Tower Private Advisors
- Correction mode continues
- Oil dynamics likely to fluctuate (deep thought by Jack Handy, that one)
- Slow week for economists
‘Ever find yourself filling up the tank with petrol or wheeling the cart out of the grocery story, wondering how deflation could be a problem? I do.
In November, the Consumer Price Index grew by 1.1% over 12 months. Net of food and energy costs, the so-called Core CPI grew by just 0.8%. That’s not what our budget at home reflects. The reason why is in the way the government manipulates calculates inflation. The following chart shows what the current CPI basket of component indexes looks like.
Note that housing comprises about 42% of the index, while Food & Beverages, Transportation, and Medical Care comprise just 38%. Now, I’m not arguing that housing isn’t important, but once you’ve got a roof over your head, you could argue that the other three categories become more important.
The Bureau of Labor Statistics, however, says that homeowners could rent out their homes, and, therefore there needs to be some allowance for that. Thus, was born, Owners Equivalent Rent, and it is fully 25% of CPI, as the chart below shows.
Here is a look at the November CPI and the basket components.
Economists are notorious for stripping economic series down to their cores. Whatever their ostensible reasoning for doing so, the real reason is because the headline figures are harder to forecast than the core versions. Since they do that, so can we. So here is a look at the components amongst the CPI baskets that you and I would say are the essentials; they’re what we need to spend money on to live. For the chart below, I’ve factored out the housing and recreation components. This version looks more like our household; it would look even more like it if we factored out the prices of vehicles.
And here is the resulting CPI from the Mr. Obvious Insights’ household CPI. If we factored out vehicle prices–we haven’t bought one in seven years–our inflation picture–and, I’m guessing, yours–would look even worse (i.e. higher.)
That’s still not what we’d call runaway inflation, is it? It is, however, almost twice the official statistic and more than twice the so-called Core rate of inflation, and it certainly doesn’t look inflation.
Does it matter?
It absolutely matters because it is the basis of government policies–namely the Federal Reserve. The entire premise of quantitative easing–stated or not–is that we must not slip into deflation, as we don’t want to repeat the mistakes of the ’30s.
2.29% is a whole lot more ‘flation than is 1.13%.
So if deflation isn’t a problem, then what is the Fed doing by quantitative easing? Inflating bubbles, and like all of them, this one will end badly. Candidates for bubblicious asset classes are:
This one’s a bit long. Read the underlined parts and you’ll get the gist.
If you haven’t heard by now, last Friday’s jobs report on U.S. Nonfarm Payrolls didn’t go over so well. Naturally, the President saw hope in a portion of the release, but it took some seriously rose-colored glasses.
Here’s a quick recap:
So how does one explain the market’s performance, shown below? The market dropped shortly after the opening, and the opening nonsense is often reversed, but there was very little positive to be found in this most important of economic reports. Indeed, at this point in the game, it is the most important report, bar none, whatever that means.
According to a couple of sources, it was rumored that the Federal Open Markets Committee; i.e. the Fed, which is to meet tomorrow, is prepared to announce another round of monetary policy measures meant to stimulate the economy. So far, traditional monetary policy has amounted to pushing on a string, so the market is hoping for another round of Quantitative Easing–QE to the informed. For those of you worried about the government printing money that’s what QE is. In this case, they wouldn’t exactly be printing money, just reinvesting principal-paydown proceeds from Mortgage Backed Securities (MBS) into . . . Treasuries or more MBS.
According to some of those same sources, those hopes are likely to be dashed. As we like to say–and like most things, it’s not original to us–hope is not an investment strategy. It is, however, a decent speculation strategy, so long as you can sell the idea (and your securities) to a greater fool.
If the Fed does not announce new measures, the market tanks.