Inflation: This Week’s CPI Numbers

Posted by T.W. Hanson - Feb 21st, 2008 at 21:02

cpi

Earlier this week, the Bureau of Labor and Statistics released data on the change in the prices for goods and services for the month of January. The numbers showed the continuation of a disturbing trend. Prices continue to rise at uncomfortably high rates.

There are two numbers cited in the CPI (consumer price index) to which economists pay attention: the “CPI” and the “Core CPI”. The CPI is a measure of the prices of a fixed basket of goods and services, and it rose 4.3% from January 2007 to January 2008. The Core CPI is a measure of the prices of a fixed basket of goods and services excluding food and energy, and it rose 2.5% in the past twelve months.

People will use both numbers to try to convince you of different things. Some will say that inflation is wildly out of control because it is increasing at 4.3%. Others will say that 2.5% inflation isn’t that far from historical levels and is perfectly tolerable and healthy.

Know the difference between the numbers and interpret what they mean for yourself.

There are good things and bad things about using both numbers. Historically, people have followed the Core CPI more closely. Energy costs are historically volatile and can skew data from month to month. Another reason why people look at the ex-energy number is the potential for double counting its effects. When you buy almost any good, energy was used in its production and transportation. This is being reflected in its final price. Food is another volatile commodity with a long term stable trend. Panic over inflation because droughts in Australia moved U.S. grain prices for a season aren’t necessarily warranted.

However, there are changes in the global economy such that there is a very credible case to be made that there has been a secular shift in energy and food price trends. Increasing demand and the realization that there is a finite supply of these commodities is distorting long term historical trends, meaning that ignoring food and energy price appreciation is no long an option.

This means that average prices for goods and services increased on average somewhere between 2.5% and 4.3% in the past year. Keep this in mind when people are citing these numbers. Know when they are taking them out of context to further their own agendas.

Sharper Image K.O.

Posted by T.W. Hanson - Feb 20th, 2008 at 22:02

sharper image

Sharper Image, the maker of massaging chairs, digital clock thermometers, nose hair trimmers and other fine products, filed for protection under chapter 11 of the bankruptcy code today. Liquidation is a possibility, meaning their assets may be sold to pay off creditors. I fear this is a sign of things to come. Companies, like some homeowners, have lived beyond their means for the past few years. In coming months, it is highly likely that corporate default rates and bankruptcy filings will increase. This is not good for the stock or bond market and is a factor you should consider when investing in any company with a significant debt burden.

In the meantime, get whatever you need from Sharper Image, as its doors may close forever. Hopefully you will be able to live with other gadget stores like Brookstone.

Coping with $100.01 Oil

Posted by T.W. Hanson - Feb 19th, 2008 at 21:02

oil

Today, crude oil prices closed above $100 a barrel for the first time ever. Increasing global demand, a debauched U.S. currency, hostilities between ExxonMobil and Venezuela and a refinery explosion are some of the macro and micro factors driving the current price appreciation. The short term catalysts will likely dissipate, but factors like Chinese and Indian demand will not. To help cope with higher fuel prices most effectively, manage your life in the most fuel efficient manner possible.

  • Fill up your gas tanks soon. $100.01 dollar crude oil will translate into higher gasoline prices in the weeks ahead. As you know, gasoline is a refined product of crude so increases in gasoline prices will lag until existing inventories are replaced.
  • Keep your car parked as much as possible. Be efficient with your grocery shopping. Don’t make 12 driving trips to Trader Joe’s every week.
  • If you’re in the market for a car, choose a more fuel efficient vehicle. It may be tempting to trade up to the 6 cylinder engine, but 4 is likely more than enough to get through life.
  • Take public transportation or car pool. Save money, save fuel, save the environment and listen to people serving up their life stories to complete strangers.
  • If you are in the market for a new apartment or home, choose to live close to convenient public transportation. It takes me the same amount of time to drive to work as it does to take the bus that stops right across the street. An added benefit is that I can make it through a few sections of the paper on the way into town, a dangerous task when driving.
  • Inflate your tires to their proper level. Little things like maintaining your automobile and its parts can reduce fuel consumption and save you money.

If you don’t believe me, consult a higher authority.

Save Munis! Split the Monolines

Posted by T.W. Hanson - Feb 14th, 2008 at 20:02

Split

Munis, municipal bonds, are instruments through which cities, counties and other local governments fund bridges, schools and other projects. Their cost of borrowing has increased in recent months because the companies that insure the payments of principal in interest on municipal bonds, monolines, decided to insure securities backed by failing mortgages as well. The clear way to take the mortgage market burden off of civic institutions and to place that burden where it belongs is to sever the monolines’ municipal insurance businesses from the mortgage security guarantees.

With people defaulting on mortgages, the insurers are responsible for paying the principal and interest on securities backed by the bad debts. The losses they are sustaining because of misguided mortgage guarantees makes them less credit worthy to insure bonds backed by local governments.

Why should the public suffer higher costs for infrastructure and other civic functions because of financial engineering and monoline bond insurers’ greed?

We shouldn’t!

Today, MBIA’s CFO, Charles Chaplin, stated to Congress:

“The notion of a ‘bailout’ of highly creditworthy companies who, at most, are at risk of losing the very highest ratings available is misplaced…The company believes that MBIA is more than adequately capitalized to meet obligations to policyholders.”

If he and his company are that confident with the entirety of their obligations, then split them apart. Take the muni insurance business out and leave them with their non-municipal bond insurance business. Don’t bail them out. They can keep insuring pathogenic mortgage securities in which they appear to have confidence.

Warren Buffet, other institutions and the Federal government (in the interim) could easily insure the municipal securities, reducing the cost of borrowing for local governments across the country. This country’s infrastructure should not suffer because of greed and Wall Street ingenuity gone astray.

The Business Cycle - Recession?

Posted by T.W. Hanson - Feb 11th, 2008 at 22:02

Red Arrow

Although it is part of the normal pattern of events observed in free market economies, recession isn’t to be taken lightly. The economy has slowed in recent months, and more signs are indicating that the U.S. economy is in the downward portion of the business cycle.

First, what is recession? It is defined in different ways by different economists. However, there seems to be some consensus around it being two consecutive quarters of negative growth.

Where are we now? Fourth quarter GDP came in at an anemic 0.6% annualized growth rate, the unemployment rate is rising, house prices are falling and consumer sentiment and spending are weakening.

This means that a recession is now likely. Vicenarians are especially vulnerable to the likely effects. It is more difficult to find jobs in a contracting economy, and graduate schools become more picky with applicants. Dealing with a downturn will be different for each one of us. However, opportunities will surface. Take advantage of them when they do, as they are likely to be limited in number.

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