by Addison Wiggin - February 17, 2011
- Government says consumer prices up 0.4%... A real-world measure that calls BS
- Amoss on the Fed’s dilemma... and the potential whipping stocks could get
- Revolution in the country Iranians label their “14th province”
- Stupidity or malice? The 5 examines the raw deal Fox News gave Ron Paul
- Photographs and memories from Nicaragua
The Dow and the S&P have begun the day down about a quarter percent each. Judging by the reaction to the day’s key data point, the market may be finally sniffing out a story we’ve been onto since last fall. Let’s dive in…
That most-massaged measurement of the cost of living -- the consumer price index -- rose 0.4% last month, according to the Bureau of Labor Statistics.Over the last four months, CPI has risen 1.1%. On an annualized basis, that’s 3.3%. You can be forgiven for thinking your own cost of living is rising at a somewhat faster pace since last October.
But it’s no surprise when the statisticians “adjust” their numbers like so…
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If you can’t afford steak and buy hamburger instead, your beef costs have remained stable (the BLS calls this “substitution”)
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If a new car costs more than last year’s model, but also has more standard equipment, then your cost really hasn’t gone up (the BLS calls this “hedonics”)
- Prices of things that are going up are given proportionally less weight in the index than prices of things that are going down (the BLS calls this “geometric weighting”).
For an alternative (and more realistic view), we turn to the academics at MIT, and their Billion Prices Project. They track the daily price fluctuations of 5 million items sold by 300 online retailers in 70 countries.Its latest data for the United States show a shocking divergence from CPI, starting in early 2010 and skyrocketing so far in 2011.
Back in fantasyland, “measures of underlying inflation remained subdued and longer-run inflation expectations were stable,” according to the minutes from the Federal Reserve’s Jan. 25-26 meeting, released yesterday -- “further increases in commodity prices” notwithstanding.How can the Fed say such a thing? Because it relies on an even more massaged measure of the cost of living called “core CPI” -- which strips out the costs of food and energy, supposedly because they’re “volatile.”
The core rate clocked in at 0.2% last month. Over the last four months, it’s up 0.4%.
Despite all the statistical games, the some of the numbers within CPI reveal a genuine rise in the cost of living. Check out some of these year-over-year increases:
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[Ed. Note: Figures like these make Chris Mayer’s most recent presentation more timely than ever. For some simple ideas about inflation-proofing your portfolio, look here.]
“I’m surprised at how complacent the stock market remains in the face of obvious pressure building on the CPI,” says Strategic Short Report editor Dan Amoss. “If the Fed doesn’t react to a rising CPI by tightening policy, Treasury yields will keep soaring and inflationary psychology will take root among most producers.”On the other hand, “if the Fed does react by ending QE and raising short-term rates, it doesn’t require much imagination to guess what would happen to a stock market that’s running entirely on fuel from the Fed.
“Either of these potential scenarios is bad for stocks.”
“The only scenario that argues for further rallies in stocks,” Dan continues, “is if -- miraculously -- even with unprecedented money printing and deficits worldwide, the CPI doesn’t continue rising.“A rising CPI will give more ammunition to the growing chorus of Fed critics in Congress. At a hearing last week, when questioned about the building pressure on consumer prices, Fed chief Ben Bernanke answered that it would be easy to stop this trend by reversing his policies. But you know he’s terrified at the prospect of tightening.
“He’s an academic with his head in the sand.”
“The price of everything seems to have skyrocketed,” writes Mark Thornton of the Mises Institute. Only housing, the dollar and inflation-adjusted income are negative. World food and commodity prices are up 28% over the last six months.“Higher food prices set off the revolutions in Tunisia and Egypt and the mass protests in countries like Algeria, Jordan, Yemen, Bahrain and Iran. People in these countries buy more unprocessed foods and spend a much higher percentage of their income on food, so they have been severely impoverished by Bernanke’s QE2.”
Now… Let’s take CPI at face value for just a moment… and compare it to the producer price index released yesterday.CPI is up 1.1% over the last four months. But wholesale prices as measured by PPI rose 3.0% during the same period.
Returning to the Fed minutes from last month: “Some business contacts indicated that they were going to try to pass a portion of these higher costs through to their customers but were uncertain about whether that would be possible given current market conditions.”
In other words, consumers are still strapped… and businesses find themselves trapped in the “margin squeeze” we’ve been warning about for… well, the last four months.
This margin squeeze has already shown up during earnings season. Procter & Gamble… Ford Motor… Kraft Foods… they’re among dozens of companies whose profit and revenue beat the Street’s expectations during the fourth quarter… but whose profit margins shrank compared to the third quarter.There will be more where this comes from: This week, FedEx slashed its earnings forecast for the current quarter by 22%, thanks in large part to fuel prices.
None of this bodes well for a stock market that just yesterday finally reached the milestone of doubling from its lows of March 2009 (at least as measured by the S&P 500). The Fed has done a bang-up job of driving up stocks with quantitative easing… but it can’t be sustained forever.“The fact remains,” says Dan Amoss, “that there is no direct ‘transmission mechanism’ from the Fed’s balance sheet to the stock market. Speculators have to have a very specific, benign perspective on Fed policy in order for Fed policy to impact stocks.
“Today’s misplaced faith in the omniscience of the Fed will soon fade, and when it does, the market will return to intrinsic value very rapidly. Using the most robust, back-tested historical valuation models, the best estimates of fair value for the S&P 500 that I’ve seen are somewhere in the range of 800-1,000 – 25-40% below current levels.”
Tomorrow, Dan issues his newest recommendation that can position you to profit from falling stock prices in general… and margin squeeze in particular.
It’s a counterintuitive strategy… but one that proved immensely profitable as the market swooned in 2008. While the S&P plunged 42% that year… Dan’s plays delivered an average gain of 99%. Learn all about Dan’s strategy here.
In another sign that the “recovery” is about to be strangled by margin squeeze, the Conference Board’s leading economic index eked out a mere 0.1% increase in January, the smallest, by far, since last August.The index’s three financial components pushed the index up -- especially stock prices and the spread between the federal funds rate and 10-year Treasuries.
But the index’s seven economic components dragged the index down -- especially the average workweek in manufacturing, first-time unemployment claims and building permits.
Gold is taking the CPI figures in stride, the spot price up another $5, to $1,381. Silver is yet again knocking on the door of $31. At $30.93, we’ll see if the white metal can stick its foot in the door before it gets slammed shut.The dollar index is hanging in there just below 78.
Oil prices are steady, with Brent Crude pulling back a few pennies, to $103.57, despite the latest revolution in the Middle East coming to a head. The rulers of Bahrain just banned all protests and sent in the military to break up the main protest camp. Officially, three people are dead and 231 hurt.We’ve had a wary eye on Bahrain for months. “It’s home,” we wrote on Sept. 1, “to a seething cauldron of Sunni-versus-Shia conflict -- the ultimate dividing line in Islam, going back to the seventh century. The rulers are Sunni. The majority of the population is Shia. You can see how this might be a problem.”
The plot thickens when you consider as recently as 1970, Shia Iran claimed Bahrain as its own territory. Iranian politicians sometimes refer to Bahrain as Iran’s “14th province.”
Readers with good memories might recall how just after Saddam Hussein invaded Kuwait in 1990, he justified it by calling Kuwait Iraq’s “19th province.” If this raises an eyebrow, you should probably examine the “New War” scenario for $220-a-barrel oil. It comes courtesy of Byron King’s Outstanding Investments -- just named the top-performing newsletter over the last 10 years by the prestigious Hulbert Financial Digest.
Is this a case of media deception? As the slogan says, “You decide.”Ron Paul followers are incensed by this Fox News segment a few days ago, after Paul won the straw poll at the confab of the Conservative Political Action Conference. An interview featuring Paul is set up with video of CPAC’s pollster announcing the result -- to a chorus of boos from Mitt Romney supporters.
Except the video was from last year’s announcement, when Paul also won. This year, the reception was less hostile.
“Truly low and smarmy” reads an email from a friend who passed this along. On blogs and message boards, the reaction is even more scathing.
“We made a mistake with some of the video we aired,” says a Fox News statement, “and plan on issuing a correction… explaining exactly what happened.”
“Fox has ‘plausible deniability’ here,” says The 5’s Dave Gonigam, who toiled in TV newsrooms for 20 years. “I don’t know how digital video files are labeled and archived in their system, so it’s conceivable some poorly paid numnuts pulled up a file labeled ‘CPAC straw poll announcement’ and didn’t bother to confirm it was, in fact, from this year.
“Hell, if they can put Egypt in Iraq on a map of the Middle East, they can do just about anything out of stupidity, rather than malice.”
“I am puzzled by the 15%-plus difference between Brent Crude and WTI,” a reader writes, “and why there’s no arbitrage play to be had here. I know Brent and WTI are different grades, but surely the difference in refining costs between the two aren’t as high as 15%, or are they? No doubt there are other things at work here -- perhaps you can clear this up in a forthcoming issue of The 5?”The 5: In theory, Brent should be lower priced than WTI because it’s more viscous and has more sulfur… so it’s more difficult for refineries to process.
But a funny thing has developed in recent weeks: In short, there’s a whole lot of crude from the Canadian tar sands that’s backing up into the terminal at Cushing, Okla. -- where WTI is priced. And there are only so many pipelines leading out of Cushing to Midwestern refineries.
That situation is pretty much irrelevant to the rest of the world. Brent is rapidly becoming the new world benchmark. The spread is crazier than ever today -- more than $18 a barrel. As we write, WTI is at $85.11, while Brent is $103.58.
“I would like to strongly recommend a new movie with Ben Affleck -- The Company Men. It is the most significant, poignant and timely movie that i have seen in a couple years. I’m amazed that is has had so little advance hype.“Sorry, I really know why it hasn’t, because all the lessons the movie teaches about today’s economy and how we got there are still in place. I’m 72 years old, retired truck driver (Teamster’s union) and I genuinely fear for the future of this country. The movie is superbly cast and played.
“The real villain is our humanity. However, the real lesson i got is that capitalism, which has made us the envy of the world, has begun to cannibalize our strong middle class and may well be our undoing unless we can figure out how to get it under control.”
The 5: Thanks for the recommendation. While we’re at it, our friend David Tice from the Prudent Bear mutual funds advises us that Soul Surfer is due for release April 8. He financed it and serves as executive producer.
“This is the inspirational story,” David says, “of Bethany Hamilton, the Hawaiian girl who lost her arm to a shark attack and who’s come back to become a professional surfer. The movie stars AnnaSophia Robb, Dennis Quaid, Helen Hunt, Carrie Underwood, Lorraine Nicholson and Craig T. Nelson.
“It’s been getting very good scores in test screenings and will leave you feeling great and inspired.”
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S.:At the poetry festival in Granada, Nicaragua, yesterday, we noticed this poster:
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They’re trying to pass our favorite South American dictat... er, presidente as a member of the global literati. Heh. We don’t know how seriously to take it, however, given our level of comprehension in the native tongue here, or the fact that John Grisham’s latest effort is also featured on the poster.
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We’re told poets from all over the world come to read their poetry at this event. We caught the tail end of one reading from a woman whose accent sounded like she might be of Hispanic origin but living in California. She praised the crowd in English for having the courage to “display their happiness” and the strength to “chase out the scorpions.”
We can’t help but feeling each time we come to Nicaragua that we’re witnessing a rare moment in history. The country still feels to this outsider like its healing from a civil war that ended nearly two decades ago. There are folks who work with us down here at the ranch who think of the war as the struggle of their parents’ generation. But the complexities of the global market also seem at bay for the time being. The food is fresh, untainted and local. The locals are genuine, generous and happy. From where I sit in the “clubhouse” I can see a panga -- a local fishing dinghy -- pulling up the catch of the day. It will likely be served up fresh on a table here tonight.
Our contractor in Baltimore is an energetic 30-something from Oaxaca, Mexico. He owns land along the San Juan River not too far south from here. “I love Nicaragua,” he told me at a reception we were co-hosting this past summer. “The people are untainted. And they still believe they can make their world a better place.”
On our last Chill Weekend in December, a Reserve member tried to convince me at dinner one night that we were doing God’s work in the area. We employ some 300 local workers. We’ve sponsored a clinic that delivered some 25 newborns last year. Ground just broke for a technical school in the field opposite the clinic. So yes. Good things. But God’s work? We’re not so sure. What else do we bring?
If you’re a Reserve member and you’d like to observe the scene here in Nicaragua with us in June, you can find the details here.
2 Responses
Tough to take advice from a former Teamster who recommends a movie with Ben Affleck.
Continuing the Discussion