October 28, 2010
– Comments (19) |
RELATED TICKERS: CEF
Ok, so I've been thinking about this whole inflation vs deflation argument that's going on. We all know commodities are going through the roof and that those prices should translate to higher prices in stores.
Many places and people are still crying deflation. The CPI, according to your chart is still showing a small (too small for the Fed) inflation. I understand them because I'm seeing some things for less and other things for more.
Where's the disconnect?
Here's my theory:
The economy is bad and people aren't as motivated to spend, so many companies are lowering prices to spur spending. They are competing aggressively for the fewer dollars out there. Some businesses have simply decided it is smarter to cut costs right now to keep inventory moving until the economy might pick up, or to permanently squeeze out smaller businesses to create monopolies, or to (in the case of smaller companies) to compete with big cash-rich companies even if it means inevitable business suicide.
It makes no sense for companies to be paying more for the raw goods and selling the processed products to customers for less. That's not sustainable.
Yesterday I went to a Hostess bread outlet. They dropped their bread prices this month from $2.29 to $1.79. That's over 20% drop! I asked what was going on, and was told that SaraLee, their top competitor, had signed a long-term flour agreement so was able to make bread for less. Wonderbread was just trying to compete even though it meant no profit margin. They used to order 160 loaves a week, and now they are down to SEVEN. It sounds like this little outlet, in a region which just had a few corporate types get let go to cut costs, is on its way to shutdown. Hostess is private. Sara Lee is publicly traded (SLE).
We are still seeing high profits from multinational corporations because they have many big advantages that local/national companies do not, in mitigating a down economy. The big corporations can afford (with their billions in cash) to slash prices, and take Christmas-season losses, to take customers away from squeezed smaller companies that will be out of business next spring.
I can think of a couple of reasons why the commodities prices haven't shown up in CPI.
1. I believe the substitution algorithms and reporting of core / total CPI leave room for the index to understate the true cost of inflation. i.e., if the same approach was applied to the items in the chart, the gov't would assume grain consumption would shift to more corn, less wheat and oats and more beef, less pork to come up with a lower aggregate increase than if the basket wasn't changed.
2. The commodities prices should start showing up in producer price indices soon, but haven't made it to CPI yet. Recent earnings coverage on CNBC has pointed out a couple of reasons - some companies have seen this coming and have hedged their commodity costs, for example Hanes Brands has cotton hedged to something like the third quarter of 2011. Other companies are seeing the increase in raw material costs, but aren't able to pass those costs along and are squeezing margins.
3. Commodity costs are a relatively small part of most manufactured goods. Labor, capital, etc. tend to be a much larger portion of the finished product cost. Using Hanes as an example again, I think the CEO said in a CNBC interview that cotton is only something like 6% of product cost at Hanes.
All that said, the chart shows a clear picture of inflation on the horizon and it doesn' t look pretty. Thanks for posting.
Fool on, Russ
Russ, do you know if google's new GPI is subject to the same lags as the CPI? I was surprised to hear that even Google's program was showing very low inflation.
What's scary is to see that we obviously have huge inflation coming, but the Fed, at least publicly, keeps referencing the CPI as a basis for trying to create some much higher desired inflation rate. Does he not know about the substitution algorithms and lagging hedges you reference?
Cost of living? I can live without any gold and silver. I even think rising price of gold is deflationary because it will help part many fools from their liquidity, reducing future competition for wheat and corn.
If Natural Gas is up 15% why is UNG down 44%
CPI is low for several reasons, in my view. Food and energy costs are left out of the CPI calculation. Plus, hedonic adjustments are made, which skew reality in a not so good way.
For various reasons, when the CPI is low it makes the GDP high.
I feel like I'm at the beach and a 12 foot wave is looming over me, but hasn't crashed on me yet. Right now I'm fine, but soon there will be mayhem. That is likely to happen when the producer prices work their way into the retail prices. That will eventually happen, because even though retailers are cutting margins that can't go on forever.
For a good synopsis of this topic go to http://www.shadowstats.com/article/consumer_price_index
Excellent chart. Clearly Helicopter Ben and his cronies are unable or (probably more likely) unwilling to accept what the inevitable consequences of their hyperinflationary insanity will be.
However, what is missing is an alternative policy - and no, the lunatic deflationary policy of Weimar Chancellor Bruning (which shortly led to Hitler and his Nazi thugs in Germany) is NOT an alternative policy.
The best current case study is that of China. The Chinese have been smart enough to ignore the absurd sophistries of the Anglo-Venetian Liberal School (Adam Smith, JM Keynes, et al), as well as those of the equally insane Austrian and Marxist Schools of economic mystification.
Rather, the Chinese are following a much more traditional policy of protectionism, dirigism, and economic nationalism; for this, they have been consistently rewarded with the highest rates of economic growth of any leading nation on the planet.
Indeed, the current Chinese policy orientation bears a far greater resemblance to the original American System of political economy (of Hamilton, Lincoln, Henry C. Carey, McKinley, FDR, and JFK) than the poisonous foreign doctrine of British "Free Trade," which currently reigns as policy in Washington.
UNG is a terrible ETF. Contango and management fees destroy it. No matter which direction nat gas goes, UNG goes down
You may have won the prize for the strangest, most far-out, and utterly implausible statement of the year. :)
And speaking of the lies people swallow, here's a hum-dinger:
Chink of Light Shed on New York Fed Gold
The world's largest storer of gold, the Federal Reserve Bank of New York, has said it holds bullion from far fewer countries than it had previously reported, shedding a rare chink of light on the opaque activities of central banks in the gold market.
Central banks have helped drive prices to all-time nominal highs by becoming net buyers of bullion this year for the first time in 22 years. But trades by central banks are often secret -- as is where they store their vast gold reserves.
The New York Fed revised down the number of countries whose gold it stores by 40 per cent to 36, from a 2004 statement in which it said it held about 60 nations' gold.
The revision is significant because the New York Fed's historic vault, built on the bedrock of Manhattan Island, is the world's largest repository of bullion with holdings worth about $290 billion, but very little is known about which countries store their gold there. Individual vaults have numbers so any visitors cannot tell which gold reserves belong to which central bank.
The New York Fed said the revision was the result of a change in the way it counts the countries that use its services to store gold. Its previous claim of "approximately 60" countries referred to the number of foreign central banks with accounts at the New York Fed, including those that did not hold any gold.
Its revised figure of 36 refers only to those foreign central banks that actually have gold stored at the US central bank's Manhattan vault, the New York Fed said.
"There has been no change in the number of accounts with active gold holdings in recent years," a spokesperson said.
The different statements are laid out in two versions of the same brochure about the New York Fed's gold, dated 2004 and 2008, which are the only known information about the vault.
The 2004 brochure stated that "the gold you see in the vault of the Federal Reserve Bank of New York [...] belongs to approximately 60 foreign governments and central banks and international monetary organisations." The New York Fed has never explained in the past that that number included 24 countries that held no gold at its vault.
After the Financial Times contacted the Fed about the differences between the documents, the central bank removed the old brochure from its website.
The New York Fed added that its vault had contained 226 million ounces of gold in mid-2004, rather than 266 million, as claimed in the earlier version of the brochure.
The vault, opened in 1924, holds nearly a quarter of all the gold belonging to governments and central banks. Other major depositories of official sector gold are at the Bank of England in London and the Bank for International Settlements in Switzerland.
The gold market is often in the dark about the activities of central banks and other official institutions in the gold market as some of the largest buyers and sellers do not regularly release information about their trading.
Saudi Arabia this year said its gold reserves have almost doubled. Riyadh attributed the increase, disclosed in a quarterly financial statement from the central bank, to an accounting change. Earlier, China surprised the bullion market when it revealed that its gold holdings had almost doubled without any explanation.
Investors are scrutinising central banks' purchases and sales of gold as the official sector is set to buy 15 tonnes of bullion this year, according to estimates from GFMS, the precious metal consultancy -- a sea-change from the past decade, when on average central banks sold more than 400 tonnes a year.
Higher cotton prices will soon start showing up at the retailers near you. Probably in 2-3 months, right before Christmas. As for other commodities, they are food components mostly and food prices went up significantly 2 years ago and they envert adjusted down afterwards so food producers might be able to hold the line a while longer using their usual tricks such as smalelr packaging. When it comes to clothing you can't make is in a smaller size only.
Thanks TMFSinchiruna! I always enjoy your articles and the repsonses they generate.
I noticed two of your coal selections (ACI, CNX) haven't done so well lately - at least compared to their peers. Is this a good buy point? What is your favorite coal today, is it still BTU?
@BillyTG - Sorry, I'm not up to speed on Google's GPI. First I've heard of that index. There will nearly always be some lag between producer prices and consumer prices because of things like hedging, but I don't know if or to what extent GPI might capture that.
I'd say it's an attractive more attractive setting for CNX after the miss. Pessimism over NG prices continues to punish this stock, but for those expecting an eventual (even currency-induced) resurgence in NG prices long-term, these prices for CNX look great to me.
ACI is not an exciting stock to me. It's starting to look better, so I think the stock could move some in the near-term (next 3-6 months), but long-term, rivals like Peabody are just waaaaaaay better positioned.
Simply, the cpi & governments numbers are not believed by many. The disconnect is we buy products for best price we can find; using gross funds.
The government lives in the world of net; add all together increases & decreases and the spit out their calculated weighted avg number.
Oh by they way, the government has nothing on the table, all the money for their expeiments come from we the people. OPM (other peoples money)
Steak? Pork tenderloin? Sweet corn? Wheat? Who needs this to live? As the Marie Antoinettes at the BLS proclaim:"Let them eat a basket of goods!"