The Big Picture | Inflation

Five phases to the current down-cycle

Tuesday, July 08, 2008 | 09:15 AM

in Consumer Spending | Credit | Economy | Inflation

Interesting analysis via David Rosenberg of Merrill Lynch:

"There have been five phases to this current down-cycle – the first four are still in full swing, but it is the fifth that will very likely emerge as the most difficult stage of this economic downturn and bear market:

• The first wave was the end of the housing cycle when starts peaked and began to roll over in the first quarter of 2006.

• The second wave was the end of the home price bubble when the Case-Shiller index began to deflate in the first quarter of 2007.

• The third wave was the end of the credit cycle when the interbank market froze in August 2007.

• The fourth wave was the employment cycle, which peaked when payrolls did in December 2007, prompting the Fed to reluctantly embark on an aggressive policy easing course.

• The fifth wave will be the end of the consumer cycle and the beginning of what may well prove to be the most significant recession since the mid-1970s, and while delayed by the tax rebates, this phase seems to have commenced in June when U of M consumer sentiment collapsed to its lowest level in 28 years."

Rosenberg has been consistent in terms of warning about an economic slowdown over the past year, and dates the likely start of the recession to January 2008. Going forward, he is more concerned with Deflation than Inflation . . .

Source:
Five phases to the current down-cycle
David Rosenberg North American Economist
Merrill Lynch, 07 July 2008
http://tinyurl.com/69s6hx

Open Thread: Hedonics - or "Dedonics" ?

Monday, July 07, 2008 | 07:00 PM

in Inflation

One of the criticisms I've had about the way BLS calculates price inflation is the Hedonic adjustments applied by the Bureau. We'll spend some time in the near future discussing and debating the weaknesses of hedonics.

For those who may be unaware, Hedonics is the technique used (in theory) to separate the difference between inflation and "product improvement."

For tonight's open thread, I want to ask a slightly different question.

What aspects of the modern economy have resulted in product degradation, i.e., increased time consumption for services; on hold for tech support, weaker quality goods, or any other negative factors that are not otherwise incorporated into price?

Call these the "Anti-Hedonics." They are the effects of living in an "Always Low Prices" world that results in a poorer product or service for the same amount of money.

Question: What does the flipside of hedonics -– dedonics? -- look like?

~~~

What say ye?

Crude Oil = $145 (The Trichet Oil Rally)

Thursday, July 03, 2008 | 06:00 AM

in Energy | Federal Reserve | Inflation

Wow -- this is amazing. It shows no sign of stopping, which of course, it eventually must.

Here's a question -- at what point does ECB Central Bank Chief Trichet realize that every time the ECB hikes rates, it pummels the dollar and sends oil higher?

Let's rename this the Trichet Oil Rally!

Crude Oil, August Futures

via Barcharts.com

Previously:
The Costanza Energy Policy: 25 Ways to Drive Oil to $150 (May 2008)
http://bigpicture.typepad.com/comments/2008/05/how-to-drive-oi.html

Related:
Will Trichet drive the world over a cliff?
Ambrose Evans-Pritchard
Telegraph, July 2, 2008, 04:41 PM GMT
http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2008/07/02/will_trichet_drive_the_world_over_a_cliff

Are Trichet's Rate Hikes 1930 All Over Again?
Yves Smith
Naked Capitalism, Jul 3, 2008
http://www.nakedcapitalism.com/2008/07/are-trichets-rate-hikes-1930-all-over.html

Trichet Adopts Greenspan Policy as ECB Attacks Prices
Simon Kennedy
Bloomberg, July 3 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQHtTYGdxKcM&

Trichet fears worst for eurozone inflation
Gary Duncan
Telegraph, July 2, 2008
http://business.timesonline.co.uk/tol/business/economics/article4256486.ece

~~~

Headline of the Day: Zimbabwe's Million-Percent Inflation

Wednesday, July 02, 2008 | 11:15 AM

in Financial Press | Inflation

I just love this WSJ headline:

Zimbabwe Can't Paper Over Its Million-Percent Inflation Anymore
http://online.wsj.com/article/SB121494022693420271.html

Giesecke & Devrient -- a secretive, family-owned Bavarian company that once made its money churning out worthless cash for the doomed Weimar Republic in the 1920s -- has been airlifting tons of blank notes to the Zimbabwean capital Harare. The company, which has been doing business with the African nation since before Mr. Mugabe took power in 1980, is one of the few sources in the world for the specialized paper that is so important in an age when computers and laser printers have made forgery easy.

Germany's foreign minister, Frank-Walter Steinmeier, phoned Karsten Ottenberg, Giesecke & Devrient's chief executive, Tuesday to complain about the deliveries, according to a German diplomat. On Friday, Germany's development minister denounced the company's dealings with Zimbabwe as "terrible" and sent a fax demanding that they stop.

Classic!

~~~

Why the Disconnect: Population vs Pros, part II

Monday, June 30, 2008 | 01:00 PM

in Commodities | Inflation | Psychology/Sentiment

As per our earlier discussion: We know health care costs have skyrocketed, that education costs are through the roof, and that Housing doubled over 7 years and has since fallen modestly from those levels (about 15-20%).

Then there are the commodities: Let's look at a few data points, to see who is less in touch with reality: The gloomy populace, or its Economists:

Goldman Sachs Commodity Index (1978-2008)

via MRCI

One-Year-Ahead Inflation Forecasts, Survey of Professional Forecasters
(1970 - 2008)

Source: Philidelphia Fed

~~~

On an unrelated note, the latest version of Excel for Mac is stripping the dates from the second chart -- I fixed it, but I have no idea how -- any suggestions ?

Here is the Philly Fed file Download inflation.xlsx:

~~~

Consumer Sentiment Drops to 28 Year Low

Friday, June 27, 2008 | 11:12 AM

in Consumer Spending | Inflation | Psychology/Sentiment

Confidence among U.S. consumers fell in the month of June to the lowest level in 28 years. The culprits are record-high energy costs and rising joblessness.

Earlier this week, the Conference Board's Consumer Confidence data plunged to 16 year lows. The chart at right shows that over the past 5 years, sentiment readings have been rangebound. Despite the war(s), rising prices, weak job creation, Katrina, and an otherwise mediocre post recession recovery, Americans have remained not-all-that-gloomy.

That is, until recently.

The most recent peak in sentiment was January 2007, and since then, its been more or less straight down. 2008 saw the prior range broken, to record levels of unhappiness.

What gives? This must be perplexing to those who look at Inflation and Unemployment data without any context. The numbers seem relatively modest.

For a moment, forget all of the arguments about models and how the BLS measures things, and how thats changed over time. If we have full employment, where is the wage pressure? If Unemployment is so low, why is sentiment so negative? If inflation is contained, why the negative sentiment? Something here doesn't compute.

We learned today that consumer spending upwards by 0.8% in May. However, that appears to be primarily inflation driven consumption, fed by stimulus checks, and higher food and energy prices. Personal income also rose, gaining 1.9% from April.

The chart below, via Merrill Lynch's David Rosenberg, explains why: Real Personal Expenditures had moved up to a 5+% rate in the 1990s; Now, we are heading in the other direction. Annual changes in Real Personal Consumption is heading downwards. Its not the actual level, but the directional change that is negative. It seems to be following sentiment towards the zero line.

Consumers in uncharted waters

Source: Conference Board, Bureau of Economic Analysis, Merrill Lynch.

Sources:
U.S. Michigan Consumer Sentiment Index Falls in June
Bob Willis
Bloomberg, June 27 2008
http://www.bloomberg.com/apps/news?pid=20601068&sid=a0Ta5iRjGUAg&

Consumer Confidence Plummets
KELLY EVANS and ANTON TROIANOVSKI
June 25, 2008; Page A1
http://online.wsj.com/article/SB121431191157999655.html

Consumers Wary Over Economy, Reports Indicate
MICHAEL M. GRYNBAUM
NYT, June 25, 2008
http://www.nytimes.com/2008/06/25/business/25econ.html

~~~

The IRS & Inflation Angst

Friday, June 27, 2008 | 07:13 AM

in Commodities | Economy | Inflation | Markets | Psychology/Sentiment

This morning, we have two interesting economic data points: Personal Income & Outlays, and the University of Michigan's Consumer Sentiment reading.

The related theme throughout all of this is Inflation. It is the thread that runs through the tapestry of the economy. The interconnected psychology of the populace, the behavior of consumers, the revenue and profits of corporate America and therefore the equity markets, are all hanging on the Inflation factor.

It has to be one of, if not the single most influential economic factor these days.

The US lags the world in what Bill King terms "Inflation Angst." King blames the CPI's lack of correlation with the real world experience of consumers. The rest of the globe is teeming with inflation angst. When we look at other official inflation measures, we understand why. Russia and China are running double digit inflation; Most of European governments are measuring inflation at 5-7%.

Only the United States, with our debased currency and our enormous twin deficits -- balance of trade and fiscal budget -- has moderate inflation ~~under 3~~ 4.2% (see chart below).

Funny how that happens.

But the man-in-the-street is all too aware that the official inflation data fails to reflect their real world experiences, their actual cost of living increases. They understand that their wages are failing to keep up with prices.

But its more than a bunch of whiny consumers, vicious, lying short sellers, pajamed bloggers -- and PIMCO's Bill Gross -- that have recognized the absurdity of our inflation rate. Even the IRS has finally thrown in the towel:

"The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008, as set forth in Rev. Proc. 2007-70.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year."

As the table below shows, deduction of gasoline expenses was 44.5 cents in 2006; this deduction increases to 58.5 cents by year's end. As measured by the IRS, we have a 32% rise in energy costs over two years.

The IRS measure of energy inflation is far outstripping what the BLS has stated is happening with fuel prices. No seasonal adjustments, no hedonics for better, cleaner, ethanol tinged fuel -- just a whopping big price increase.

How is it that the government division in charge of collecting money has a better handle on Inflation than then the government department in charge of measuring inflation?

IRS Mileage Deductions

courtesy of Fleets & Fuels

UPDATE June 27, 2008 9:26am

The Bespoke Boys have this spot on table of global inflation rates:
click for detailed view

Sources:
IRS Increases Mileage Rates through Dec. 31, 2008
IR-2008-82, June 23, 2008
http://www.irs.gov/newsroom/article/0,,id=184163,00.html

Fleets & Fuels
March 27, 2006
http://www.altairnano.com/documents/ElectricVehicles_FleetsFuels.pdf

~~~

Bill Gross on Inflation & Recession

Friday, June 27, 2008 | 03:30 AM

in Economy | Federal Reserve | Inflation | Video

The Fed is walking a tightrope between inflation and a recession, hoping to find its way to neutral. Bill Gross, of PIMCO, shares their insight.

click for video

Gross:

"There's a lot of stress in the financial markets. Let's face it, this economy, the US economy and even the global economy is delevering, and when an economy delevers there are substantial problems and substantial risks.

"We've seen a lot of that. We've seen writeoffs in the hundreds of billions of dollars with more to come. But yeah, there's a lot of tenuous action in the financial markets these days and I expect more of it."

Source:
Gross: Fed Will Hold Steady for Rest of Year
CNBC.com | 25 Jun 2008 | 03:20 PM ET
http://www.cnbc.com/id/25372572/site/14081545

Doug Dachille & Gary Kaminsky discuss Fed, Rates, and Inflation

Thursday, June 26, 2008 | 03:00 AM

in Commodities | Economy | Federal Reserve | Inflation | Video

Very interesting video from SquawkBox Wednesday morning -- I thought Doug Dachille of First Principles Capital Management did a nice job and Gary Kaminsky Neuberger Berman is always solid.

click for Video

This was not Joe Kernan's finest interview . . . especially later in the interview.

Part II is here:

FOMC: Upside Risks to Inflation

Wednesday, June 25, 2008 | 03:00 PM

in Credit | Economy | Federal Reserve | Inflation

The well-parsed FOMC statement remains too cheery on growth, not concerned enough about inflation -- and is totally irrelevant.

What matters is whether the Fed can tighten or loosen rates or not -- and they apparently cannot. The Fed has painted themselves into a box, with a recession, housing collapse and credit crunch on one side, and $140 Oil, rampant food and other inflation on the other.

What's a jawboning Fed Chair to do? As little as possible . . .

Parsing the FOMC Statement

via WSJ

“Appalling” Market Fundamentals, Not Inflation, Is The Problem

Wednesday, June 25, 2008 | 08:30 AM

in Economy | Federal Reserve | Inflation | Psychology/Sentiment

Fascinating discussion a few weeks ago in welling@weeden with Albert Edwards and James Montier of Societe Generale, reprinted with permission:

"In the cacophony that is global investment strategy research, Albert Edwards (that’s him, below left) and James Montier (on the right) stand out as clearly distinctive voices. And not merely because of their British accents or because they’ve tended to the decidedly bearish side of the scale over the last decade or so. Despite long tenure in the rarified top echelons of the investment banking world, for many years with Dresdner Kleinwort and more recently at Societe Generale(where they are co-heads of global cross asset strategy) both have managed to retain a natural plain-spoken bluntness. Also large dollops of common sense and strong streaks of reflexive independence, which they employ in conveying their often invaluable insights on investment strategy. In Albert’s case, those spring mostly from his long experience in the dismal science of economics and in James’, from his explorations of the equally mysterious realms of behavioral neuroscience.

They are, in a word, skeptics, and at this juncture most deeply skeptical of any and all notions that “the worst is over.” The recession, which has barely begun, is more likely to be deep than shallow, market valuations are hideously expensive and the flation policymakers should be worried about starts with de-, not in-.

For their reasons, keep reading, if you dare."

Source:
Inflation Not The Problem
Kate Welling
welling@weeden, May 30, 2008
Download 053008_Welling_Edwards-Montier_REPRINT.pdf

~~~

What Conspiracy?

Friday, June 20, 2008 | 07:33 AM

in Data Analysis | Economy | Employment | Inflation | Psychology/Sentiment

>
"All models are wrong; some are useful."
-George P. Box

I enjoy intelligent criticism. It forces you to tighten up your analysis, more aggressively dig up facts, communicate your position more effectively. Good criticism should be challenging, eloquent, and raise the argument bar -- making you sharpen your rhetorical pencil.

Then, there is the criticism that can be most charitably described as "wanting." These come in a variety of forms, ranging from the simple ad hominem attack to the complex Straw Man arguments, to the classic taking quotes out of context.

There are many other weak, disreputable forms of argument, and they all find a ready home in the blogosphere.

Lately, I have been noticing an increase in the conspiracy accusation. In particular, our many discussions on the systemic understatement of Inflation or Unemployment gets derided as "There goes Ritholtz again with his conspiracy theories!" This one statement manages to combine all 3 rhetorical errors mentioned above above into one lazy and dishonest argument.

Today, we spill a few pixels on this, and what it might say about current society.

Let's begin with how BLS models are constructed and function in the real world. I find this complex subject to be quite fascinating. The entire statistical output from the various governmental data bureaus is like a giant crossword puzzle, Sudoku and murder mystery wrapped up in one. Dissecting the publicly available data, teasing out nuance, placing the snapshot into the context of the larger moving picture is a delightful intellectual exercise.

I can understand that these sorts of puzzles are not for everyone, but I simply cannot fathom how they can be so easily dismissed. Rather than address the gravamen of these intriguing mathematical conundrums, they are simply waved away. Conspiracy theory! Tin Foil Hats! Nut Jobs!

I began this post with a little known quote, which I will slightly modify "All models are flawed, but not worthless." (~~I misplaced the author's name~~ Thanks!).

The issue is not whether any specific model might be wrong: ALL MODELS ARE BY DEFINITION WRONG. They are approximations, a numerical depiction of a small portion of universe. The true question for interested statisticians, mathematicians and economists is "just how wrong are they?" And, is there any inherent bias in the model? Are the errors random, or systemically leaning in one direction?

This is not, as some have implied, a question of nefarious cabals or governmental conspiracies. It is simply a mathematical reality.

For example, we know that the way Inflation is measured has changed over the years. The focus on the core rate, variable weighting of items in the CPI basket, the changes from the Boskin Commission -- these all end up altering the output of the monthly inflation data. All of the changes to the BLS inflation methodology are released by BLS, painstakingly footnoted, and very, very public.

An even better example is the BLS expansion of the Birth Death model. To grossly oversimplify, BLS statisticians identified a shortcoming in the way the Establishment Survey (CES) picks up new jobs from start up firms. Rather than interview people at home (which the Population Study (CPS) study does to determine the unemployment rate), CES takes data from employment tax filings at existing companies. However, economists believe that new job creation in the US comes disproportionately from new firms. In order to capture the jobs which were being missed by the old CES methodology, the BLS expanded a B/D model. Now, they use new incorporation filings by State, and a formula that deduces how many new jobs go along with these newly born firms.

My criticisms about this are legion, but none claims this is a hidden conspiracy or political manipulation by the BLS. The fix corrected an undercount in the beginning of an economic cycle, but created an over-count at the end of the cycle. But the changes to the Birth Death model are all very public, and well documented.

All of the various economic models used by the Bureau of Economic Analysis, and the inputs and algorithms involved, change the output that gets published as your favorite monthly data point. No conspiracy, just models that have inherent flaws -- and those flaws seem to have a systemic bias to make things like Inflation and Unemployment look better than they really are.

As I have said repeatedly over the years, all of the data is there -- its released in a variety of forms, raw, non-seasonally adjusted, monthly, year-over-year. You just have to fight your way through it. Here's what we said on the subject last year:

"One of the things people do not understand is a basic truth about the BLS, BEA, Commerce Department, and other government data sources. I get constant emails warning me of the dark cabals manipulating the official releases.

While I have been critical over the years of the models and methodologies employed, I do not believe this is any grand conspiracy.

Sure, the headlines are often misleadingly spun, but the data is all there for whoever wants to peruse it. Indeed, if you strap on your green visor, you can find all of the data releases for Inflation, Unemployment, GDP, New Home Sales, Durable Goods, etc. The non-seasonally adjusted, non-hedonics, no substitutions data is all right there. You need only bring a critical eye and a dollop of skepticism, and you can usually deduce the real meaning beneath the spin."

That is my long held view. You are free to disagree with it for any number of reasons. You might recognize the error, but think it is so small as to be meaningless. Maybe you think the errors are random, not systemic. Perhaps, you think there is a conspiracy. Maybe you believe the BLS models -- unlike every other model ever created by mankind -- are flawless. These are legitimate disagreements amongst people of different viewpoints.

However, if your intellectual sophistication and analytical acumen is at a level where you find it easier to claim that those who disagree with your views on inflation, employment and GDP wear tin foil hats and consort in Area 51, well that's just so much intellectual detritus, and I am calling you out on it.

Your dismissive comments are lacking in critical rigor. They are analytically vapid, and reflect a mental laziness that I personally find offensive. This is my pushback to the creeping anti-intellectualism that has been working its way into all too many fields. And, it has no place in what was once considered a thoughtful and analytical discipline: Market analysis and economics.

There is a silver lining: They put the reader on notice that they are dealing with an intellectual lightweight, a political hack, someone not worthy of any further expenditure of your limited time and finite attention.

Its one thing to see this sort of thing on blog comments -- I expect no less from anonymous cowards; However, I refuse to tolerate this sort of nonsense on actual blog posts by authors who should better.

~~~

Previously:
No Conspiracy Theory -- Just Data (November 2007) http://bigpicture.typepad.com/comments/2007/11/no-conspiracy-t.html

~~~

Other Worthwhile Conspiracy Discussions:
Does the Government Understate Inflation? http://www.fundmasteryblog.com/2008/06/17/does-the-government-understate-inflation/

Why Bears Always Have the Best Arguments http://paul.kedrosky.com/archives/2007/12/13/why_bears_alway.html

Merrill's David Rosenberg goes postal on the inflation conspiracy theorists
http://time-blog.com/curious_capitalist/2008/06/merrills_david_rosenberg_goes.html

Statistics as a government plot
http://www.scsuscholars.com/2008/06/statistics-as-government-plot.html

~~~

Anonymous Cowards:
Area 51 coment
http://www.dealbreaker.com/2008/02/hot_ladies_talk_money_with_bal.php

JMF Comment
http://blogs.wsj.com/economics/2007/08/21/four-types-of-views-on-feds-next-move/

~~~

Hall of Shame:

Thinking About Butterflies Randomosity
http://thelearningcurve.blogspot.com/2008/05/thinking-about-butterflies-randomosity_08.html

SCOOPED BY MUCKDOG
http://oldprof.typepad.com/a_dash_of_insight/2008/05/scooped-by-muck.html

Role of proprietary trading at banks http://finaxyz.blogspot.com/2008/01/role-of-proprietary-trading-at-banks.html

How To Understand Inflation Data http://seekingalpha.com/article/24572-how-to-understand-inflation-data

When making money becomes too easy.......
http://stockbee.blogspot.com/2006/11/when-making-money-becomes-too-easy.html

The Conspiracy to Keep You Poor and Stupid
http://www.poorandstupid.com/

~~~

Only a Minor Slowdown . . .

Thursday, June 19, 2008 | 04:30 PM

in Economy | Inflation

Perfect!

Tom Toles via WaPo

~~~

Chart of the Day: US Miles Driven

Thursday, June 19, 2008 | 11:42 AM

in Consumer Spending | Energy | Inflation

$4.05+ average national gas costs and $140 barrel oil is having its effect: Demand destruction brought about by high prices has lead to Americans driving less.

Total vehicle miles traveled grew by nearly 3% a year from 1984 to 2004, the rate of growth slowed suddenly in 2005 and 2006 and has declined since then:

"As the price of gasoline quadrupled over the last decade, American drivers seemed to defy the laws of economics by pumping more into their vehicles year after year.

But this is the year American drivers appear to be finally succumbing to price shock at the pump, according to a new report by Cambridge Energy Research Associates, a consulting firm affiliated with IHS Inc. It says the slowdown in the economy and soaring gasoline prices have finally persuaded Americans to drive fewer miles in fewer gas-guzzling vehicles.

“U.S. gasoline demand will likely decline in 2008 for the first time in more than 17 years,” says the report to be released Thursday. “For the first time since the 1970s and early 1980s the number of miles driven by Americans has clearly begun trending downward.”

The Transportation Department reported on Wednesday that Americans drove 1.8 percent fewer miles on public roads in April 2008 compared with the same month last year, the sixth consecutive month of driving mileage declines."

Sources:
Driving Less, Americans Finally React to Sting of Gas Prices, a Study Says
CLIFFORD KRAUSS
NYT, June 19, 2008
http://www.nytimes.com/2008/06/19/business/19gas.html

Americans Drove 1.4 Billion Fewer Highway Miles in April of 2008 than in April 2007
DOT, Wednesday, June 18, 2008
http://www.dot.gov/affairs/dot8408.htm

Traffic Volume Trends
http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.htm

U.S. Vehicle-Miles http://www.bts.gov/publications/national_transportation_statistics/html/table_01_32.html

~~~

Are We Too Gloomy?

Thursday, June 19, 2008 | 07:24 AM

in Earnings | Economy | Financial Press | Inflation | Psychology/Sentiment

That's the question asked by the Washington Post:

"Soft? You betcha. In recession? Quite possibly. And a crisis in the financial markets has rattled nerves for months now. But so far, the economy is holding up better than it did during the last two recessions in 1990 and 2001. Employers haven't shed as many jobs, the unemployment rate is still relatively low, and gross domestic product has kept rising. Things are nowhere near as bad as they were in the Great Depression, or even during the severe recession of 1982-83. The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent respectively."

The naked comparison between the stats today versus 25 years ago -- without some context -- is misleading, and perhaps revealing of economic naiveté. Even if you take the headline data at face value (which you never should), one must acknowledge the many changes which have been made over the years to how the BLS models are constructed. It becomes an apples to oranges comparison. Perhaps the fault lies not within ourselves, but within our data.

Instead, we should be asking different questions of our financial media: "How economically literate Is our press? What degree of statistical naiveté is endemic to mass media? Why our some of the financial media mere stenographers? What happened to critical thought, analytical rigor or investigative journalism? Wasn't the charge of the press at one time to "afflict the comfortable?"

To be blunt, any scribe that trots out the headline data on Unemployment or Inflation as gospel are fools or liars.

Of course, there are other possibilities: IIt could be that we Americans are ungrateful; we are morons, too dumb to understand just how good we have it. Or, another other option is that the official models, like every mathematical depiction of reality, are flawed. It is not that they are worthless, it is that they are an imprecise and inaccurate depiction of the real world. They cannot be anything but, as they are merely a partial depiction of the universe.

Do not think that the present issue is whether any model is right or wrong; All models are wrong. The true question for interested statisticians, mathematicians and economists is just how wrong are they?

Here are a few clues for those who do not seem to understand why so many Americans seem so unhappy despite the current state of economic affairs in the world:

• Prices have far outstripped wage and income growth, leading to the first major decrease in the standard of living in the US in the modern era.

• Its more than food and energy prices -- medical care and education costs have gone up 10-15% per year, local municipal and property taxes are rapidly rising, and yes, even free-falling housing remains considerably higher relative to median income.

• The US savings rate flipped into negative territory for the first time since the Great Depression. That doesn't mean we are going to go into a depression -- but its no reason to be cheerful.

• Curiously, this article on sentiment failed to mention either of the words "Iraq" or "War." How in a discussion on psychology, can there was no mention of War fatigue? There is a weariness related to the ongoing costs and casualties of the Iraq War, even as it slides off the front pages. It has worn on the national psyche for more than 5 years. Yet that was not worthy of any mention; That reeks of hackdom.

• We are barely a quarter or two into what is still not acknowledged as a recession by many. The danger, reflected in Sentiment data, is that the economy rolls into something far uglier --a deeper and more prolonged contraction.

As to the broader state of the economy, let me direct the author of this one column to yesterday's Federal Express (FDX) earnings. The economic bellwhether's report were nothing short of fugly. FedEx management issued an inflationary-recession view of the economy. FedEx lost $241m due to what they called "soaring fuel costs and a very difficult economic environment." They are primarily a business-to-business shipper, but UPS, their more consumer oriented competitor, had very similar things to say. In terms of future guidance, FedEx CFO Alan Graf said that the coming year will be “very difficult due to the weak U.S. economy and extremely high fuel prices.”

Gee, that doesn't sound like our economic woes are psychosomatic.

~~~

We have discussed over the past 5 years how inflation is so much worse than reported. The latest pushback against this meme has been not only wrong, but lame. Its a difficult argument to make, and this is a typical weak example of exactly why that is.

I'll have more on some other inflation related nonsense later today; tomorrow, we will look at those who accuse we who challenge the official data as tin foil hat wearing, grand conspiracy theorists . . .

Previously
Consumer Sentiment Hits 28 Year Lows (June 2008)
http://bigpicture.typepad.com/comments/2008/06/consumer-sentim.html

Sources:
Why We're Gloomier Than The Economy; Consumer Anxiety Outstrips the Data
Neil Irwin
Washington Post, June 18, 2008; Page A01
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/17/AR2008061702463.html

FedEx Has First Loss in 11 Years; Profit to Decline
Mary Jane Credeur
Bloomberg, June 18 2008
http://www.bloomberg.com/apps/news?pid=20601103&sid=aBPgROetK_Oc

Related:
Hard numbers: The economy is worse than you know
Kevin Phillips
Harper's Magazine, Sunday, April 27, 2008
http://www.tampabay.com/news/article473596.ece

~~~

Poole: Fed Has to Deter Inflation From Fueling Wages

Wednesday, June 18, 2008 | 03:00 AM

in Federal Reserve | Inflation | Video

Former Federal Reserve Bank of St. Louis President William Poole talks about monetary policy, the outlook for inflation and the housing market, and the Fed's response to the turmoil in credit markets.

click for video

00:00 Fed's stance on inflation, policy outlook
03:58 Core PCE; energy not a "temporary shock"
05:49 Inflation expectations, wage growth
07:12 State of U.S. banking system
08:32 "More pain" in housing market; energy prices
11:40 Fed's response to credit market turmoil
14:01 Brokerage regulation; Fed's independence
15:50 Fed "should stay clear" of dollar policy.

Source:
Poole Says Fed Has to Deter Inflation From Fueling Wages: Video
Bloomberg, June 17, 2008 09:51 EDT
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFhz7hzCqm8s

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GS's Jan Hatzius on Fed Rates, Inflation & Jawboning

Tuesday, June 17, 2008 | 03:30 AM

in Federal Reserve | Fixed Income/Interest Rates | Inflation | Video

The Fed is putting the spotlight back on inflation concerns:

click for video

UK Cost of Living Increases: 9.5%

Monday, June 16, 2008 | 06:45 AM

in Inflation

By now, you are probably tired of reading me rail on and on about how government data fails to accurately portray the reality of inflation, and therefore GDP. I don't have particularly good things to say about NFP data either.

You should not, however, believe that such accounting legerdemain is confined to the USA. Over the weekend, an article in the UK Telegraph noted that The Real Cost of Living Index: 9.5 per cent; it had the subheading: "Why official figures don't tell half the story."

It is not that there is any grand conspiracy going on in either the US or the UK. It is just that the official measurements of inflation fail to capture the reality experienced by its citizens. Over the years, the politcos in charge have directed the statisticians who run BEA, BLS, Census, etc. to alter the models they work with. Over the years, this has worked to incrementally to show more of the good stuff (employment and growth), and less of the bad stuff (inflation, unemployment) than would be warranted by an truly objective read of the data.

Whenever you read criticism of legitimate critique of government data as "tinfoil hat/conspiracy theorists," you know you are reading a disingenuous hackery. I do not know any credible BLS critic who thinks some dark cabal is pulling the levers to generate whatever numbers they want -- instead, it is a case of what John Williams of shadowstats.com calls "Pollyanna creep."

Here is your Ubiq-cerpt™:

"Rising food and fuel prices, as well as increased taxes and other household bills, mean the average family must cope with inflation that is twice as high as official estimates, according to new research by The Daily Telegraph and moneysupermarket.com, the price comparison website. Taking all these factors into account, the Real Cost of Living Index (RCLI) is rising at 9.5 per cent.

No wonder hard-working families wonder how the Retail Price Index (RPI) can be only 4.2 per cent and the Government's preferred measure of inflation – the Consumer Price Index (CPI) – claims inflation is only three per cent.

One explanation is that CPI does not include council tax or mortgage costs – which are major outgoings for many families. Both costs are included in the RCLI, which sets out to give realistic weightings to rising costs, as experienced by an average family."

Interesting stuff . . .

Food Costs
Click for larger graph

via the Telegraph

Source:
The Real Cost of Living Index: 9.5 per cent
Emma Wall
Telegraph,11:23pm BST 13/06/2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/13/cmcostofliving113.xml

British families fear inflation is running out of control
Edmund Conway, Economics Editor
Telegraph, 1:27am BST 13/06/2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/12/bcninfla112.xml

HOUSEHOLD BILLS http://www.telegraph.co.uk/money/main.jhtml?menuId=244&menuItemId=10151&view=PICHEADLINESUMMARY&grid=F7&targetRule=14

What Do Higher Rates Mean?

Friday, June 13, 2008 | 03:30 PM

in Economy | Inflation | Markets | Psychology/Sentiment

Brilliant cartoon, from the New Yorker 1981:

CPI Goes Higher on Food, Energy, Transportation, Medical, Tuition & Books, Restaurants, Alcohol, Rent, etc.

Friday, June 13, 2008 | 10:05 AM

in Commodities | Consumer Spending | Economy | Inflation

If you are purchaser of computers, women's clothing, or household furnishings, well then I have some good news for you: Everything is on sale, and prices are falling!

However, if you regularly buy Fuel, use transportation, need hospital services, education, books, eat food at home, pay tuition, require medical care, eat out, drink booze, or pay rent, well, sorry: Everything is costing you more.

Even if you back out food & energy -- inflation ex-inflation -- we still have rising prices, and elevated inflation expectations.

This leaves the Fed painted into a corner -- the weak dollar, caused in large part by low rates, is adding to inflation. But the recession and the credit crunch are preventing the Fed from appreciably raising rates.

Here's your cost increase picture, measured year over year:

May CPI
click for bigger graphs

Sector Breakdown

Thanks, Jake!

Will the Fed Hike Anytime Soon?

Thursday, June 12, 2008 | 08:00 PM

in Federal Reserve | Inflation

Let's have a quick Fed recap:

-Fed Funds Futures are now pricing in a 100% chance that the Fed raises rates by a total of 50 bps by the October meeting.

-Futures place a 24% chance of a 75bps increase by October.

-Futures By the January 2009 meeting, we have a 98% chance that Fed Funds rate will be raised by a total of 100 bps to 3%.

Is the Fed likely to be raising rates in this environment? Will we see a new tightening cycle? Or, is the Fed merely jawboning in response to a more Hawkish ECB?

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What say ye?