Category: Inflation

Inflation Numbers are Complete Bollocks, Revisited

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I’m not sure why, but it seems to be my day for quoting Martin Hutchinson, this time on inflation, where he points out that without the Bureau of Labor Statistics adjustments, inflation would be around 9%, which means that prices double every 8 years. (Use the law of 72 for quick figuring)

I noted this two weeks ago, and further noted that the mainstream press is beginning to note this too.

I think that correcting this would be a good thing. The only advantages to understating inflation are to collect more revenues from bracket creep, and to reduce benefits pegged to the CPI.

The downsides are legion:

  • It masks declines in living standards, and so removes political impetus for correcting this.
  • Pensioners are short changed.
  • The poorest of the poor are short changed, which takes mild poverty and creates crushing poverty, with its associated social ills.
  • It presents a distorted picture of our society.

In terms of actual inflation, I think that we get out of the credit crunch. If dollars are devalued, which is what inflation is, then repaying loans in those constant dollars becomes easier.

Furthermore, even while home prices decline in real terms, because of the devalued dollar, fewer will be “under water”, which means fewer foreclosures, neighborhood blight, and “jingle mail”.

Oops! Wholesale Prices Surge

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Wholesale prices rose by 1.1% in March, analysts had been predicting .4%, and over the past year, it has been 6.9% (I’m not doing the core rate bull sh@# for a 1 year reading, that’s enough time to smooth out the noise)

This means that there is more pressure to raise rates:

  • Lower interest rates make it cheaper to accumulate stock piles of raw materials and keep them off the market.
  • Inflation fears drive the dollar down.
  • Low interest rates drive the dollar down.

I don’t expect any interest rate increases in the next couple of months, but we might have seen the end of rate cuts, which have pretty much stopped working anyway.

Economics Update

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The average consumer is smarter than Alan Greenspan and the rest of the economic glitterati, because consumer sentiment dropped to a long time low (also here).

In energy, gasoline prices have hit another all time high, and oil prices seemed to have settled comfortably about $110/bbl.

That being said, it’s not just oil imports, inflation in non-energy imports in March surged 1.1%, with a year over year increase of 5.4%.

That 1.1% number is the largest jump ever recorded.

There is a smidgen of bright news, the Fed’s excrement for cash exchange program did not sell out this time, with only $33.95 billion of the $50 billion offered being taken.

In real estate, we have US banks killing the no down payment loan, which is long overdue. Even with a small amount of skin in the game, home borrowers tend to be much better risks.

Housing is tanking overseas too, with UK mortgage rates going up, despite BoE rate cuts, so they are pushing on a string there too.

But’s it’s not just us Anglo-Saxons, because Dutch home sales are tanking too, and let’s not talk about Spain.

Also, GE released earnings, and they sucked, which surprised the experts, but not me.

People are scared and not buying stuff. GE makes stuff. Any questions.

Press Beginning to Notice that Inflation Numbers are Complete Bollocks.

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Elizabeth Spiers at Fortune magazine notes that increasingly, it seems that consumer price index numbers have no bearing in reality.

It’s true.

Here is a graph from John Williams’ Shadow Government Statistics

If he is only half right, it means that total price change over the past two decades is understated by something near 50%.

When one tries to get a grip on the cost of living, there will always be a subjective element. When, for example, did the cost of ice delivery get dropped from the CPI. The ice man was a big deal in 1922, after all.

That being said, there has been a consistent assault on accurate CPI numbers from pretty much everyone in government for the past 30+ years.

It makes things easier. Artificially ow CPI numbers mask declining living standards and make inflation adjusted benefits cheaper, allowing for lower taxes.

The question is then how is this done.

The first way is through what is called “hedonics”. Basically, it adjusts the prices of commodities because their quality has improved. Check out The Illusions of Hedonics from the Mises Institute for a good critique.

Let’s apply hedonics to a car, for example. It’s clear that a new car today is far safer and more fuel efficient (per weight of car) than a car of a few years ago, so why should we not make an adjustment for that?

The first answer is that we can measure this more accurately in other ways. Safer cars mean less health care spending*, and better fuel economy means less spending on gas. Thus, the market basket would change.

The car delivers the same service as it did 20 years ago, just as my computer, despite being millions of times more powerful than it was 20 years ago delivers the same service, word processing, spread sheets, etc.

The second way of fudging the numbers is by messing with what goes into the “basket” which is used to figure CPI.

Why, for example, is a 3 fold increase in the price of housing in the past decade or so not inflationary, but instead “asset appreciation”. Housing is a necessity. It should be an integral part of any look at inflation, but instead, the rising house prices are waved away with some fairy dust, and all is well.

Look at the picture above, and if Mr. Williams is right, and I believe that if anything he is conservative on this, it means that there is about a 2½% spread between official and real inflation.

That means that true cost of living doubles an extra time roughly every 20 years. Which means that right now, the cost of living is nearly twice what the government is reporting, because it ignores skyrocketing healthcare, education, and housing costs, along with using bogus tweaks to create a bogus number.

No wonder the people of the United States are in debt up to their eyeballs.

*I would note however, from a purely economic perspective, replacing airbags with double ought buckshot shells would net an even higher reduction in health care costs, since dead people need no health care.†
†And this argument is why people who see classical economics as the tool for all societal problems are full of it. Economics is a tool, not the tool for dealing with the world.

Economics Update

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Any time that the Fed cuts rates, it’s the lead economic story, and today the Federal Reserve huts its discount rate by 75 basis points to 2.25%.

There is not a whole bunch left for the Fed to do. At the rate that they have been cutting this year, they will be at zero some time in July.

We are in a pickle, and Paul Krugman is right when he says that at best we are almost in a liquidity trap, if we aren’t already there. The Fed cutting rates has very little effect on interest rates for the rest of the economy right now.

As a result of the rate cuts, and the inflationary pressures involved, Oil appears to be heading back up.

Additionally, low interest rates tend to push the dollar down. The dollar spent most of today above $1.58:€1.00, though it’s now strengthened to a bit less than $1.57, about 1% below the all time low of $1.5904:€1.0000 reached on Monday.


Our economy in 1000 words.

Of course the real economy, the one that most of not on Wall Street live in, had a few statistics too, with Industrial output dropping 0.5% in February and inflation on the move, with the core producer price index increasing by 0.5% in February.

And it’s not just our economy, it’s both pillars of “Anglo-Saxon Hypercapitalism”, with banks the Bank of England’s emergency 3 day loans totalling £5 billion obeing oversubscribed by almost 500%.

It also looks like Lehman may be the next brokerage to have to deal with a run on its accounts. It’s shares were down 39% in early trading Monday, though it had largely recovered today.

One source of revenue for the various financial houses, private equity buyouts and other forms of leveraged merger and acquistion activity, appear to be drying up. No one wants to lend right now.

It probably does not help that we have it looks like a new star is born in the ppathetic theater that is the monoliner insurance debacle, FGIC, which posted a $1.89 billion loss. If people cannot trust the insurers to pay off if you default, then maybe they don’t want to fund your ill conceived takeover scheme.

This applies to foreigners, who not only are not interested in investing in American businesses, but are avoiding what used to be the safe haven of US Treasuries.

Finally, housing starts hit a 17 year low, though the article optimistically states that it is “above forecast”.

A pox on economic reporters. A little truth a little earlier, and perhaps housing starts would not be the lowest since Poppy Bush was in the White House.

Economics Update

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It looks like people are starting to notice that the cost of groceries are going through the roof. According to the article, Bush’s dumbass corn-ethanol program, increased demand from overseas because the dollar has fallen, and increased energy costs are the primary drivers.

Then we have experts saying that Banks face a “systemic margin call” to the tune of nearly half a trillion dollars, according to analysts at JP Morgan.

“Systemic Margin Call” is a nice way of saying that the credit markets are imploding.

Thornburg Mortgage is teetering on the edge of liquidation as a result of more specific margin calls. They do not have the capital to repay their loans, and this will lead to more of their loans becoming non-conforming, resulting in more capital.

Thornburg is not the first, and it’s nowhere near the last.

Economics Update

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Yawn, another day, another all time low for the Dollar vs. the Euro, breaking the $1.53:€1.00 barrier.

The expectation of a major fall in the dollar is one of the major causes of oil prices rising again today, though the fact that OPEC his telegraphing that there will be no production increase, contributes to this.

The job market is looking increasingly grim, with
nonfarm employment declining by 23,000, and, in a good indication of an incoming recession, productivity growth is declining.

We do have some good news, the appraisal standards for Fannie Mae and Freddie Mac are not officially implemented.

It would have been better news a year, or 5 years, ago.

I have this rule of thumb when looking at the economy, which is when something happens in high finance that is truly bizarre, start by assuming that it is bad news.

That’s the case with yields falling below 0% on Treasury Inflation-Protected Securities (TIPS).

TIPS are government bonds in which the principal appreciates along with the consumer price index. They are sort of inflation proofed as a result.

They are less riskier, because if inflation shoots up, you will get that back in the end, so the interest rate, which are set by auction, is lower.

Only for the past three days, the interest rate has been bid to less than zero, meaning that the bidders expect significant increases in inflation.

Paulson Sees New Capital Markets Proposals in ‘Weeks’

Bush’s Treasury Secretary is, after months of prodding by Democrats, coming up with a plan to close the barn door after the cow is gone, saying that, “We’re looking at the mortgage-origination process, we’re looking at the securitization process, we’re looking at rating agencies, we’re looking at disclosure issues, we’re looking at capital issues and regulatory issues in the weeks ahead.”

If it were done by honest decent and competent people, it would still be too late, but in this case it’s being done by Bush and His Evil Minions™, which means that it’s primary goal will be two fold, preventing meaningful regulation, and benefitting Bush, His Evil Minions™, and his campaign contributors.

The auction bond failure rate is nearly 70%, and appears to be getting worse, which means that at this critical time, with revenues falling, cities and states will find raising money for projects much more difficult.

In real estate, we now have mainstream press using phrases like, “Housing in ‘deepest, most rapid’ decline since Great Depression“, the alt-A crash is well and truly starter (Alt-A are not quite prime, typically credit scores over 700), and we have Ben Bernanke saying that housing woes could persist for years.

Additionally, we are about to see the revenge of the 2005 bankruptcy law, with filings up 18% from January, and 28% from the year before.

We are about to see the negative effects of the law, which were predicted when it was initially proposed.

BTW, all is not quiet in the ever entertaining world of the monoliner bond insurers. Ambac has announced a reorganization, where it will exit the mortgage securities market and raise $1.5 billion in new capital.

Economics Update

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The European Commission is predicting higher inflation and slower growth for this year.

Because the European Central Bank has controlling inflation as its sole mission, as opposed to the Fed, which also has an obligation to maximize employment, I think that we will see no rate cuts from the ECB, and perhaps a rate hike, which means that the current, and any future rate cuts by the fed will increase downward pressure on the dollar.

In terms of the US economy, we have the index of leading indicators index falling for the 4th straight month, the Philadelphia Federal Reserve’s report on manufacturing activity fell sharply, to the lowest point in 6 years, and Philly Fed’s future general activity index, which looks forward about 6 months, fell to the lowest number since 1990.

On the brighter side, this has driven oil prices down, because a recession implies reduced demand for energy, to $97.31/bbl.

In real estate, we have Mark Zandi, chief economist and co-founder of Moody’s Economy.com, predicting that home prices will fall 20% from their peaks.

He’s an optomist. First, interest rates are going up, and second, you always get overshoot in a correction like this. I expect a 40%+ drop in real terms, though inflation will mask some of that.

We also have the spread between adjustable-rate and fixed-rate mortgages growing. This is an indication that lenders are expecting rates to go up in the relatively near future, and they don’t want to be locked into low return loans.

We are also seeing localities recognize that they are going to get hosed on bond issues because of the bond insurance crisis, paying higher rates on lower rated bonds.

Economics Update

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The Fed cuts rates by 50 basis points.
The discount rate is now at or below the inflation rate, well below the inflation rate using real world inflation.

There are no longer any monetary tools to use that will work, it has to be fiscal (spending), because any lower, and the Fed is paying people to borrow money.

Still, it makes sense, as GDP growth in the 4th quarter was only at a .6% rate annual rate. When you consider the fact that inflation is (at least) 3%, this means that real GDP is falling at more than a 2% rate.

The dollar has fallen currently at $1.4761:€1.0000, and $1.0003:$1.0000 CDN, so the Canadian dollar is above unity again.

And the credit crunch is spreading all over the world, the Swiss bank UBS AG has reported its biggest loss ever, in US real-estate related issues.

We also have Morgan Stanley using some serious weasel words to not call its write downs a loss, when it, “reclassified $7 billion of funded assets and $279 million in unfunded assets from Level 2 to Level 3.”

Of course, the fact that the FBI has dropped some subpoenas on their asses isn’t good news eithr.

Lever 3 assets are ones in which buyers are not easy to find, and it’s rapidly getting to the point where the buyers are getting harder to find than straight Republicans.

It looks like the bond insurers will be downgraded below AAA, which in addition to closing off a lot of their business, and making it harder to raise capital, will likely force investment banks towrite down $70 billion more.

Economic Update

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Wholesale inflation rose at the highest rate in 26 years, 26%, which would seem to indicate that the Fed won’t cut rates, but they have to, or the market will implode, leaving nothing but a greasy stain.

The Fed auctioned off $30 billion in loans, and this time the interest rates were lower, 3.95% as versus the previous 4.65% and 4.67%.

The banks borrow this money, so that they can lend it out at higher interest, and make money on the spread. The interest rate has dropped because another fed cut is expected, and because the lenders are still retrenching, so they have fewer loans to make.

And Merrill-Lynch is selling another piece of itself in a bit to hold onto solvency, this time to Kuwait Investment Authority, a sovereign wealth fund.

And in real estate, San Diego County house prices are down 13.1% year over year, and the recovery in UK house prices is over, it turned out to be a dead cat bounce, as the UK house price slowdown continues.

OK, I Was Right, How Did I Do That?

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Remember when I said that “Maybe they know that there is some level of bullsh&% in the figures that they cannot trust.” In response to why the Fed would cut rates when the economy was growing at a brisk 3.9% growth rate? I also noted that the markets felt the same way too. The dow fell something like 350 points.

Well, Barry Ritholtz of
The Big Picture gives us all the specifics on what happened. It appears that a measure of inflation, “the price deflator rose a much less than expected .8% vs expectations of 2%.”

Essentially, this is a measure of inflation, and is used to separate out real growth from inflation. By lowering the price deflator, you count inflation as real growth.

The average of the price index since Q1 2004 to Q2007 was 2.98, ranging froma low of 1.7% to a high of 4.2%. Thus, if the deflator matched consensus, it would have generated a GDP of 1.9%; if it was at its recent 3 year average of 2.98%, GDP would be ~1%.

See the graph, and notice the WTF: point.

This I think, is the difference between an amateur (me) and a professional (Mr. Ritholtz). I knew in my gut that something was off, but a professional can tell where, and how.

Nouriel Roubini is a F&^%ing Genius

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Dr. Roubini reminisces aboutr how he was thought a lunatic in his latest blog post. A governor of the Chilean central bank commented “Usually at this kind of meetings I used to hear that the views of Nouriel Roubini about an impending financial and real hard landing are from the Moon. But this year there are plenty of “lunatics” around!“

Just so you know, these were the good doctors predictions form a year ago:

  • The U.S. would experience its worst housing recession in decades;
  • home prices would follow sharply (at least 20% in the next few years);
  • the housing troubles would start in the sub-prime mortgage market and lead to move severe problems and a credit crunch in broader mortgage and credit markets;
  • housing woes would spillover to the rest of the economy and to other components of demand – including consumption – via a variety of channels;
  • multiple bearish factors (housing slump, credit crunch, spillovers of housing to other sectors, high oil prices) would lead to a hard landing of the economy in 2007;
  • the world would not decouple from such a U.S. hard landing.
  • Needless to say Nouriel Roubini is a f&^%ing genius, I should also note that I’ve been predicting this since 2003 on the Stellar Parthenon discussion board.

I would also note, that I have been predicting much the same since before December 2003, and additionally, I’ve been commenting on the downward pressure on the dollar, which I believe will lead to sever (double digit) inflation, though this may already have occurred, given how much the BLS and other governmental entities collude in tweaking the numbers to generate low numbers.

I can’t give an exact date and time, but I expect the dollar to weaken to more than $1.50:1.00€ before years end. 5 Years ago it was about $0.95:1.00€, and a few years befoire that, it was $0.72:1.00€.

So the dollar has fallen 50%.