"Hmmmmmm ?" Reviewed

The famous bond fund mamager, Bill Gross, wrote a piece about inflation titled "Hmmmmmm ?" for his June "Investment Outlook". The gist of the article is that US government inflation data are wrong.

Hmmmm ... ? My poem fits here,

Sigh,
Why ?

His principle evidence is a chart of a "composite" of the CPI data of 24 other nations that shows inflation near 7% now, albeit that same chart shows the inflation rate for the mid 2006 thru mid 2007 period averaging about 3.5%. The 10+ year mean for that composite for the 24 nations is about 7%. The piece then shows a similar chart for the US headline CPI which is comsiderably more volatile with a mean of about 2.6% for the same period.

The conclusion is something suspicious exists.

He never explains a theory or rationale "why" there should be a connection between US inflation and inflation in other nations. Why is that ? Because none exists. Here are the 24 nations whose inflation data are used to contruct the composite: Belgium, Brazil, Chile, Colombia, Ecuador, Estonia, Germany, Indonesia, Iceland, Ireland, Italy, Japan, Mexico, Peru, Philippines, Russia, Slovenia, South Korea, Spain, Switzerland, Thailand, Turkey, Taiwan, Vietnam. It's odd that Britain, Canada and France are not included, being large economies, nor is Australia or India. .. or China.

That list should make you think. Also, no data is shown comparing inflation in Germany or Switzerland or Japan, to the composite. That should make you think, too.

Here is some inflation data from this week's Economist magazine, issue of May 24, page 119, for selected nations on that list. These are the latest monthly numbers.

US - 3.9%
Germany - 2.4%
Switzerland - 2.3%
Japan - 1.2%
Chile - 8.3%
Indonesia - 9.0%
Russia - 13.3%

The Economist also gives the "Euro Area" inflation as 3.3% and for China, 8.5%

At this point you can see the "composite chart" is crap - a meaningless amalgamation of unrelated data to make a polemical point. All the real data show is the prices rise faster in rapidly growing, emerging markets ... or in unstable nations. And the rates of headline inflation in the US are roughly similar to the more comparable developed economies in the Euro area or Japan - which given roughly similar monetary policies and G-7 coordination, makes some sense.

So his "evidence" for something suspicious just vaporised with a simple analysis.

He then turned to the "long term" disparity between the core CPI and the headline CPI, showing a three year chart with both plotted as an index values [ not rates of change] arbitrarily setting both at 100 for January 2005. The chart shows the headline CPI continually trending over the core for that period. He says this implies the Fed policy focus on "core" inflation is wrong. Hmmmm ? I wonder what that chart would show over 10 or 20 or 30 years ? Point of original selection for polemics is so common one must really question the choice. Oil prices have risen in that period, true. But since the diffusion of steadily rising oil prices throughout the economy must take a few years as firms and people adjust behavior, why should we not expect that chart he shows to display just the effect it does ? Core will lag the headline as long as oil prices continue to rise as the adjustments must lag the impulse to make changes.

By the way, if prices for some commodities such as oil, wheat, and copper are based of world supply-demand relations, I'd like an explanation of how fed policy can affect those ? Of course, none is ever forthcoming from anyone. In addition, this week's Barron's on page shows the US monetary based grew at that rip roaring rate of ... 0.9% year over year for the week ended May 21. Gollly, the Fed sure is turning on those money spigots, isn't it ? Yes, I am being facetious.

There's more in the article criticizing hedonic adjustments and weightings, but having disintegrated its main evidence and points, why bother with the rest ?

Here's a provocative quote: "Somebody's been foolin', perhaps foolin' themselves - I don't know. This isn't a conspiracy blog ... "

Look, this is Bunkerman writing. I know about conspiracies. I've seen black helicopters fly over my house every Sunday morning for years* ... I live in a bunker with plenty of survival gear stockpiled. I own lots of gold & silver for the unknown. The US inflation data are correct. If people choose higher priced, newfangled gadgets with more capacity instead of being thrifty and maintaining their standard of living, that's their choice. The index is supposed to measure the cost of living, not the cost of living better.

PS: I might address the other points in Bill Gross's article later. But it's time to post this blog ... and get my breakfast.

*lol ... they were from a nearby National Guard facility that had weekend training sessions ;-)

Word of the Day

"Idee fixe" - noun, French [$10], usually printed with an accent on the frst "e" and pronounced "e-day fix"
Idee fix means an idea that dominates the mind; an obsession.
Sentence: In the late 1990s, investors acted under the idee fixe that "it's different now", bidding up technology stocks to bubble levels. Now investors acts under the idee fixe that inflation is roaring so bid up the prices of some commodities like oil to bubble-like levels. Sigh ... why ? Learning the wrong lesson is really dangerous to one's net worth.