Backfire on Corrupted Price Index

May 24, 2006

We are fast entering the other side to statistical distortion, as an unusual combination has revealed itself. If it were not so destructive, it would be hilarious. The pendulum has begun to swing on the housing sector component to the Corrupted Price Index (CPI). For a few years housing rents had been tame (if not dropping), as the housing boom inflated in full force. Buy the property, bid its price up, while the rental properties go begging with minimal attention. Now rising rents are the new phenomenon, as the housing boom deflates. House properties are fast becoming unaffordable. People flock to rental homes and apartments, thereby pushing up rents requested and paid. Heck, who are we kidding? There was no housing boom. It was a dangerous reckless bubble, to salvage Greenspan's reputation, offer him yet another bubble to inflate so as to rescue the previous busted bubble. What a tragic end written in stone! Now Mr Magoo is off on speaking engagements, warning of the perils which lie ahead, leaving Ben Bernanke to assume the position of Pied Piper. The harsh spotlight might expose Ben more as a mad professor who cannot keep the wagon on the road, the wagon which had begun to careen off the road when Greenspan jumped out from behind the wheel.

The down side of the corrupted CPI game has begun to show itself in the latest month. Not only have housing prices softened, but the balance of rent versus housing price now damages the CPI as reported. A jump in the rental component was enough to lift the April CPI by 0.6%, translated into 7.2% annualized. The shelter cost accounted for half of the increase in the core CPI increase. The financial markets remain transfixed on the core, in defiance of the harsh reality for the communities and corporations which must eat food and consume energy. The financial sector does little work. It just prints money, spins stories, urges more lubrication of the machinery, and conducts arbitrage (of both people and market differentials). One might suspect global warming comes from the hot air emanating from both politicians in Washington DC and financial monkeys in Wall Street. Over the first four months of 2006, the CPI is running at a 5.1% annual rate, versus 3.4% for all of 2005. It is hard to justify a 5.0% or 5.2% long-term Treasury yield in the face of such a CPI. This statistic is no longer respected by even the mainstream, no longer a reflection of the Untied States Economy.

It might be helpful to review main messages from some past articles on the topic of the CPI, its blatant distortion (pervasive in almost every aspect), export of inflation (becomes their problem), and the risk to policy from doctored statistics (bad data, bad decisions). The entire saga of deception and setting up a biased system has begun to come full circle. The irony and pathetic twisted humor is inescapable to an informed observer. Have you ever seen an evil bully set a trap, then break his nose as he falls unwittingly into that same trap himself down the road at a later date? Have you ever seen a social deviant place brown bags of dog manure on the path of his rival buddies, only to step onto them himself, dragging along a stench of his own making? This is such the story of the USGovt cockeyed shameless embarrassing display of garbage statistics, led by the total joke known as the CPI. Let it be known as the Corrupted Price Index, its true description.

In "Inflation Pushes Down the CPI" (Feb 1, 2005) arguments were laid out to demonstrate how in American style, our brand of credit largesse and reliance upon imports has actually pushed down the CPI. One would figure that the explosion of new credit and abandonment of domestic industry would cause a direct adverse effect on the price inflation scheme. It did not in the past, but it is showing signs of doing exactly that right now. The cited article explained how the housing bubble smothered the rental market, and kept rent costs down. How car sales encouraged by 0% and 1% deals kept used car prices down, even with underwater loans assumed and buried in the new car loan. How the flood of Asian imported products, combined with foreign central bank collusion (called intervention), conspired to keep down consumer prices. How the rising cost structure, against a backdrop of global competition, made price increases a desperate challenge to businesses, resulting in inventory liquidations from real stress. However, the pendulum swings with its sharp edge back toward the tied down victim, much like in the horror films we often enjoy. Monetary inflation has raged out of control for so long that the public and investment community believe it is normal. A tame CPI had signaled a "green light" to our hapless US Federal Reserve to continue the astronomical credit growth. No more, no mas, non jamais.

In "Export Inflation, Import Deflation" (March 16, 2005) the virtuous circle was depicted whereby monetary inflation was exported to Asia, and in reaction finished products poured onto our shores. Asians exploit their own cheaper labor costs and we exploit their desire to capture market share. Nowhere is the insanity of USGovt economic policy making more evident than the abandonment of entire US industries, devotion to foreign factories, and the massive shift of wealth from the Untied States to an organized growing Asia. We trade our credit supply and debt ownership for their industrial development and factory output. As "old school" economists preach, FOLLOW THE FIXED BUSINESS INVESTMENT. Believe in investment based growth rather than inflation based growth,. Asia has it, we do not. Their wealth grows from export trade. Our debts mount as we spend money from home equity and credit cards. Asia benefits from the productivity, we do not. Their standard of living expands from job growth. Our standard of living is slowly eroding as jobs are outsourced. Asian economies are founded upon industrial plants and construction booms, ours is not. The Untied States Economy is centered on retail malls and housing construction, a direction leading toward disaster. When the process turns into a vicious circle, the dynamics shift into reverse. The process fails to operate as before. We begin to witness and suffer more domestic price inflation, even as economic growth stalls. Curiously, no longer does the queer twisted corrupted CPI distort the price inflation measurement, as it is designed to do.

In "Risks From Doctored Statistics" (May 24, 2005) an attempt was made to plead the case that the Untied States Economy has been subjected to great risk in monetary policy from basic lies on economic performance. The US GDP (economic growth) is exaggerated by 4% to 5% easily and most assuredly. Designed to remove price inflation from economic activity, the GDP Deflator is even lower than the goofy CPI. As higher costs filter through the economy, too little price inflation is removed. The result is that we label "inflation" as "growth" and claim strength, which is pure horse manure abuse of statistics, my chosen field. My favorite quote from all last year in public scribbles is the following:

Any lack of proper adjustment in nominal GDP is falsely labeled as real economic growth. In my view, most of it comes from inadequate adjustment of higher energy & material costs, even food costs. Ironically, we boast that the economy is strong enough to handle higher energy costs, but evidence of that strength to handle more burden is distorted growth from wrongful (favorable) adjustment of those same energy costs!!! Most economic growth comes from hedonics to information technology and improper removal of general cost increases. The most glaring obvious higher cost born by the public and business world is for energy costs… Our GDP growth is mostly exaggerated technology spending and price inflation!!!

The end result is that the USFed continues to hike interest rates when the USEconomy has entered a stall. One must wonder if Fed Governors are aware of their hikes in the face of weakness, or whether they are too stupid to see what they are doing. They might actually believe the nonsense promulgated by USGovt agencies and their statistical mumbo jumbo, which is better depicted as propaganda. The Untied States Economy has grown tragically and utterly dependent upon the financial inflation sector, from housing to bonds and stocks. Such a strategy is destined to fail. It requires a painted billboard on a constant basis proclaiming bold statements: that price inflation is nil, that growth is strong, that productivity is robust, that jobs are being produced, that we are moving forward as a nation. It is a big lie, a grand lie, a colossal lie in all respects. Rising interest rates expose the fat naked unsightly people scattered in the shallow water on the beach. If only we could all obtain the corner on the facial blind folder market, or stocks to such firms.

Next on the path to the Corrupted Price Index (CPI) is the rise in imported product prices. After a few years of depending upon tame Asian currencys, our consumer product providers have run amok with a gigantic hoard of USTreasury Bonds. Our Asian suppliers have conducted routine and regular interventions in order to keep their currencys from rising. Now they are meeting with a dozen Asian regional partners for the openly expressed purpose of preparing for a currency downgrade for the USDollar. They set the stage for the birth of a pan-Asian credit market. They are acting with surprising unity. The historical disunity seen in Europe had been traditionally eclipsed by a profound disunity in Asia. Europe did finally unite, created a continental currency, and has acted in a constructive fashion for a few years. Not without a rocky time, such as when they rebelled against the grant of centralized power in Brussels, the Europeans remain with the euro currency. At least for the time being. Now Asia is acting in a more unified and constructive fashion. The real leader is emerging in the process, China.

More nonsense comes from the Untied States side, which must watch and listen to the Asians. Our representatives have been shouted down, discredited, and bored the heck out of the Asians with incessant tiresome talking points. Our highly paid clowns actually believe, and state publicly, that as Asian currencys rise in unison, the USEconomy will not be affected on the price front. How reassuring! This seems why they are paid and serve in office, to deceive and sing new choruses in the propaganda concerto echoing from political and economic bastions. These bastions have merged forces with corporate America in a very unfortunate, inefficient, and harmful manifestation.

A telephone call awakened me on Monday, a friend from Zurich of Irish descent, a bright, well-informed, kind, and colorful man. He told of a gold and currency drubbing, led by a tepid USDollar recovery of sorts. By the end of that call, both gold and the opposing (non-US$) currencys had staged the early makings of a recovery. After the noon hour, the recovery and reversals were clear. One day does not a trend make, but it sure was a day with significant notables. The metals all three reversed and held their highs. The currencys all finished on daily highs, enough to erase USDollar gains in Europe.

Gold might have plumbed too low when it descended below 640 intraday, too low to claim an equilibrium of demand against supply. It reversed to close at 658.0, a full 21 bucks above its low, within a buck of its high, and over 3 bucks above its open, for a nice reversal. Silver overcame its 30-cent drop at the open, then extended for a 32-cent plus day, another nice reversal. Copper climbed 10 cents off its low to finish near even, a good recovery. Unclear is whether the metals are leading the currencys, or vice versa. My personal view is that gold leads. However, in the last couple weeks the currencys lead and the metals follow. Only a meaningful USDollar bounce will justify and sustain a continued gold selloff. The entire world is engaged in a global rejection of the USDollar, and a vote of no confidence in USGovt and USFed leadership.

The euro finished up 89 basis points, a hefty 104 bpts off the low, closing at the day's high. The yen finished up 26 basis points, a hefty 90 bpts off the low, closing at the day's high. The swissy finished up 78 basis points, having climbed all day to close at the day's high. The Canadian dollar finished up 48 basis points, a hefty 90 bpts off the low, closing at the day's high. Even crude oil, the cantilever to the petro-dollar, finished up 70 cents, a hefty 1.68 off the low, holding the majority of the day's gains. The USDollar is bloated, corroded, and mismanaged. Gold cannot hold a much lower price without confirmation by the currencys led by a bonafide recovery in the USDollar.

The follow through on Tuesday is underway. Gold has added 12 bucks. Silver has added 50 cents. Crude oil has jumped 1.40 upward. The euro is even, but the yen is up 30 basis points. We have early signs of a confirmation that Monday saw indeed a turnaround event.

One must deem as irreconcilable and inconsistent the long-term interest rates at work. Do long-term rates rise to respond to a ground swell in the Corrupted Price Index? Recall that the CPI runs now at an annualized 6% to 7% rate. Do long-term interest rates fall in realization that the Fed has already tightened too much, and broadly pinpricked the housing bubble? The entire USEconomy has been dependent upon the $12 trillion housing market, which used to be half that size before Greenspan urged its inflated condition in 2001 and 2002. Do long-term interest rates continue upward in order to attract foreign credit suppliers? They are in a dangerous state of international rebellion, and have begun their rejection of the USDollar as world reserve currency.

DeutscheBank has warned that the USEconomy has begun to decelerate rapidly. Goldman Sachs has warned that the weakening housing market is certain to slow the economy. High Frequency Economics actually unveiled a forecast for a 2% slower GDP which would come in at 1.5% for the 2H2006. And Fed Governor Poole warns that price inflation will not go away even if the economy slows in a meaningful way. WHY CANT THESE GUYS USE THE WORD "STAGFLATION" IN THEIR WORDS ??? Because it is more dreaded than the word RECESSION.

An insightful comment circulates, that USFed Chairman Bernanke strives for increased transparency. Well, we are seeing more transparency in their policy and their perception of the climate for policy making. Sadly, we the investment community are not seeing much wisdom in their inner chambers, nor deep insight. Meanwhile, Bernanke, Treasury Secy Snow, and SEC Chairman Cox speak before the Congress on financial illiteracy. Is that to report on Congressional illiteracy or the public illiteracy? Let it be known there is confusion at the USFed. It is worth a stadium ticket price to observe (former major league baseball pitcher - Philadelphia Phillies) Senator Bunning toss a fast ball at Chairman Bernanke on his poor judgment to speak on monetary policy to financial press reporters at an informal dinner, and on his responsibility for triggering a stock market decline. Big Ben managed only a weak ground out to the short stop, and seemed not to run full speed to first base. At least he owned up to his error, which is something you would never see the High Priest Greespasm do.

A 340-page Fanny Mae report has been released. It describes a cesspool as the foundation for the mortgage finance industry. It describes an arrogant and unethical culture which routinely catered to executive bonuses and stock options by their decisions. It describes flawed investigations to place new effluent layers over revealed impropriety. DO PEOPLE REALLY EXPECT A SOFT LANDING FOR HOUSING, WHEN NOT A SINGLE SOFT LANDING HAS BEEN WITNESSED IN ANY ARENA SINCE THE GREENSPAN ERA DAWNED ???

Lastly, Transportation Normal Mineta struggles to craft national policy for a nation whose entire infrastructure is hopelessly dependent upon the car (including inefficient SUV's) and trucks, with painfully little usage of railways and magnetic levitation (MagLev) trains for public commutes. The entire paradigm of the suburban residential model is flawed, vulnerable to energy prices, inefficient in operation, and destructive to national wealth potential. He believes automated toll collection will relieve congestion in urban highway systems. One must harken back to the $230 billion Transportation Bill last year, whose pork barrels were loaded to the rim with wasteful and self-serving useless projects. And yes, the Untied States national energy policy is spelled IRAQ and SPR. We waste our efforts in a referee role inside a denied civil war torn Iraq, where oil production is actually lower than the Shock & Awe annexation launch. We dither with a national strategic petroleum reserve instead of making difficult tradeoffs of environmental concerns versus needs for domestic energy production. We pay lip service the entire next generation of fuel cells and hydrogen systems, which will be dominated by Japan.


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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors For personal questions about subscriptions, contact him at [email protected]

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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