the realm of speculation here.

We're not yet at a point where we can say that the process will be affected. So it's not time to make any wholesale changes to our asset allocations. It's just, something to keep an eye on. But as you say, it doesn't have to come to the actual changes. It just has to come to investors anticipating those changes for markets to respond.

That's right. And I think we've moved in that direction already with this firing of the BLS head, right? First you complain, then you fire the people in charge, then you apply pressure to the new people and present them with proposals that will change the way that things are done. I mean, it's a step-by-step process. I can tell you that in Argentina, which is the most notorious example of this, They fired the head of the statistical agency that calculated inflation back in 2007, I think it was. But then when the staff that was still there complained, they fired the whole staff as well. And then effectively they were able to resolve the issue that you were referring to before, which is how does a change in the head of the agency change things if you have this whole bureaucracy underneath them? Well, they got rid of the whole bureaucracy, so it's not conceivable. I think we got to that point, of course, We would look increasingly like an emerging market here in the US, and you'd be at the point where we would have other things to worry about, let's say, besides just the value of TIPS. We'd have to worry about the status of the US dollar as a reserve currency. We'd have to worry about the general inclination or disposition of foreign investors to continue to invest in the US when government agencies can be corrupted in this fashion. There's a lot more steps to take place here to the ultimate collapse. Of course, but you know, we've taken the first baby steps towards that.

Here's hoping we don't get to those latter stages. You've given us a lot to think about here, Terry. Is there anything on this subject that I've neglected to ask you that you want to add, or you think we have it covered in terms of the basics that investors need to know?

Well, let's just keep in mind that, you know, if we're talking about the CPI being corrupted eventually, right, it's not just Treasury Inflation Protected Securities or TIPS that matter. There are a lot of other contracts in the economy that reference the CPI, including some wage contracts, some rent contracts, but especially, and I think this is where investors might be more inclined to take a pause, is we have infrastructure assets whose compensation structures reference the CPI inflation. So if a toll road operator, for example, may get a dispensation from the government to increase the tolls by the rate of inflation. A utility that has its tariffs or service rates regulated, those rates may be linked back to CPI. So of course, just as a TIPS investor might get shortchanged, any investor in any of these assets that reference the CPI might get shortchanged. How about your raise for Social Security? Well, yes, cost of living adjustments also reference the CPI. You're right. It just highlights how important the CPI is in determining, uh, the distribution of income between payers and receivers in this country. In the case of Social Security, obviously it's the government that pays, or the taxpayer that pays the non-taxpayer, the retired person, a Social Security check. So implicitly, by shortchanging the Social Security recipient or beneficiary, you are enriching the taxpayer or the government, depending on how you look at it.

Thank you, Terry. I also want to thank Joe from J&J, and I'd like to thank the third Johnson brother. I'm not sure which one, whichever one is not in the Johnson Johnson name. If you ask me, you haven't gotten your due. And thank all of you for listening. If you have a question you'd like played and answered on the podcast, you can send it in. Might be in a future episode. You can use the voice memo app on your phone, send it to jack.hough@barons.com. Alexis Moore is our producer. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, write us a review.

See you next week. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine.

Morningstar, where data speaks.