Thursday, December 07, 2006

Watch What the Dollar Does, Not What the Fed Says

We all know the joke about “adjusted” inflation numbers.

I’m referring to the fact that in an effort to find a “core” rate of inflation unencumbered by the ups and downs of volatile commodity prices, the Fed (and its pals in the bond market) routinely strips away the costs of the two most essential staples of human life: food and energy.

Not to mention the other adjustments the Fed makes, such as the “rent-equivalent” housing cost calculation that bears so little relation to the reality of home-ownership in America that the accounting scam artists at Fannie Mae, who we now know inflated the profits at that mortgage buyer by precisely $7.9 billion, would blush. (Fannie Mae's new slogan: “Buy a House on Us, What the Hell”)

Still, I’m not sure how the Fed will adjust away other real-world numbers now hitting my email inbox, such as the basic cable television price increase going through in one major Midwestern city that amounts to double the current “core” CPI of 2.5%.

Or the healthcare coverage increase being asked of a small business in a different major Midwestern city that is likewise somewhat greater than the current “core” CPI.

In fact, the proposed price increase is multiples of the current “core” CPI: it is a 30% proposed increase.

I am not making that up.

Now, this number is a starting point in a negotiated rate increase that will likely be lower than 30%, but even so it will still be significantly above the “core” CPI.

And while individual claim experience can and does affect the healthcare coverage quotes for businesses large and small, such that 30% is not likely to be the standard asking price of the HMO in question, the small-business emailer who flagged this writes as follows:

“I can tell you there is a complete disconnect between the government statistics and my real world costs.”

That last—about “real world” costs—is key: the Fed can run and it can hide from inflation statistics that don’t tell the right story, but those who buy and sell our currency in the real world aren’t so easily fooled.

A friend recently pointed out that the 30% decline in the U.S. Dollar over the last five years amounts to a 6% annual adjustment in the value of our currency, and 6% seems like a much more realistic notion of the actual underlying decline in purchasing power of assets based in this country than any “core” number the Fed might come up with.

So watch what the Dollar does, not what the Fed says.

And get started on those healthcare negotiations ASAP.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


supplysider said...

Most Wall Street economists will argue that there's been limited 'pass-through' of Dollar weakness to inflation thus far (defining 'inflation' as in increase in the government's core CPI statistic of course). They may well also argue that given the shift in emphasis from manufacturing to services in our economy, rising commodity prices are less problematic in terms of domestic infaltion.

Of course they completely miss the point, which is that its not the direct effects that are important, its what the real-time decline of the Dollar against other currencies and commodites TELLS US about how the floating unit of account is being managed.

While the lags are of course long and variable, rising domestic prices will follow the decline of the USD against FX and commodities (ok, I have thing for Gold), as sure as night follows day.

In fact, in this light the so-called housing bubble does not look that bubblish at all, merely reflective of the inflation. Did you know that if you express national home prices over the course of this decade by commodity prices (using the CRB), gold prices, or express them in FX Terms (using the Dollar Index) THEY ARE FLAT TO LOWER? Jeff, I am not making this up...

whydibuy said...

What healthcare negotiations??? I've always found they're coverages to be a take it or leave it matter. You no no covered. But other than electronic goods, the only other real deflation I see is with automobiles. I bought a basic GMC Sierra back in Dec. '92 for 12,500. My neighbor just bought a new ( 06) silverado ( equivalent to a Sierra ) including a driver side airbag which I don't have, for 11,800. Mind you its 14 years later so its a incredible feat that GM is still kind of solvent given their real world costs.

whydibuy said...

Further thoughts on your point about disconnects of financial markets and real life...aside from WMT's dramatic drop in sales growth in Nov, slowing car sales and sinking house prices nationwide and especially here in Mi. where metro Detroit is now the foreclosure capital of the country, I bowl at a house called 5 Star lanes in Sterling Hts. This season starting in Sept saw the biggest drop in league participation that the owner, Mike Moceri, has ever seen. Hes quite personable and we all talk to him. Leagues there are down about 15% across the house (50 lanes) and Mike laments that his cost structure is still high regardless of the reduction in league play so the loss is coming directly out of his pocket. And not just his place. I'm hearing leagues are shrinking everywhere around here. And before you say its new entertainment causing this, guys whos teammates didn't bowl this year say its because of economic reasons(lost job, hours cut back, their business is slow ). Point is I see this dramatic economic decline and all I hear from wall street is that all is well. If you told me we're in a deep recession it would be alot more believeable. So you can add this anecdotal evidence to the goldilocks economy to go along with the no inflation economy.

taylorfedrates said...

Some day this war is going to end.
Jeff, do you seriously ever believe that we will wip inflation now, or stop it dead, or impose *successful* wage and price controls with our current system.

Inflation is just background noise. After all the rates in the bond market prove it. If the bond market acted like it did in the 80's I wouldn't be so cynical, but it looks quite the Fed can get away with *tough* talk, until the falling dollar does so much damage to import balance and our consumers that we will *finally* have to own up to near bannana republic financial status. I know, no yahoo style discouse, but really- if run money you know what really backs our financial system, don't you?

Full faith and credit will be downgraded with the helicopters leaving Iraq. Dang,I hated the 70's and now we have to do it again.

tahoe kid said...

If you want to see some real signs of inflation just take a look at the recent signings of some Major League Baseball players: Soriano (Cubs) 8 years/$136 million, Carlos Lee (Astros)6 years/$100 million and the Red Sox paid $50 million for the right to negotiate with a pitcher from Japan who has never thrown a pitch in the U.S. The numbers are so big even the Yankees are sitting somewhat idle. Now THAT says something. And get ready for the signing of Barry Zito, the most coveted pitcher this off season, who will (IMHO) sign for $100 million or more. I can hear it now next Opening Day, "Peanuts! Popcorn! Caviar!" Calling Ben Bernanke!

stealthelephant said...

Sep-Nov Px Increases In My World
--Storage Unit +10%
--Aetna Dr. Visit Co-Pay +33%
--Antique Car Insurace +18%
--Mail/Delivery Charges ~9% (rough)
--coffee ~10% (at Paganini's)

1. Travel charges are up demonstrably but no way to quantify this since I'm such a deal hunter. Add up airfare, trains, parking, surcharges and it is more. My best guess is +15% more on a basket at a minimum.
2. My treasured AV cigars are higher by the 1/2 box by about $10. It's probably more. Just remember cracking the $100 mark on 12 of the No.2's. Never paid that much before.

BUT...stock market has been so good. Why would I worry about inflation.

BlackLab said...

Verizon just upped the monthly price of my landline telephone package, which allows unlimited long distance and local/regional toll calling, to $44.99, an increase of $5.04 from the prior price of $39.95 (12.6% increase).

Consequently, the amount of sales tax I pay also went up.

This is the first increase since my line was initiated in February 2006.

Laurent GUERBY said...

Some information about the way inflation is measured, in particular why raw price data (collected on taxpayer money) isn't made public in the USA.