Another quarter tucked away. Another three months of addled statistics and cockamamie figures.
Are stocks expensive or cheap? How much do you earn? Is the economy growing? Are we getting richer… or poorer?
It all depends on how you measure inflation. If nominal (unadjusted for inflation) GDP is falling at a 0.8% annual rate – as it did during the first quarter – and if consumer prices are going up at an annual 2.1% rate – as the feds say they did during the first quarter – then you get an annual real (inflation-adjusted) “growth” rate of MINUS 2.9%.
Real incomes, too, depend on how you measure inflation. The median household earns less this year than it did in 2000. Today’s level is about $50,000. This is said to be about 7% lower than it was 13 years ago.
“Disappointing.” “Worrying.” “Lackluster.” These are some of the words the press has used to describe this situation. Had the numbers been more truthful, we would have heard words like “disastrous,” “catastrophic” and “oh sh*t!”
Jiggling and Jiving
But heck, we don’t trust numbers… especially when we make them up ourselves. Here’s Barron’s with more evidence that the inflation figures lie:
There’s the official inflation rate. And then there’s the real one.A new report from the American Institute for Economic Research shows how rising costs for certain necessities make many Americans’ personal inflation rate much higher.
So, while the CPI is up 47% since 2000, the institute’s Everyday Price Index (EPI) is up 69%. Unlike the CPI, which tracks more than 200 categories from breakfast cereal to funeral expenses, the Everyday index includes only the prices of frequently purchased goods and services.
Barron’s goes on to tell us we can avoid these higher costs by not owning a house or a car… by not eating much and remaining young forever. “For aging Americans,” the report continues, “it’s rising health-care costs that really hurt.”
Well, that does it for us. We weren’t that keen on aging anyway!
Calculating consumer price increases is not as easy as it looks. Let’s cut the feds some slack. Consumers’ cost of living is subject to interpretation… jiggling… jiving… and outright fraud.
But our beef with the feds is not that they pretend to calculate inflation, unemployment and GDP growth correctly… it’s that they believe they have some special power – never demonstrated – to make these things turn out better than they otherwise would.
Turning Water Into Wine
The Fed believes it can turn water into wine… and multiply the loaves and the fishes. It claims to be able to perform these miracles by manipulating the price of credit. This, as we said yesterday, is either remarkably naïve… mindbogglingly stupid…
…or just plain self-serving claptrap.
Look, the feds aren’t stupid. They know what they are doing. They are transferring money and power to themselves and their crony sidekicks.
It doesn’t help the average person to understate the rise in consumer prices. The typical household knows what things cost. Underestimating the cost of living doesn’t help Americans afford good and services.
Nor is helpful to overstate (by failing to adjust properly for inflation) GDP growth and incomes.
Super-low interest rates don’t help the typical household, either. Households are net savers. Low rates deprive them of income while providing a bonus to big borrowers.
Who’s the biggest borrower of all?
You have raced ahead of us, haven’t you, dear reader? You know the feds borrow more than anyone. And you also know that – unlike household borrowers – the feds have no intention of ever repaying their loans.
They simply “roll over” their debt. They take on new borrowings to pay for the old borrowings. And they count on the central bank to provide much of the funding.
This is the system that has evolved over the last 100 years – since the founding of the Fed in 1913. Fraudulent numbers. Jackass theories.
Price fixing. Market manipulation. Bubbles. Busts. And bum outcomes.
Bonds Are Dangerous Right Now
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
It’s not just the Fed that believes it can turn water into wine… and multiply the loaves and the fishes.
Investors believe it, too…
As I told members of Bill’s family wealth advisory, Bonner & Partners Family Office, two pieces of new-era thinking have developed over the last five years or so.
The first is that there isn’t a bump in the road that central banks can’t fix. The second is that the interest rate and inflation cycles are dead.
Both are extremely dangerous to your financial health.
Don’t just take it from me. The Bank of England just published biannual Financial Stability Report. It drew three important conclusions:
1. Historically low levels of interest rates globally and the current backdrop of low volatility across financial markets may encourage market participants to underestimate the likelihood and severity of tail risks.
2. There are increasing signs that investors, in searching for yield, may be increasing the vulnerability of the financial system to shocks.
3. The future path of monetary policy will be a key factor in determining whether markets will remain in bull mode.
It’s hard to blame investors for this new-era nonsense. So far in 2014, central banks have managed to engineer a market where everything soars…. except inflation, interest rates and the VIX (which is at an ultra-low reading of 11).
Year to date, gold is up 9.7%…
… industrial commodities are up 8.1%…
… the 10-year Treasury note is up 6.4%…
… developed market stocks are up 4.8%…
… and emerging market stocks are up 4.3%…
Complacency abounds. But the most dangerous corner of the market, by far, is bonds.
Bonds are rallying despite the Fed continuing to taper QE… despite the official CPI moving up to an annual rate of 2.1% (above the Fed’s target of 2% inflation)…
Perhaps more important, bonds are rallying despite the measly yields available to investors.
Nowhere is this more apparent than in Europe. Investors are buying 10-year Spanish government debt at a yield of just 2.64%, and they’re buying 10-year Italian debt at a yield of just 2.72%.
That’s a heck of a lot of extra risk for precious little extra yield, when you have the 10-year Treasury note yielding 2.55%.
What should an investor do?
Avoid the crowded bond trade like the plague. Consider adding some inflation-hedging gold and energy stocks to your portfolio. And remember that when all experts agree something else is bound to happen.