Tuesday, May 13, 2008

News of the Day - Inflation

Scouring the globe for news that does not matter to the high and mighty financiers of the world because Uncle Ben is on their side...

....what matters to the bottom 80% aka the proletariat is not of concern. But it's still interesting to read about their tales of woe.... err... I mean their impending rebound during the 2nd half 2008 recovery. And one day stocks may care... but until then may I introduce our official blog mascot and also our future covergirl? (boy?) of the mutual fund prospectus. (you think I'm kidding) ---->

In this round of stories we'll focus on inflation - something every country in the world has but not us. As I keep repeating inflation cannot cross the Atlantic or Pacific Ocean nor the Canadian or Mexican border - therefore it is a problem every other country must deal with but not us. We are so lucky that way. But if inflation were real and not just something bloggers like me make up in our over active imagination what would it look like...

Let's begin with shoes... yes shoes. Not that there is any inflation in the world, but if there was - it appears to have trickled down to even shoes, per the Wall Street Journal. As I have been stating since last fall, we are moving from a global deflation environment to a global inflation environment - and those cheap Chinese goods are going to be incrementally increasing in cost. Until the global multinationals decide China is too expensive and its time to exploit Vietnamese labor.... err, I mean create a new middle class in Vietnam.
  • The hottest trend in footwear this season? Inflation. (oooh, my favorite style!) After a decade of declining prices, footwear makers at all levels are raising prices.
  • Brown Shoe Co., which makes Via Spiga and Buster Brown footwear and hasn't altered prices in years, plans an increase of 5% to 12% for fall. And the Nine West shoe label plans to boost prices on some styles by 15% next year.
  • The moves reflect higher costs in China, which makes about 85% of shoes sold in the U.S., as well as higher fuel costs and the weak U.S. dollar. And they could presage price increases of other goods soon: Handbags, belts and other leather accessories are made in the same region in China.
  • For retailers already struggling with a downturn in consumer spending, the higher costs couldn't come at a worse time. They fear the price increases will further damp shopping, forcing them to eventually slash prices to move merchandise and hurting their profit margins in the process. (but don't worry, buy retail stocks - they have been rocking and rolling lately because of the "early cycle recovery" story - that is, the US consumer is going to be rocking and rolling by this fall - don't you worry about facts; the hedge funds say buy retailers so you should buy retailers.)
  • ..estimates that shoe makers will raise prices by an average of 10% to 15% in the next year, which would be the largest single-year increase in more than 50 years, according to the BLS. (once we move to "barefoot in the office" day, then we can say there is no inflation in shoes...)
Now the government has this thing I love to talk about called the substitution effect; put simply when the cost of steaks gets too high they assume you move down to hamburger - so they substitute steaks for hamburger in their measure (seriously) and hence inflation disappears. So in the government's eyes we are going to be a world of bicycle riding, barefoot, and beltless (or using string to keep pants us) people. Because otherwise, inflation would go up. You think I am exaggerating right? Well the most respected man on the globe in terms of bonds is named Bill Gross - he works for a small firm called PIMCO. I'd like to directly quote him from this story about the farce that are government numbers that more and more people are waking up to each week. He calls the numbers a "con job".
  • Americans are feeling a lot more economic pain than the government's official statistics would lead you to believe, according to a growing number of experts. They argue that figures on unemployment and inflation are being understated by the government. (I literally have typed this on a monthly basis as each report comes out; thank you - I now feel less alone)
  • Over the past ten years, there have been other changes in the calculations, particularly for big ticket items. Cuts to estimated prices for items like electronics and cars that are thought to have improvements in quality year-after-year have lowered the overall CPI. In addition, changes in the way certain products, such as food, are tracked by the government, have also contributed to lower readings than otherwise expected.
  • Bill Gross, the manager of Pimco Total Return, the nation's largest bond fund, refers to the CPI as a "con job" that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low.
  • Another flaw with the CPI numbers is that the government now assumes that higher prices for one item will lead consumers to buy more of a substitution item. That may be true. But if people buy fewer steaks and more hamburgers, for example, it's unrealistic to say that inflation isn't a problem, skeptics maintain.
  • "The government can claim there's no inflation but all they're measuring is a reduced standard of living," argues Peter Schiff, president of Euro Pacific Capital (Booyah!)
  • With all this in mind, California economist John Williams argues that CPI is understating inflation by at least 3 percentage points and perhaps as much as 7 percentage points. So instead of an annual inflation rate of 4%, the true number could be between 7% and 11%. (higher - college tuition, food, oil, gas, medical costs - all the things we need in life? higher)
  • Even the government's own numbers show there are many unemployed people not showing up in the unemployment rate. The official reading does not include 4.8 million people who want to work but haven't found a job, for example. Many of these people are dropped from the official calculation because they have become so discouraged from looking without success that they haven't looked in the previous four weeks. Simply adding those people to the number of unemployed takes the current unemployment rate to 7.8%.
  • Still, the Labor Department's own broadest measure of unemployment, which includes as jobless those working part-time jobs because they can't find full-time positions as well as some discouraged job seekers, puts the unemployment rate at 9.2% in April. [Apr 2: The Underemployment Rate is Rising]
That's the second such mainstream report in just the past few days commenting on the joke that is government statistics [May 10: Finally Some Mainstream Reporters are Figuring Out the "Spin" From Government] Excuse me while I dab a tear (of joy) from my cheek. However, don't worry, in about 12 hours we can listen intently to the great work CNBC tells us Uncle Ben is doing to fight inflation when our "official" number comes in at 4%-4.1% - heck maybe they can get it down to 3.8% if we are very good boys and girls, and the pencil came with an extra big eraser this month.

Speaking of which, remember our government leaders and in fact, most trusted bankers, still live in a 1950s world where everything revolves around the United States of Subprime. So when our economic activity slows (which it has since late 2006), inflation must ebb because we are the end all and be all. That's worked out GREAT so far (err, not so much). But since it has not worked so far, that's ok - when things don't work, let's continue down the same path. It will work sooner or later - during each cut by the Federal Reserve we've been assured that inflation will come down in the "2nd half of 2008"... they still cling to thing like a soft blankie.
  • Seeking to ease fears that rising oil and food prices will spark an inflation brushfire, San Francisco Fed President Janet Yellen argued Tuesday that prices have probably peaked and should be headed lower in coming months
  • The key to her forecast of moderate inflation was the tame behavior of wages, Yellen said. Unit labor costs only rose a tepid 0.25% in the first quarter, she noted.
  • In her remarks, Yellen said she believes the economy should improve a bit after June as the impact of the Fed's aggressive rate cuts begin to be felt. "I expect the economy's performance will improve somewhat in the second half of the year." (oh my favorite time of year... "6 months from now" - the nirvana time)
  • Yellen said that, adjusted for inflation, interest rates are now around zero. (no, adjusted for inflation we are PAYING people to take money, real rates are NEGATIVE - now thats inflationary! Here, we will pay you to take our paper peso)
Now here is the punchline for said "unit labor costs" (read: workers) - unlike the 70s when labor was able to ask for increases during a huge uptick in inflation because (a) we lived in a less global world where you were not competing on wages with people 4000 miles away and (b) government reports actually showed inflation to be happening - it's a new world now. Cramerica! You can't ask for wage increases to offset inflation. That's GREAT! (for corporations). For those of you who actually work for a living? Not so great - that means you have to actually pay for things that have exploded in price with your measly 3-3.5% wage increase. But this helps to keep "inflation contained" and central bankers giddy as they cut cut cut, and create liquidity to stuff into the system. It's all good! Except for those who consume.

And to think most companies have been absorbing input costs so far - just wait until they actually begin passing the lion's share onto you. Then you can go to your boss and ask for a 6-9% wage to help you cope - and your boss can say (with hand raised to your face)... talk to the Yellen. (while smirking) So that's whats coming. Right now you are only seeing the leading edge of inflation. No wait, you are not seeing it because there is little inflation. But if there was inflation... you'd be seeing the leading edge. Or something. Whatever - just repeat to yourself - there is no inflation. And buy stocks.

Long the total lack of inflation in the US economy; priceless!

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