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Just a thread to post charts and whatever might be related to discussions in the chatrooms
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roguetrader
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roguetrader
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roguetrader
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roguetrader
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roguetrader
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roguetrader
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roguetrader
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roguetrader
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WOT, No Inflation
Hedging Your Bets With Matt Davio: Ex inflation, There is no inflation!
If that title has you confused, then you are probably not a fan of the CPI ex- food and energy and healthcare, occasionally referred to as the core inflation rate. That's the measure some economists have been using to track the rate of inflation. It's a foolish game played by those whose grasp on economic reality is tenuous at best.
Ostensibly, removing the more volatile elements of inflation data points avoids having a single outlying month disrupt data. Some of the more numerically literate of you might note that a simple moving average would do the exact same thing, yet allow any simultaneously rising prices to be revealed for what they are.
For whatever reason, some choose to ignore this approach. Instead, they select the "ex-" methodology of looking at inflation "ex-" inflation. This "ex-" method ignores too many inconvenient facts, i.e., that the CRB Index has been in a strong uptrend since October 2001. Yet despite 4 years of rising prices, the core rate has been remarkably stable. One wonders what the appeal is of such a misleading indicator.
Mind you, this is not the first time the Dismal set has purposefully shifted inflation data downwards. As The Economist reminds us "when oil prices surged in 1973-74, then Fed chairman, Arthur Burns asked the Fed's economists to strip out energy from the consumer-price index (CPI)." This was to get a "less distorted measure of inflation." Unfortunately, they couldn't stop with just oil - food prices were stripped out too, followed by used cars, children's toys, jewelry, housing and so on, until around half the CPI basket was excluded because it was supposedly 'distorted' by exogenous forces."
It is no surprise that those who have been overly reliant on the core rate have been unpleasantly shocked recently. The "ex-" group insisted the Fed would pause; after all, why raise rates, if there is no inflation (not once you back out all the inflationary data). Their distress at the most recent hike is directly proportional to their failure to understand the difference between smoothing a data series to reduce volatility, and simply removing inconvenient data that suggests something one does not like. If that reminds you of the recent shenanigans of the Conference Board with their LEIs, than good - you have been paying attention.
Those who live in a seasonally adjusted, hedonically altered, optimized world have to occasionally confront the unpleasant reality of a universe that doesn't care for their artificial constructs. Ignoring energy - the inflationary data in the CPI - is less than pointless; It shifts the focus away from exactly where it should be: On the part of CPI that has been rapidly increasing in price.
Hedging Your Bets With Matt Davio: Ex inflation, There is no inflation!
If that title has you confused, then you are probably not a fan of the CPI ex- food and energy and healthcare, occasionally referred to as the core inflation rate. That's the measure some economists have been using to track the rate of inflation. It's a foolish game played by those whose grasp on economic reality is tenuous at best.
Ostensibly, removing the more volatile elements of inflation data points avoids having a single outlying month disrupt data. Some of the more numerically literate of you might note that a simple moving average would do the exact same thing, yet allow any simultaneously rising prices to be revealed for what they are.
For whatever reason, some choose to ignore this approach. Instead, they select the "ex-" methodology of looking at inflation "ex-" inflation. This "ex-" method ignores too many inconvenient facts, i.e., that the CRB Index has been in a strong uptrend since October 2001. Yet despite 4 years of rising prices, the core rate has been remarkably stable. One wonders what the appeal is of such a misleading indicator.
Mind you, this is not the first time the Dismal set has purposefully shifted inflation data downwards. As The Economist reminds us "when oil prices surged in 1973-74, then Fed chairman, Arthur Burns asked the Fed's economists to strip out energy from the consumer-price index (CPI)." This was to get a "less distorted measure of inflation." Unfortunately, they couldn't stop with just oil - food prices were stripped out too, followed by used cars, children's toys, jewelry, housing and so on, until around half the CPI basket was excluded because it was supposedly 'distorted' by exogenous forces."
It is no surprise that those who have been overly reliant on the core rate have been unpleasantly shocked recently. The "ex-" group insisted the Fed would pause; after all, why raise rates, if there is no inflation (not once you back out all the inflationary data). Their distress at the most recent hike is directly proportional to their failure to understand the difference between smoothing a data series to reduce volatility, and simply removing inconvenient data that suggests something one does not like. If that reminds you of the recent shenanigans of the Conference Board with their LEIs, than good - you have been paying attention.
Those who live in a seasonally adjusted, hedonically altered, optimized world have to occasionally confront the unpleasant reality of a universe that doesn't care for their artificial constructs. Ignoring energy - the inflationary data in the CPI - is less than pointless; It shifts the focus away from exactly where it should be: On the part of CPI that has been rapidly increasing in price.
roguetrader
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roguetrader
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Fairly impressive turnaround yesterday, so I thought I would update some charts, and take a look at where we stand.
With an opening gap down and some fairly heavy volume early on the market staged an impressive turnaround. Overall volume increased by some 25% on the NYSE, and, while a single day of heavy volume gains does not signify a turnaround and a signal to leap into longs, it should garner some respect.
SPX has a lot of overhead potential resistance, but a higher low has now been set on the hourly charts.
With an opening gap down and some fairly heavy volume early on the market staged an impressive turnaround. Overall volume increased by some 25% on the NYSE, and, while a single day of heavy volume gains does not signify a turnaround and a signal to leap into longs, it should garner some respect.
SPX has a lot of overhead potential resistance, but a higher low has now been set on the hourly charts.
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John Maudlin
Frontline Thoughts
How can inflation be so low over the past few years if we see rising energy prices, ever-increasing medical costs and especially the cost of housing rising so dramatically? Today, for the first time we see inflation actually showing the results of rising energy costs, and the number is ugly. But it is not as ugly as it could be. This week we look at how the Consumer Price Index is calculated. Like the making of sausage and laws, it is not pretty. It will make for a fascinating read, I think.
Inflating the Numbers
A 12% jump in energy prices in September caused the CPI to rise by 1.2 % last month, the largest monthly increase since a 1.4% rise in March of 1980. The sharp rise in September followed increases of 0.5% in each of the prior two months, bringing the annual inflation rate for the quarter to 9.4%. (Dean Baker at CEPR)
However, if you look at the core inflation, without food or energy, it was just 0.1%, which is the same as it has been for the last five months. That means that the annual rate in the core inflation rate for the last quarter has been just 1.4%. But as we will show in a few paragraphs, that number doesn't tell the whole story. If you take out the housing component of the core index, you find that inflation has been rising 2.2% over the last quarter.
But the government changed the way it calculates the housing portion of the CPI back in 1982. If you use the old method, you would find that inflation is 5.3% today and even core inflation is 4.3%. This is a far cry from 2.2%. Can you imagine the 10 year bond prices if inflation was thought to be 5.6%? Somewhere north of 7%, I would think, and certainly high enough to put more than a crimp in housing prices.
If all of this sounds a bit confusing, that is because it is. Let's see if we can shed some light on the process.
The government currently assumes that housing costs are 23.158% of the Consumer Price Index. Prior to 1982, the housing cost numbers were based upon what you actually spent for the house and the related mortgage. After 1982, the Bureau of Labor Statistics (BLS) began to use an imputed number. They now use what is known as "owners' equivalent rent of primary residence" for the housing portion of the CPI. This is based on an economic theory that says that homeowners are essentially leasing the houses from themselves and paying implied rent for that service.
In theory, they are trying to figure out what it would cost you to rent your home. There's actually a rational reason for doing this and we will talk about that in a minute, but first let's look at the numbers.
Why are these imputed rents so low? Dean Baker tells us, "The main factor holding down shelter costs is the overbuilding associated with the housing bubble. This has led to record nationwide rental vacancy rates, which is putting downward pressure on rental prices in many of the areas with the biggest bubbles in housing prices. For example, rents in the New York City area rose by just 1.9 percent over the last year. They rose by 1.8 percent in Tampa, Florida and by just 0.3 percent in both Boston and San Francisco. (This is the inflation rate for the owners' equivalent rent index, which strips out utility prices.)"
How much does using imputed rent affect the CPI? Bill King wrote a few months ago, "In the Q1 GDP data, the US government has housing prices up only 1.1%, yet industry data shows double digit gains. And this week the June existing home sales data shows a 14.7% increase in the median house price. The BLS has 'owners' equivalent rent of primary residence' up only 2.2%.
"A couple of months ago, we delved into the BLS web site and discovered that "owners' equivalent rent of primary residence" is also suppose to account for real estate tax hikes. The Rockefeller Institute has the average US real estate tax bill +6% y/y. Of course it's double digits in most urban areas.
"Here's the math: 14.7% + 6% = 20.7%. But the BLS calculates this at 2.2%. 20.7% minus 2.2% = 18.5%. Now multiple by 23.158% and you get 4.28%. So by this metric, CPI is understated and thus GDP overstated, by 4.28%."
Remember that real GDP is calculated after inflation. You subtract the inflation rate from nominal GDP to get real GDP, which is the number everyone focuses on. So if inflation is higher than the BLS statistics show, which means GDP is not as high. The numbers have not changed all that much since the first quarter, so that would mean that GDP growth is almost non-existent if we used the old method of figuring housing costs.
If the CPI were 5.3%, we would be in a serious recession. But it doesn't feel like a recession. Profits are rising, unemployment is falling and things seem to be moving along just fine, thank you. So what gives? Is there some government conspiracy to understate inflation, so that they don't have to pay large increases in Social Security and other inflation indexed payments? The answer is not really.
If you look at a graph of home ownership cost you find that the numbers are actually very volatile. And I mean very volatile. In 1985, prices were rising at 6%, and just two years later prices were falling by 6%, but one year later 1988 prices are rising over 8%. Dramatic swings of 4-5% over a period of a year are quite common.
If you look at a graph of owners' equivalent rent you find that the volatility is much less and the moves take a longer time. Instead of 14 percentage points swings in just one year, you get 1-2%.
If you put these charts together, it almost looks like the imputed rent is an average mean of the actual costs. By that I mean that the actual costs swing both higher and lower, constantly reverting to the mean or long term average. Now that is not what it actually does from a calculation standpoint, but the chart sure looks that way.
In an odd sort of way, the imputed price seems to work rather well in smoothing the volatility. Otherwise we would have times when GDP said "recession" while the economy was growing and vice-versa. And this makes a certain sense.
Economists often claim that the CPI overstates inflation. And the housing component did do just that in the periods around 1987 (by 10% at one point!), from 1989 through 1994, briefly in 1996 and from 2001 through 2003.
But now, we are getting a rather large difference of almost 8% between actual costs and imputed rents! Looking back since 1982, this is the largest such difference of any one period.
What does that tell us? If this is indeed a mean reversion effect, as the chart makes it look to be, then we would expect either rents to rise or housing prices to become stable or fall, and not too far into the near future.
But as noted above, we now have record nationwide rental vacancy rates. Such does not portend for a rise in rents, so we are left with the thought that housing prices must at least stop growing, if not fall somewhat. And we read in paper after paper that they seem to be doing just that.
Could it be that the Fed rate increases are having an effect? Today, if you decided to buy a home and planned to pay it off in a few years, you find that a 15 year loan is cheaper than a one year arm. In fact, you would pay 5.625% a year with perfect credit! That is a far cry from the lower than 2% ARM rates of just a few years ago. (I know, Bloomberg says rates are lower than that, but try and get one!)
Gone are the days of the cheap mortgage. In the United States, refinancing a home last year brought in an astonishing $600 billion - or about 5% of GDP. That is, people "made" more money from refinancing their houses than they gained from salary increases, investment returns or any other source. (Daily Reckoning)
As housing price gains slow and then maybe stop, as interest rates continue to rise, that "cheap" money from borrowing against your home is going the way of the dodo, at least for awhile.
So, which is it? Is inflation running at a 9.4% clip, a 5.6% rate of just over 2%? The correct answer is all three. It just depends upon how you want to calculate the numbers and over what time period you want to calculate them.
But the various Fed governors seem to be calculating them using numbers which suggest inflation. Bert Dohmen brought this quote from Fed Governor Richard Fisher of Dallas to my attention, "We cannot let the equivalent of sclerosis block the arteries and disrupt the workings" of the economy, Fisher said. "Nor can we let the inflation virus infect the blood supply and poison the system."
As a little side note, using BLS statistics, health care costs are about 17.5% of consumption, but it is weighted much less in the CPI calculation. Healthcare is 4.649% of CPI; healthcare commodities are 1.484% of CPI. Healthcare is reportedly 15 to 17% of GDP. This presents a huge discrepancy in CPI weighting. If CPI healthcare costs were in tune with reality AND they had an accurate weighting, CPI would be substantially greater. (Bill King)
BLS assumes health care costs have risen about 4% a year for the last ten years. Anyone who is paying health insurance knows this is not the case.
John Mauldin
Frontline Thoughts
How can inflation be so low over the past few years if we see rising energy prices, ever-increasing medical costs and especially the cost of housing rising so dramatically? Today, for the first time we see inflation actually showing the results of rising energy costs, and the number is ugly. But it is not as ugly as it could be. This week we look at how the Consumer Price Index is calculated. Like the making of sausage and laws, it is not pretty. It will make for a fascinating read, I think.
Inflating the Numbers
A 12% jump in energy prices in September caused the CPI to rise by 1.2 % last month, the largest monthly increase since a 1.4% rise in March of 1980. The sharp rise in September followed increases of 0.5% in each of the prior two months, bringing the annual inflation rate for the quarter to 9.4%. (Dean Baker at CEPR)
However, if you look at the core inflation, without food or energy, it was just 0.1%, which is the same as it has been for the last five months. That means that the annual rate in the core inflation rate for the last quarter has been just 1.4%. But as we will show in a few paragraphs, that number doesn't tell the whole story. If you take out the housing component of the core index, you find that inflation has been rising 2.2% over the last quarter.
But the government changed the way it calculates the housing portion of the CPI back in 1982. If you use the old method, you would find that inflation is 5.3% today and even core inflation is 4.3%. This is a far cry from 2.2%. Can you imagine the 10 year bond prices if inflation was thought to be 5.6%? Somewhere north of 7%, I would think, and certainly high enough to put more than a crimp in housing prices.
If all of this sounds a bit confusing, that is because it is. Let's see if we can shed some light on the process.
The government currently assumes that housing costs are 23.158% of the Consumer Price Index. Prior to 1982, the housing cost numbers were based upon what you actually spent for the house and the related mortgage. After 1982, the Bureau of Labor Statistics (BLS) began to use an imputed number. They now use what is known as "owners' equivalent rent of primary residence" for the housing portion of the CPI. This is based on an economic theory that says that homeowners are essentially leasing the houses from themselves and paying implied rent for that service.
In theory, they are trying to figure out what it would cost you to rent your home. There's actually a rational reason for doing this and we will talk about that in a minute, but first let's look at the numbers.
Why are these imputed rents so low? Dean Baker tells us, "The main factor holding down shelter costs is the overbuilding associated with the housing bubble. This has led to record nationwide rental vacancy rates, which is putting downward pressure on rental prices in many of the areas with the biggest bubbles in housing prices. For example, rents in the New York City area rose by just 1.9 percent over the last year. They rose by 1.8 percent in Tampa, Florida and by just 0.3 percent in both Boston and San Francisco. (This is the inflation rate for the owners' equivalent rent index, which strips out utility prices.)"
How much does using imputed rent affect the CPI? Bill King wrote a few months ago, "In the Q1 GDP data, the US government has housing prices up only 1.1%, yet industry data shows double digit gains. And this week the June existing home sales data shows a 14.7% increase in the median house price. The BLS has 'owners' equivalent rent of primary residence' up only 2.2%.
"A couple of months ago, we delved into the BLS web site and discovered that "owners' equivalent rent of primary residence" is also suppose to account for real estate tax hikes. The Rockefeller Institute has the average US real estate tax bill +6% y/y. Of course it's double digits in most urban areas.
"Here's the math: 14.7% + 6% = 20.7%. But the BLS calculates this at 2.2%. 20.7% minus 2.2% = 18.5%. Now multiple by 23.158% and you get 4.28%. So by this metric, CPI is understated and thus GDP overstated, by 4.28%."
Remember that real GDP is calculated after inflation. You subtract the inflation rate from nominal GDP to get real GDP, which is the number everyone focuses on. So if inflation is higher than the BLS statistics show, which means GDP is not as high. The numbers have not changed all that much since the first quarter, so that would mean that GDP growth is almost non-existent if we used the old method of figuring housing costs.
If the CPI were 5.3%, we would be in a serious recession. But it doesn't feel like a recession. Profits are rising, unemployment is falling and things seem to be moving along just fine, thank you. So what gives? Is there some government conspiracy to understate inflation, so that they don't have to pay large increases in Social Security and other inflation indexed payments? The answer is not really.
If you look at a graph of home ownership cost you find that the numbers are actually very volatile. And I mean very volatile. In 1985, prices were rising at 6%, and just two years later prices were falling by 6%, but one year later 1988 prices are rising over 8%. Dramatic swings of 4-5% over a period of a year are quite common.
If you look at a graph of owners' equivalent rent you find that the volatility is much less and the moves take a longer time. Instead of 14 percentage points swings in just one year, you get 1-2%.
If you put these charts together, it almost looks like the imputed rent is an average mean of the actual costs. By that I mean that the actual costs swing both higher and lower, constantly reverting to the mean or long term average. Now that is not what it actually does from a calculation standpoint, but the chart sure looks that way.
In an odd sort of way, the imputed price seems to work rather well in smoothing the volatility. Otherwise we would have times when GDP said "recession" while the economy was growing and vice-versa. And this makes a certain sense.
Economists often claim that the CPI overstates inflation. And the housing component did do just that in the periods around 1987 (by 10% at one point!), from 1989 through 1994, briefly in 1996 and from 2001 through 2003.
But now, we are getting a rather large difference of almost 8% between actual costs and imputed rents! Looking back since 1982, this is the largest such difference of any one period.
What does that tell us? If this is indeed a mean reversion effect, as the chart makes it look to be, then we would expect either rents to rise or housing prices to become stable or fall, and not too far into the near future.
But as noted above, we now have record nationwide rental vacancy rates. Such does not portend for a rise in rents, so we are left with the thought that housing prices must at least stop growing, if not fall somewhat. And we read in paper after paper that they seem to be doing just that.
Could it be that the Fed rate increases are having an effect? Today, if you decided to buy a home and planned to pay it off in a few years, you find that a 15 year loan is cheaper than a one year arm. In fact, you would pay 5.625% a year with perfect credit! That is a far cry from the lower than 2% ARM rates of just a few years ago. (I know, Bloomberg says rates are lower than that, but try and get one!)
Gone are the days of the cheap mortgage. In the United States, refinancing a home last year brought in an astonishing $600 billion - or about 5% of GDP. That is, people "made" more money from refinancing their houses than they gained from salary increases, investment returns or any other source. (Daily Reckoning)
As housing price gains slow and then maybe stop, as interest rates continue to rise, that "cheap" money from borrowing against your home is going the way of the dodo, at least for awhile.
So, which is it? Is inflation running at a 9.4% clip, a 5.6% rate of just over 2%? The correct answer is all three. It just depends upon how you want to calculate the numbers and over what time period you want to calculate them.
But the various Fed governors seem to be calculating them using numbers which suggest inflation. Bert Dohmen brought this quote from Fed Governor Richard Fisher of Dallas to my attention, "We cannot let the equivalent of sclerosis block the arteries and disrupt the workings" of the economy, Fisher said. "Nor can we let the inflation virus infect the blood supply and poison the system."
As a little side note, using BLS statistics, health care costs are about 17.5% of consumption, but it is weighted much less in the CPI calculation. Healthcare is 4.649% of CPI; healthcare commodities are 1.484% of CPI. Healthcare is reportedly 15 to 17% of GDP. This presents a huge discrepancy in CPI weighting. If CPI healthcare costs were in tune with reality AND they had an accurate weighting, CPI would be substantially greater. (Bill King)
BLS assumes health care costs have risen about 4% a year for the last ten years. Anyone who is paying health insurance knows this is not the case.
John Mauldin
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