The Inflation Con-Job
Dear Trader,
Folks, if any of you thought that questioning the way the government calculates inflation data was odd, or just flat out silly, (after all, the government would never lie to us – right?) today’s report should make you rethink that conclusion. It was so blatantly absurd that it calls into question the government’s calculation of unemployment reports, GDP and everything else it reports.
The crux of the astonishment is that the CPI came in below the already anemic expectations for April, even as food prices skyrocket at the sharpest rate in 18-years! Moreover, after the government statisticians were done massaging the data, it reported that gasoline had…wait for it….wait for it…DROPPED 2.0% last month!
Excuse me…but who the !$#k do they think they are fooling? Does anyone still believe this nonsense? Oh sure they do…just turn on your television and you will be inundated with excuses. That huge, yet illusory, 2.0% drop in gasoline prices brought the overall inflation number to a negligible .2% for the month, and the “core” was just .1%. Yeah – right!
I’m happy to know I’m not alone…“If you believe that inflation is under control, I have a bridge that spans the East River that I can sell you for a really good price,” said Joel Naroff, president of Naroff Economic Advisors Inc. He went on to say, “Watch out for the headline number in May as the full increase in gasoline will show up.” Good point, but what other part of the CPI will magically go negative…apparel? Medical costs?
It doesn’t matter which portion of the CPI is molested – it will happen. What’s happening is sort of like the following: One of these egghead statisticians is standing next to me in the pit; he steals my winning trade so I break his nose while I shout derogatory remarks at him. As he is writhing on the floor in pain, blood is spewing from his nose at the same rate of his heartbeat - covering his nifty white jacket - I say, “What happened buddy?” Like the BLS pretending it didn’t happen, so do I.
In order to explain themselves, the eggheads at the BLS released the report with the following sidebar: “Gasoline prices rose 5.6 percent in April. Compared to a year ago, these prices were up 20.9 percent. Gasoline prices increase seasonally during the first five months of the year, with the largest increases occurring in March and April and decline seasonally for the remainder of the year.” Read that again!
So there is the truth: the actual cost of gasoline is skyrocketing. But when has that mattered to Poindexter at the BLS? He took a pencil from his pocket protector, one with a new eraser mind you and magically erased the increase by using a substantial “seasonal adjustment” of 7.6% because gas prices “might” go down next month...and poof…you have a negative reading that is lapped up by most of Wall Street. Why rock the boat – right?
When I read this I screamed “Hey MORON …Look at a chart of oil for a change! It has been going straight up since 1998, which, as best as I can surmise, is a TEN YEAR ADVANCE…not seasonal!!!”
Here is more proof why you should be disgusted by the way the government lies to you about inflation and gas prices…
According to AAA (national average as of 05/14/08): Gasoline: Regular grade = 3.758, month ago = 3.373, year ago = 3.087. Mid-grade = 3.990, month ago = 3.582, year ago = 3.277. Premium = 4.134, month ago = 3.711, year ago = 3.396. Diesel = 4.419, month ago = 4.108, year ago (wow...) = 2.902.
Why doesn’t the government want to properly report inflation? To be sure there are many reasons; however, the main reason is COLA payments to senior citizens. According to a survey released Tuesday by the AARP, the economic downturn and higher prices are hitting roughly one in 10 middle-aged and older Americans especially hard, compelling them to borrow money for everyday living expenses and to seek help from family, friends or charities. In the telephone survey of 1,002 adults 45 and older, nearly four in 10 said they had helped a child pay bills or expenses. Among retirees, one-third said they'd helped their children pay bills. Eight percent said they'd helped a parent pay bills or expenses. The survey's margin of sampling error was plus or minus 3 percentage points.
Prices are rising so fast that many need help to pay the bills. Yeah, no inflation!
For more anecdotal proof I called a friend of mine this afternoon to ask him about his commercial roofing business costs, and this was what he said, “Commercial building products going way up. Material pricing that I work with normally has a 3-to-5% increase per quarter. Some products that we sell that have asphalt base products such as shingles…rolled roofing felts, cements and adhesives have only 30 day price protection to no price protection at all, due to the volatility in the markets. Straight asphalt products can now jump 5-to-10% in as little as 2 weeks. Insulation products that are more chemical based, Isocyanurate and such, had increases of 5-to-6% in June and another 5-to-6% in August. Metal products have jumped the most with increases as high as 20-to-22% and some metal manufacturers are now looking at allocation to distributors on specific product lines.”
Yeah, no inflation there either!
With all this in mind, California economist John Williams argues that CPI is understating inflation by at least 3 percentage points and maybe as much as 7 percentage points. So instead of an annual inflation rate of 4%, the true number could be between 7% and 11%.
Bill Gross, the manager of the country’s largest bond funds, 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. Welcome aboard Bill!
In a report about the CPI, he noted that some of the adjustments don't accurately reflect how much consumers pay for goods. “Did your new model computer come with a 25% discount from last year's price?” Gross wrote to his clients. “Probably not. What is likely is that you paid about the same price for memory improvements you'll never use.”
He is referring to another trick the BLS uses to lie to you about cost increases. If Poindexter says the computer has “improved” by 25% because of memory improvements, he once again grabs the pencil from his pocket protector and erases 25% off of the cost of the new computer. It doesn’t matter that it costs 25% more today than last year because it is better, and the government says that offsets the higher price. Voila – no inflation!
“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.
During one of my trading breaks today I managed to catch my friend Rick Santelli on television discussing the CPI data. The usual suspects on TV were actually ridiculing Rick for not believing the government data. They tried to put words in his mouth that he didn’t say, like there was a government conspiracy to lie about that data, etc – like he was a kook. There is no conspiracy; the obfuscation is done for the masses but the “hedonic adjustments, seasonal adjustments, etc” are out in the open. People are just tired of being told there nose isn’t broken when blood is flying from it and your fist is still wrapped up in a ball.
The TV hosts were trying to explain the intricacies of the wonderful models the BLS uses and how it’s all up-and-up…nay, it’s the perfect mathematical model. To wit Rick responded to the government apologists by saying, “If mathematical models and algorithms are so perfect, then I guess Bear Sterns (bankruptcy) was a mirage.” Clearly, Rick is the most level-headed person you will see on financial television.
Simply put... these government numbers are absurd. The headline CPI is absurd. The core CPI is especially absurd. The heuristic adjustments now applied make the numbers completely absurd. Unemployment reporting is absurd. What’s that? I’m absurd…I’m out of order? No, you’re out of order. This whole courtroom is out of order! Oops, flew off the reservation there for a minute.
And now from the absurd to “it’s about time:” Merrill Lynch is changing the way it rates stocks. It sounds like, until now, Merrill Lynch analysts weren’t allowed to rate many of its stocks a “sell.” After all, that’s bad for business and we already know Wall Street doesn’t give a damn about the truth.
Currently Merrill Lynch rates only about 10% of stocks it covers now as “sell;” however, over the last decade about 40% of stocks in major global and U.S. indexes have declined. “We want to bring those two numbers closer together to drive better investment performance for our clients,” said Candace Browning, president of Merrill Lynch Global Research. What a concept! MER will now allow its analysts to rate more than 10% of the stocks it covers as a “sell.” Presumably this means…without getting fired this time.
It has taken many years, but finally…maybe…MER is getting truthful with its clients. In 2003, Merrill Lynch was one of 10 banks that settled with U.S. regulators over charges of biased research when it paid a $200 million fine.
And you wonder why I end every missive with…Trade well and follow the trend, not the so-called “experts.”
PS – One of the ridiculous methods the government uses to lie about the true cost of inflation is “substitution.” It goes like this – if steak goes up in price people will substitute steak with chicken because the latter is cheaper. Therefore the government counts the lower price of chicken instead of the steak. Even though the steak hasn’t decreased, the government pretends it has by reporting cheaper chicken prices.
So by using this method, there is no inflation in Haiti. Last month the starving people of Haiti could not afford food, so they made dirt hamburgers/cookies out of dirt, a little salt and vegetable shortening. By the US standard of “substitution” the people of Haiti have substituted FREE DIRT for real food and therefore have solved their own inflation problem.
You get my point now, don’t you!!???
Larry Levin
5/15/08 |
