Once again, as long as you keep telling the sheep everything is fine, the sheep (in America at least) seem to play along. In other countries, they riot in the streets. Its a striking contrast. And when you cannot jigger the reports any further - the other option is to simply take them away from public view [Apr 23: Barry Ritholtz on Disappearing Economic Indicators], using such excuses as "it's too expensive to maintain" (this from the government of $900 toilet seats). And you know Wall Street - in their earnest nature to find the silver lining in everything so they can rush stocks up, they take every positive data point as ultimate truth! Myself; my thesis has been only when the government data so strikingly differs from what many people on the ground are actually experiencing.... only then will the sheep start scratching their heads. We appears to finally be entering that stage.... so personally I hope this CPI figure this month shows deflation :) (Remember last month it showed gas prices going DOWN) :)
Anyhow, here are some highlights from a letter you should read, and then email/print and distribute. When it comes from me, it just sounds like some lunatic fringe blogger but now that more and more people of importance are daring to utter these things out loud, what can I say - I am loving it.
- What this country needs is either a good 5¢ cigar or the reincarnation of an Illinois “rail-splitter” willing to tell the American people “what up” – “what really up.” We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value.
- We care more about who’s going to be eliminated from this week’s American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher’s seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon.
- We care as much as we always have – we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate.
- It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome – better educated, harder working, and willing to sacrifice today for a better tomorrow.
- Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands every year?
- We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense of self importance on a geopolitical scale, that our allies are dropping like flies.
- Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.
- I’ll tell you another area where we’ve been foolin’ ourselves and that’s the belief that inflation is under control.
- Let me reacquaint you with the debate about the authenticity of U.S. inflation calculations by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S.
- These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. (it's the economic miracle of productivity - that only happens within US borders!)
- The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S. (cripes, just imagine what the real number must be - oh wait, we don't have to imagine; the import report shows 15% inflation in imported goods)
- This, dear reader, looks a mite suspicious. (remember, US border patrol does not allow inflation inside our country - hence no suspicion at all; this is the truth as it comes from government - so we can trust it)
- Sure, inflation was legitimately much higher in selected hot spots such as Brazil and Vietnam in the late 90s and the U.S. productivity “miracle” may have helped reduce ours a touch compared to some of the rest, but the U.S. dollar over the same period has declined by 30% against a currency basket of its major competitors which should have had an opposite effect, everything else being equal.
- I ask you: does it make sense that we have a 3% – 4% lower rate of inflation than the rest of the world?
- This isn’t a conspiracy blog and there are too many statisticians and analysts at the Bureau of Labor Statistics (BLS) and Treasury with rapid turnover to even think of it. I’m just concerned that some of the people are being fooled all of the time and that as an investor, an accurate measure of inflation makes a huge difference.
- The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners’ equivalent rent, and 3) geometric weighting/product substitution.
- The changes in all three areas have favored lower U.S. inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing.
- It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners’ equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.
- In the 1990s the U.S. CPI was subjected to three additional changes that have not been adopted to the same degree (or at all) by other countries, each of which resulted in downward adjustments to our annual inflation rate.
- Product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburger/less filet mignon when beef prices were rising, for example.
- In turn, hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durables. As your new model MAC or PC was going up in price by a hundred bucks or so, it was actually going down according to CPI calculations because it was twice as powerful. Hmmmmm? Bet your wallet didn’t really feel as good as the BLS did.
- In 2004, I claimed that these revised methodologies were understating CPI by perhaps 1% annually and therefore overstating real GDP growth by close to the same amount. Others have actually tracked the CPI that “would have been” based on the good old fashioned way of calculation. The results are not pretty
- The correct measure of inflation matters in a number of areas, not the least of which are social security payments and wage bargaining adjustments. There is no doubt that an artificially low number favors government and corporations as opposed to ordinary citizens
- But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation.
- A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.
- Being fooled some of the time is no sin, but being fooled all of the time is intolerable. Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market’s assumption of low relative U.S. inflation in comparison to our global competitors.
Conclusion: Homeland Security's war against inflation crossing our borders is a raging success. Countless price increases have been stopped, whether via land or by sea. Buy stocks (while concurrently laughing at every other country on the globe who doesn't have half as good of a border patrol as us). Clench fist and prepare to thrust it upward in joy Friday at 8:30 AM when once again we see another victory against the ravages of inflation. Then go to a neighborhood in your town with average salary of $38K or less (should be easy to find, 50% of Americans are below that level) and share the good news with them too! :) Find your local Senior Citizen housing adobe and run through the halls shouting the good news about their fixed income cost of living adjustment. All together now!
5 comments:
TM:
Isn't this old news?
Guy, for those of us who have been looking behind the curtain yes.
For those who have not been, not so much.
Maybe a third group who knows something is amiss but plug their ears to it as well.
Judging from how vicious the buying is whenever "better than expected" government reports are published I'd have to believe the majority are in group 2 or 3, not the curtain peekers.
http://tinyurl.com/4hoohu
article about mortgage crisis.
guy, its the sheep that need to be reached not the smarty jones' of the world. and its not because they will get slaughtered, its because when they run out of grass to eat they turn carnivorous.
The violence begins
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