Your Own Personal Inflation Rate

“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”

– Ronald Reagan

“To me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.”

– Janet Yellen

The US economy grew at a 1.5% inflation-adjusted rate in the third quarter, or so said the Bureau of Economic Analysis in its first GDP estimate last week. The number is subject to revision and will probably change. Based on recent experience, revisions could easily push it below 1% or above 2%. Since this is “real” GDP, it also depends on inflation numbers. BEA doesn’t use the familiar Consumer Price Index for this purpose – CPI comes from an entirely different agency, the Bureau of Labor Statistics.

You can get quite different real GDP growth numbers if you use the inflation figures calculated by the Dallas Federal Reserve Bank. The Dallas Fed developed something called trimmed PCE, the use of which would make real 3Q GDP growth 1.1%. Or, if we all decided that the calculation of “median CPI” performed by the Cleveland Fed was what we should use, then GDP growth was about 0.3%. (Which is of course why we don’t use it!)

And gods forbid we use the method employed in Europe for calculating inflation. Evidently, housing is not a very big deal in Europe, so it is a much smaller component of the inflation calculation; and if you can believe it, the Europeans actually use an archaic methodology for calculating housing inflation that involves the real prices of home sales, as opposed to a totally artificial guesstimate called Owner’s Equivalent Rent, used by more sophisticated countries like the United States. If we had done things the European way, inflation would have been sky-high during the last decade, and the Federal Reserve would have been forced to raise rates rather than holding them under 1% for far too long. And who knows where the inflation rate would have gone if we hadn’t pricked our little housing bubble.

This week’s letter is all about how we create the sausage that is called inflation. The Fed has a target of 2% inflation. Aren’t we almost there at +1.9% CPI? Not really, as the Fed uses something called the PCE, and it is barely at +1.3%. Which is different again from other measures of inflation. Confused? Hopefully, we can make sense of inflation today and have some fun along the way with crazy government statistics.

If, like me, you are ancient enough to remember the 1970s, you will recall that inflation was Economic Enemy #1. Presidents Gerald Ford and Jimmy Carter spent most of their terms trying to Whip Inflation Now. Their inability to tame it is one reason neither had a second term. Continue reading

The Japan Post IPO – Now That’s A Ponzi!

The global financial Ponzi gets crazier by the day, and more often than not the mad men who run Japan Inc. are front and center. But even Japan’s whacko Prime Minister, Shinzo Abe, has outdone himself with the Japan Post Holdings IPO.

We could start with the fact that after trading up roughly 25% from the offer price in an apparent fit of nationalistic mania, the holding company and its two subsidiaries were valued at $140 billion. Needless to say, that sporty valuation was not owing to the fact that Japan’s 24,000 unit postal savings system experienced a sudden spurt of growth.

In fact, revenue has been falling for years, and net profits have been nothing to write home about. Indeed, the group’s offering release indicated an expectation that Japan Post Holdings’ net income would drop 23% to 370 billion yen in the year ending next March 31.

Stated differently, Abe & Co have foisted on Japan’s retail public, which got upwards of 75% of the shares sold this week, the vastly inflated stock of a dying public bureaucracy which by its own admission is now “earning” 33% less than it did in FY 2013.

And this would not be the first time.  Back at the height of the dotcom bubble, the Japanese government sold the retail public 2.1 trillion-yen ($18 billion) worth of shares of Japan’s wireless telecom services provider (NTT DoCoMo). In perhaps a foreshadowing of what comes next, the company’s implied total market cap of $220 billion at the time now stands at just $78 billion. That is, about $140 billion of bottled air was foisted upon the Japanese citizenry.
DCM Chart

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Going Nuts in Sweden

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Scandinavian NIRP Bubble

A recent article at Reuters indicates that Sweden’s central planners are beginning to worry slightly about the bubble they have caused in their (so far) vain attempt to destroy the purchasing power of the Swedish crown in terms of consumer goods. They have instituted a giant QE program and reduced central bank lending rates below zero (an economic policy perversion if ever there was one). So the failure is certainly not for lack of trying, as the charts below illustrate.

While the “well-intentioned” plan to impoverish Sweden’s consumers by reducing their real incomes has failed, relative prices have of course been distorted enormously. Price inflation is simply showing up in asset prices, primarily real estate prices, in which a bubble of truly breathtaking proportions is underway.

 

1-Sweden, property pricesZIRP and later NIRP-induced lunacy in Sweden, as evidenced by a parabolic increase in property prices. Note that these data are as of Q1 (the most recent chart we could find). In the meantime, prices have shot up further. The latest annual rate of change amounts to 20% – click to enlarge. Continue reading

Silver as money

Submitted by Alasdair Macleod – FinanceAndEconomics.org

Gold is money, admittedly not often circulating as such today. Fiat currencies issued by governments have driven gold out of circulation. But where does this leave silver?

Money-substitutes, bank notes and bank deposits, were originally backed by physical silver, and were switched in favour of gold-backed money-substitutes over the last two centuries. It was a process that happened first in England, starting with Isaac Newton’s declaration in 1717 that silver would be exchanged at the Royal Mint in the ratio of fifteen and a half ounces to one of gold. While Newton was a towering genius in physical science, he didn’t understand markets, and that an inflexible bimetallic standard not adjusting for the subjectivity of prices would be problematic.

Market preferences in subsequent years deemed gold preferable to silver at Newton’s exchange ratio, because British merchants tended to pay for imports from the Continent with silver while hoarding gold. This might have been due to the convenience of gold for merchants’ dealings, or it could equally have been due to price arbitrage. For whatever reason, Britain moved towards gold and finally adopted it as the government’s preferred money when the first sovereigns were issued in 1821.

In was not a market vote against silver: it was the result of an attempt at bimetallism that failed, and a government that decided to switch from its centuries-old sterling silver standard. Other countries followed later falling into line with Britain, with Germany and the United States eventually accepting gold as the leading metallic money in the 1870s. And as Von Mises records in his Theory of Money and Credit, “The sharp decline in the price of silver since 1873 is recognised as largely due to the demonetisation of this metal in most countries.”1

This is an important point, obvious perhaps on reflection. The move from Newton’s gold-to-silver ratio of 15.5:1 to today’s 70:1 can be put down largely to silver’s demonetisation. Today, the price of silver measured in the world’s reserve currency, by which it trades, is heavily influenced by a cartel of industrial users and their banks through the financial markets. Continue reading

There’s No ‘E’ So ‘Q’ Is Just Formal Imagination

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

It all started with Japan so it makes sense to start there. As anyone who wishes might know, the Bank of Japan has pioneered the QE business to the point beyond extrapolation. They were first to do it, first to “have” to expand it, and first to go back to it over and over and over. BoJ is on at least QE10 if not QE22 or even 23. When QQE was first launched in April 2013, in what seems like a distant and now dismal memory, they proclaimed righteous construction of hitting their 2% target in 2 years. Despite missing that target already and being “forced” to expand QQE once already (with whispers of still another haunting over everything), the Bank’s version of “transitory” will stretch yet another year. Their expectation for that 2% “inflation” rate has recently been pushed out to now 2017:

BOJ Governor Haruhiko Kuroda and his fellow board members said in a report detailing updated economic projections that the slide in oil prices was to blame for reduced consumer-price forecasts for the coming two years. The bank now sees the inflation target reached around the six-month period through March 2017. At the start of this year, the expectation was for the goal to be realized in the fiscal year through March 2016.

As in the US, oil prices have gained the most scorn though not all; and what remains apart from crude oil is meticulously avoided. Central banks all over the world are joined, even conjoined by the “dollar”, into pulling apart their mechanistic mysticism of inflation. The very term QE refers to exactly that connotation, as “quantitative” is meant to deliver the expectation of a scientific regimen. The central bank does X amount and produces a known Y view of inflation. Thus, the situation of doing X and X^2, as in Japan, and producing Yx0 is not just an economic setback (in orthodox views; in reality, inflation is most unwelcome even at such “low” rates) it obliterates the whole theory.

Since modern monetarism, fused and infused with Keynesian central planning elements, is entirely predicated on at least some parts of the Phillips Curve, being taken out of the QE “equation” by stubbornly ungovernable inflation is fatal to the whole damned philosophy. That observation includes a US Federal Reserve and its policymaking body, the FOMC, that had been well-versed in Japan’s prehistoric experimentation with “Q”E (not that the “E” comes closer to its billing, either). At their June 2003 policy meeting, where Greenspan’s ultra-low discussion dominated, Japan was a heavy topic for those obvious reasons.

FERGUSON All of us around the table have thought about the situation in Japan for a long period of time. As you’ve reviewed and examined it, what lessons do you think we need to learn from Japan about the mistakes that can be made in executing some of these nontraditional policies?
MS. JOHNSON. Well—. [Laughter] The staff, as you know, did a paper that received some attention in which we came to the conclusion that the Japanese started too late.

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How China Broke the World’s “Bubble Machine”

Submitted by William Bonner, Chairman – Bonner & Partners 

Magical Money System

POITOU, France – U.S. stocks still going up. What does Mr. Market know that we don’t know? Plenty. He knows everything. Millions of facts. Millions of opinions. Millions of guesses. A damned know-it-all. Mr. Market is always right; there is no higher authority except God Himself So, if Mr. Market says stocks should go up, who are we to argue?

China-crisis

“Don’t fight the tape,” is another old-timer expression on Wall Street. When stocks are going up, you don’t want to be short. When they are going down, you don’t want to be long. As simple as that sounds, it doesn’t help you much. Because you never know which side the tape is on.

INDUDJIA, daily. At some point, the “tape” is going to mislead those “millions of well-informed investors” – click to enlarge.

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Bitcoin Surges 55% In Month – Chinese Moving Capital Into Bitcoin and Gold

Submitted by Mark O’Byrne  –  GoldCore

Bitcoin has been surging in value since mid October and gained more than 20% yesterday alone. At one point, it hit a yearly high of more than $491 (see chart).

GoldCore: Bitcoin
CoinTelegraph

In August, bitcoin fell to a low for 2015 near $200 amid turmoil in the Chinese and global stock markets.  But bitcoin transaction volume has been growing. Blockchain.info data shows that unique bitcoin wallet addresses—which are how users manage and trade bitcoin—are at an all-time high. Some have multiple bitcoin addresses, but such a spike suggests there are new users as well.

It’s not entirely clear what’s driven the most recent price gains. There is an assertion in an article on the front page of the FT today that the gains are due to Chinese people flocking to bitcoin in a giant pyramid scheme run on a Russian fraudsters website:

The price of the cryptocurrency bitcoin surged on Wednesday to its highest in more than a year amid a wave of Chinese testimonials for a “social financial network” called MMM, which bears the hallmarks of a pyramid scheme.

New members of MMM have to buy bitcoins to join the scheme, which is the brainchild of Sergey Mavrodi, a former Russian parliamentarian since jailed for fraud.

Although the article is unbalanced and simplistic, the truth regarding the root cause of the price movement of any market is of course much more complex – and there are many supply and demand issues to be considered.

GoldCore: Bitcoin price chart
Source: CoinDesk

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The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• This Is the Worst U.S. Earnings Season Since 2009 (Bloomberg) 
• U.S. Posts Record Deficit in Manufacturing Trade (Bloomberg) 
• German Factory Orders Unexpectedly Drop for Third Straight Month (Bloomberg) 
• America’s Labour Market Is Not Working (Martin Wolf) 
• Yellen Signals Solid Economy Would Spur December Rate Hike (Bloomberg) 
• David Stockman Explains How To Fix The World -In 7 Words- (Zero Hedge) 
• The Bear Case for China Sees PBOC Following Fed to Zero Rates (Bloomberg) 
• I’ll Eat My Hat If We Are Anywhere Near A Global Recession (AEP) 
• VW Could Face Billions In Car Tax Repayments Over Latest CO2 Scandal (Guardian) 
• VW Scandal Widens Again as India Says Vehicles Exceeded Emission Rules (BBG) 
• Germany Ups Pressure On VW As Scandal Takes On New Dimension (Reuters) 
• VW Emissions Scandal Still Obscured By A Cloud (Guardian) 
• Germany To Retest VW Cars As Scandal Pushes Berlin To Act (Reuters) 
• Basque Secessionists Follow Catalans In Push For Independence (Guardian) 
• US Presses Europe To Take Steps To Reduce Greece’s Debt Burden (Bloomberg) 
• Fannie, Freddie May Need To Tap Treasury, FHFA Director Says (MarketWatch) 
• Maersk Line to Cut 4,000 Jobs as Shipping Market Deteriorates (WSJ) 
• 2015 Million Mask March: Anonymous Calls For Day Of Action In 671 Cities (RT) 
• Merkel Overwhelmed: Chancellor Plunges Germany Into Chaos (Sputnik) 
• Merkel Reasserts Control as Rebellion Over Refugees Fades (Bloomberg) 
• Rough Seas and Falling Temperatures Fail to Stop Flow of Refugees (NY Times) 
• 800,000 ‘Illegal Entries’ To EU In 2015, Frontex Chief Says (AFP)