Consumer Price Index June 09 – Real Prices Down 6.4%

The BLS reports:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in June before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 12 months the index has fallen 1.4 percent, as a 25.5 percent decline in the energy index has more than offset increases of 2.1 percent in the food index and 1.7 percent in the index for all items less food and energy.

Looking at the detailed table, one can see that owner’s equivalent rent (OER) went up by 1.9%. If we want to calculate the True CPI, we have to replace OER with the Case Shiller home price index, which most recently dropped by 18.1% over the year. If we do this, we get an overall price decline from 1 Year ago of 6.4%. (Last month’s release yielded a real price decline of 6.3%)

Deflation is alive and well … and accelerating.

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Bets on Inflation – Full Steam in the Wrong Direction

Bloomberg writes Jim Rogers Sells Dollars, Plans to Short Treasuries:

July 6 (Bloomberg) — The dollar and U.S. Treasuries are both likely to slide as soaring government debt in the world’s biggest economy undermines confidence in its assets, according to Jim Rogers, chairman of Rogers Holdings.

“The government is printing lots of money and borrowing even more; that’s not the basis for a sound currency,” he said in a telephone interview today from Singapore. “The idea that anybody would lend money to the U.S. government for 30 years at 3 or 4 or 5 or 6 percent interest is mind-boggling to me.”

Rogers, the author of books including “Investment Biker” and “Adventure Capitalist”, said he holds fewer dollars than a year ago and plans to “short U.S. government bonds someday.” A short bet involves selling a security you don’t own with a view to buying it back after the price has fallen.

A time will come when Jim Rogers, Peter Schiff, Mark Faber, and other hyperinflationists will have to come forward and tell their investors that they were plain wrong. The only other option they have it to continue to predict for years and years to come, in millennial fashion, that someday their prophecy of hyperinflation will become reality. It is not a surprise that a lot of the current phenomena are entirely confusing and mind-boggling to them.

I would advise anyone who is still listening to them on this matter to consider Inflation & Deflation Revisited, take a look around and see what is going on with grocery stores, commercial properties, credit card defaults, friends who are losing their jobs, the immense appetite for savings, etc.

Adjust your investment strategy accordingly, and cash in while hyperinflationists continue lose money.

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Deflation Continues in Japan

The AP writes Record fall in Japan prices fuel deflation fears:

Japan’s key consumer price index tumbled at a record pace in May, the government said Friday. The core nationwide CPI, which excludes volatile fresh food prices, fell 1.1 percent from the previous year in the third straight month of decline.

With crude oil prices down dramatically from record highs a year earlier, energy and transportation prices fell sharply in May. Fuel, light and water charges were down 3 percent, and private transportation costs tumbled 9.2 percent.

Prices for household durables fell 4.9 percent, and those for clothing slipped 0.5 percent.

The core CPI for Tokyo dropped 1.3 percent in June, suggesting that prices nationwide are headed further south. Prices in the nation’s capital are considered a leading barometer of price trends across Japan.

“This is consistent with media reports that large supermarkets are marking such goods down as households turn increasingly defensive amid severe employment and income conditions,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Japan’s central bank predicts that prices will keep falling for at least two years. In its latest economic outlook report in May, it forecast core CPI to drop 1.5 percent this fiscal year ending March 2010 and another 1 percent the following year.

Note that in reality the price declines are probably move severe. I am not exactly sure how the numbers are measured in Japan, but in the US for example, real prices are actuall falling at a much faster pace than reported:

When we replace OER with the Case-Shiller home price index, which most recently indicated a year on year drop of 18.7%, prices overall actually fell by 6.3%.

Two fallacies in common reports in the media:

1. That there is a possibility of an impending deflation. – The truth is: Deflation is here and now, has been for a while, and will be for a while.

2. That we have to “fear” deflation. – The truth is: Deflation is a good thing, as I pointed out a couple of times:

Deflation is in essence a correction of the previous misallocations created by inflation.

What turns deflation into a bad thing? When the government tries to stave it off by spending billions and trillions of dollars, thus prolongs the correction, continues the misallocations, and increases the debt burden on the taxpayers. If you want to get an idea of the long term outlook for the US economy, look at Japan. The credit and stock bubble there burst in 1989, and has been deflating on and off since then.

As I referenced in The Long Term Outlook:

How much deleveraging?

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. While it’s true that Japanese firms and U.S. households may differ in important ways regarding decisions about paying down debt, the Japanese experience provides a recent example of a significant deleveraging episode that took place in the aftermath of a major real estate bubble and is useful as a benchmark.

The Japanese stock market bubble burst in late 1989, followed soon after by the bursting of the real estate bubble in early 1991. Nearly 20 years later, stock and commercial real estate prices remain more than 70% below their peaks, while residential land prices are more than 40% below their peak.

Figure 3 compares Japan’s nonfinancial corporate sector with the U.S. household sector over 10-year periods before and after the leverage-ratio peaks. In both countries, leverage ratios rose rapidly in the years before the peak.

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt to GDP ratio of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

Update: I meant to say “public debt to GDP”, not ” public debt per capita”, even thought that, too, is likely to be accurate.

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Inflation Fears Meet Reality

The Bureau of Labor Statistics reports that consumer prices fell by 1.3% over the past year:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in May before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 12 months the index has fallen 1.3 percent. This is the largest decline since April 1950 and is due mainly to a 27.3 percent decline in the energy index.

cpi-may-20091

As can be seen this CPI-U measure applies a rise of 0.5% for “Housing”. How realistic does this appear? It is obviously a mirage. It is a result of the fact that the so called owners’ equivalent rent (OER) has replaced real home prices in the index. It contributes 24.433% to the current CPI-U and is included as a component of “Housing”.

This prevented the CPI from raising red flags during the housing boom, and it is now skewing price declines significantly

When we replace OER with the Case-Shiller home price index, which most recently indicated a year on year drop of 18.7%, prices overall actually fell by 6.3%.

As I said 11 days ago:

…this is not the stuff from which inflations are made.

I expect a reversal of market data to adjust to real conditions sooner or later. I think Treasury Notes will be a good call. The dollar should start to rise again against other currencies. I think gold is likely to do fine. It is merely back to where it was before the inflation fears began. Silver’s excessive gains, however, may have partly been fueled by these inflation expectations. I would advise caution here. It may be time to ring the register on some silver gains and buy at another low.

Treasuries have rallied since then. Stocks have fallen. The dollar has gained, albeit rather moderately. Gold saw a minor drop while silver fell by about 6%. Virtually all inflation expecation indicators that I posted in that article have begun to change direction. I expect this to be a pervasive and extended trend over the next weeks and months with gold beginning to bounce back stronger than silver. Whenever expectations are so out of whack with reality, a market correction tends to be due … time will tell.

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Inflation Fears vs. Reality

Markets everywhere are unanimously heralding a return to dollar inflation

Perceptions:

Inflation expectation is up:
inflation-expectation-june-2009
Click on image to enlarge.

Stock markets are up (S&P 500 below):
sp500-june-2009
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Treasury yields are up (10 year Treasury Note yield below):
10-year-treasury-notes-june-2009
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Spreads between Treasury Inflation Indexed Securities and regular Treasuries have widened significantly:
10-year-treasury-notes-vs-tips-june-20091
Click on image to enlarge.

The dollar is dropping against major currencies:
dollar-euro-june-20091
Click on image to enlarge.

Recent news are screaming Inflation:

Gas prices above $2.60:

Gas prices have been steadily rising since early December, when the national average was around $1.60 a gallon. But despite the recent rise, gas prices are still well below year-ago levels of $3.986 a gallon and last year’s all-time high of $4.114 a gallon.

But some are concerned that prices will continue to rise. Part of that has to do with the usual increase in demand for gas during the summer months.

In addition, rising hopes of a U.S. economic rebound have helped push oil prices higher as the dollar has weakened against other currencies. A weaker greenback tends to push up the price of oil since oil is traded in dollars around the world.

Dollar’s wounds reopen:

Emerging market indexes and commodities are surging as investor wealth pours in once again. Profligate US spending and skyrocketing deficits, hyper-loose monetary policies in this crisis, and collapsing confidence that the Fed will actually be able to withdraw such policies and excess liquidity when required, are all causing dollar inflation expectations to become deeply rooted in investor psychology.

The overpowering perception on the part of global investors that the Fed, Treasury and Administration are losing control of the US fiscal position, and that inflation (more likely hyper-inflation) is virtually becoming inevitable is threatening to wreak irreversible harm upon US finances and upon the dollar itself.

Reality:

Actual market data, however, tells us the following:

Credit is imploding across the board…

Consumer Credit:
consumer-credit-june-20091
Click on image to enlarge.

Commercial Bank Credit:
commercial-bank-credit-credit-june-2009

Industrial and Commercial Loans:
industrial-and-commercial-loans-june-2009

Loans and Leases at Commercial Banks:
loans-and-leases-at-commercial-banks

Real prices are dropping at unprecedented rates:

Case-Shiller-CPI (CS-CPI) vs. CPI-U

click on chart for sharper image.

See CS-CPI Negative 5.0% Third Straight Month for more details.

Greenspan ignored the effects of asset bubble like housing, by failing to take into consideration housing in the CPI. Real interest rates were -5% in mid-2004 and stayed that low for quite some time, spawning the biggest credit boom the world has seen. Now in spite of a Fed Fund’s rate that is zero, real interest rates are +5%.

Home prices continue to decline:

home-price-index-march-2009
Click on image to enlarge.

According to the new Case Shiller report nationwide home prices dropped by 18.7%.

Top 3 annual declines:

1. Phoenix, AZ: 36.02%
2. Las Vegas, NV: 31.23%
3. San Francisco, CA: 30.06%

Top 3 monthly declines:

1. Minneapolis, MN: 6.25%
2. Detroit, MI: 4.85%
3. Phoenix, AZ: 4.52%

…this is not the stuff from which inflations are made.

I expect a reversal of market data to adjust to real conditions sooner or later. I think Treasury Notes will be a good call. The dollar should start to rise again against other currencies. I think gold is likely to do fine. It is merely back to where it was before the inflation fears began. Silver‘s excessive gains, however, may have partly been fueled by these inflation expectations. I would advise caution here. It may be time to ring the register on some silver gains and buy at another low.

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