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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (37975)	8/6/2005 4:36:57 AM
From: Elroy Jetson	Respond to of 110194

Less money spent, also known as a recession, is always equal to lower oil prices. .

To: mishedlo who wrote (37975)	8/7/2005 10:43:43 PM
From: bond_bubble	Read Replies (1) \| Respond to of 110194

Mish, Regarding CPI reversal - the following could happen. Currently, due to hedonics in CPI, some of the following adjustments are done to car prices: 1) As more features are added to the car - and the car sold at about the same price as previous year - In CPI computation, the cost of the base car is reduced. It is removing the cost of the new features (like rear window wiper, auto-turning head lamps etc.) from the cost of car as quality adjustment. When there is a depression - car makers will have to sell their cars at lower price. Well, the cost of steel etc. will fall. But, the car makers will want to cut further costs. They will start removing these features (like rear window wiper, gold plating, spare tire etc.). And they will sell at reduced price. But, now the CPI calculation will rise the cost of car because BLS will have to add the cost of rear window wiper that they had deducted earlier!!! In a depression what will definetely happen is the quality of the products will go down. For example, milk will be mixed with water. Farmers cost will be high compared to selling price, mixing water will be the best option for them. This phenomenon will be seen universally across all products. Hence during the severe depression, the quality adjustments will go in reverse and BLS will have to add back those subtracted costs now. You might say, steel prices will fall faster than these features cost. But I believe the quality features will be removed at a faster rate. In any case CPI will not fall.... (2) Secondly, the apartment rentals. I assume this is clear. Currently, people are buying more houses and hence less people renting apartments and hence the rental equivalent used for shelter computation is falling (or not rising much). The CPI does not reflect house price increases because of this reason. When house price falls, everyone will be forced to move to apartment rentals - there will be more demand and less supply (because lot of apartments have been sold to the market). You might ask - what about those millions of defaulted homes. Remember, these home prices will be way higher than multi-unit rentals. Hence rentals can still rise!!! Hence all hedonic adjustments done (like rental equivalent, quality adjustments) today - which are currently lowering CPI value - will be exaggerating CPI value in the depression.... i.e today it shrinks - tomorrow is the payback time....