Friday, May 16, 2008

How to Measure Inflation

The controversy over inflation and how it's measured seems global now, as I've heard persons from Singapore to New York to Paris comment that government measures of "inflation" are out of date, not relevant or a conspiracy to rob the poor. Screeds calling for "new definitions" are broadcast weekly.

It's inarguable that simple supply and demand for specific goods can affect those prices singularly with huge shifts in level and volatility.

So what is such a broadly available item that nothing can unduly affect it's price on short term or even intermediate time scales - except inflation ? Labor.

This thought came to me while reading "Lapham's Quarterly", volume 1, issue 2, about "Money". This new quarterly is a superb read which I highly recommend. The quarterly provides one with the thoughts of the great thinkers, writers and even "common man" about a single topic. It's colorful with sources cited and my current issue has 200 pages of great reading in easily digestible 1-3 pages bites.

Page 41 has an excerpt from Adam Smith on the development and meaning of "money". The core concept is that the value of labor really determines the value of money. Exchanging money replaces barter and lets one more easily value goods and services. How much labor can one save by exchanging money for a good/service desired - buying something instead of making/doing it yourself ? That is the critical concept in understanding "money". This is why even on a gold standard, there can be considerable inflation when new mines or sources are found, such as the discovery of the South American gold stolen from the Aztecs and Incas or later mined there in the 16th century and later.

By the way, this very broad measure of inflation via labor costs even works for inflation caused by plagues or wars that substantially reduce the labor force. Data from the era of the "Black Death" in Europe prove this.

Roll forward to now. What does the price of labor tell us about inflation ?

The cost of employment in the US increased 3.3% for the year ended March 2008. For the prior year, the cost increased 3.5%. I suppose I could further say that productivity improvement means "real" inflation is about 2% less than that measure, but golly, 3.3% is pretty low already.

Inflation is decelerating. Inflation is low. Facts are facts.

Whether the great increases in some commodity prices are caused completely by emerging market supply-demand and weather, or those prices have moved to the "asset bubble" phase from investment money, time will tell. But labor prices prove that inflation is low.

Markets

Good move up yesterday as nibbling real buyers pushed up a broad range of stocks. Buy good stocks on dips. Time diversify. Diversify by asset classes and re-balance as needed. The trend is up. Hold until something changes. Be patient.

Word of the Day

"Cacoethes" - noun [$10] - that "oe" is the German dipthong "oe" with the dots on top of the e, pronounced oi-e, sort of swallowing the combined sound.
Cacoethes means an urge to do something inadvisable; also an irresistable urge; mania
Sentence: Investors must control their cacoethes to sell to take small profits, or they'll miss the really big 100%+ gains on holding a good stock for a year or two. That's where the big money is made.

81 comments:

Bunkerman said...

It's so hard to watch Babblevision for more that two minutes ... in Rome I turned them on, heard some face ask that ubiquitous question about recession - for the 200th time in 100 days - and turned them off.

No value.

This morning they start talking about oil price volatiliy and then use data known to lag in time to look forward. Click ... stupid.

Bunkerman said...

hmm maybe the 1000th time in 100 days ?

maverick said...

Bman, could you give us a breakdown of your present asset class diversification?

Spin-em said...

ok Bunker boys pick a triple for Preakness...The Derby's paid 3 thou so lets pick it up a lil...lol

1 MACHO AGAIN LEPAROUX
20
2 TRES BORRACHOS BAZE
30
3 ICABAD CRANE ROSE
30
4 YANKEE BRAVO SOLIS
15
5 BEHINDATTHEBAR FLORES
10
6 RACECAR RHAPSODY ALBARADO
30
7 BIG BROWN DESORMEAUX
1/2
8 KENTUCKY BEAR THERIOT
15
9 STEVIL VELAZQUEZ
30
10 RILEY TUCKER PRADO
30
11 GIANT MOON DOMINGUEZ
30
12 GAYEGO SMITH
8
13 HEY BYRN

Bunkerman said...

For Krypto Fund, I am 39% US stocks, 26% Foreign stocks [split into equal 8.66% pieces for Pacific, Europe and Emerging Markets], 20% real estate, 5% gold & silver, 10% fixed income; 0% cash, 0% TIPs.

It's up 3.2% YTD [allocations were adjusted a few times, as gold & silver were 15% once - that excess was moved to US & foreign stocks in a 3:2 ratio] and all bits of cash % TIPs were sold and reinvested likewise.

Bunkerman said...

Alpha Fund is 2.3% EDU, 16.8% AAPL & GOOG, 9.8% GE, 43.3% big banks [BAC, WB, JPM, C - about equal now], 3% HDB & IBN, 21.6% in energy [DVN, CVX, RIG, DO], 3.2% miners [CCJ and FCX].

Alpha Fund is about 25% of size of Krypto Fund by asset size or about 18% by equity now.

Bunkerman said...

btw, I am spending a lot of money supporting the common working man by renovating the second floor of my "barn" into a library & second workshop. Hence am drawing some equity from Alpha Fund after its rebound this spring.

Bunkerman said...

Spin, I have to go with Behindthebar, Yankeebravo and Machoman, by the names ;-)

mern said...

http://www.viefromthebunker.blogpsot.com/

lol, hit this site this am

mern said...

Inflation is decelerating. Inflation is low. Facts are facts.


imo, fine to say this in cyber space and maybe the country club, but i honestly would not being to say that out loud, in most places.

id rather walk into a redneck bar with a negro/chin wife.

opps i do that. but i still wudnt do the former.

maverick said...

thanks for the breakdown Bman

Bunkerman said...

sometimes the public is wrong ... I am starting to think the oil moves are now becoming a bubble due to the pension fund index investments. When that's all-in, watch out below. But I might be early, as I was in 1999.

mern said...

pimco agress the govt data is bs.

r they wrong too?

:-)

(i know they r talking their book)

Bunkerman said...

When I hear that, I wait for the reason ... and when all I hear is the price of gasoline, wheat, etc., I know they know nothing.

If someone gave me some real numbers to challenge the years of patient study and analysis I know the BLS has done for over 35 years, I might reconsider.

But I studied the computation of "inflation" a lot in the late 1970s, and so far I hear nothing that indicates a contradiction to that thorough work.

Bunkerman said...

Hmmm Pimco bonds are is based in San Diego ... another playground of the sun and surf set.

Sheesh

Bunkerman said...

Shorted a bit more TLT - I missed other add points, so ... ugh ... this one will probably be too early.

Bunkerman said...

oh ... re positions ... I also have some GE Sept 30 calls which represent 5% of Alpha Fund if exercised, and my TLT short is about 8% of Alpha Fund after the add and I could take it to 16% if I get good entries.

The %'s are of the total stock value.

mern said...

http://money.cnn.com/galleries/2008/news/0805/gallery.real_people_gas/index.html

another 15 stories of people mired in stagflation. all over the country.

all over this country people r choosing food or gas, gas or food.

there will be more to follow this weekend on cnn. i saw this am that today and all weekend they will be rolling out "experts" that disagree with the govt. all these experts and common folks dont buy the govts data for a minute.

perception is reality, no?

Bunkerman said...

why not keep the food & gas and drop the cable TV ... go to the free library & read a book.

get rid of the cell phone ...

cook own food ...

make the kids walk to sports, etc.

golly ... maybe even vote for an honest politician who will let oil drilling go on and cut spending, bribes adn taxes.

make own coffee instead of paying a $1 per cup or more at the local gas station, etc.

Bunkerman said...

or bag their own lunch instead of buying it ready made at a fast food place

play b-ball at a free court instaed of golf

or even just take a walk

sheesh.

Bunkerman said...

the waste in the US is sooooo enormous ... griping about food and gas is ridiculous.

1/2 of goods at a mall ... or more ... are simply a wste of money.

stop buying bric a brac

learn how to use a wrench + screwdriver and fix own stuff

sheesh ... live like me ... uh ... most of the time.

Bunkerman said...

I already proved one can eat good, nutricious food for next to nothing with a bit of work.

I'll be making a big tray of roasted vegetables tonight that will last all weekend.

Hmmm maybe another roasted chicken for $1.50 a pound since Mrs. B will be away at a dog agility event.

plus I bought more turnips .... mmmm tasty

and make pancakes for breakfast.

and homemade bread.

Bunkerman said...

I'm getting hungry thinking about all this good, low cost food

Bunkerman said...

coffee ... that's so idiotic buying that stuff at a dunkin donuts or even a gas station and griping about price when one can make it at home, fill a thermos and get good hot joe for low cost.

see how that Adam Smith theory works fine.

no inflation.

Frosty said...

Bunky...TLT and TIP(back over108)...low v lift... a lil' flight to safey perhaps...what say you sir.

Bunkerman said...

maybe the word of the day should have been, "curmudgeon"

Bunkerman said...

I posted an add to that short an hour or so ago, frosty

Bunkerman said...

if it goes to the 50 dma, I double up the short.

mfl59 said...

Bunkerman what is your favorite drink at Starbucks?

Frosty said...

sorry, I see it...was noting all those money saving tips and missed the dark long end curve.

Bunkerman said...

hmm and stop smoking, stop buying lottery tix, stop playing keno.

read Shakespeare like me. It's free at the library.

Spin-em said...

Bunk you putting 220 in your library?

Bunkerman said...

I have never, ever bought coffee at starbucks. I was trying to once, but the secret handshake / code baffled me.

so I went to the corner deli in NYC & got a cup - black - for a $1

Bunkerman said...

"220 in the library" ???

hmmm ... ?

Spin-em said...

Doing your own electric will save you a ton....lol

mern said...

the problem with your logic, bman, is u really r not in the heads of most americans.

we all only have 24 hours in a day.

when rich, semi retired, no kids at home it is real easy to think like that.

but if u r married, with car payments, a mortgage, kids (all things i have chosen to have) that 24 hours gets real short. most people work at least from 8 to 5pm, but more realistically it is 8 to 6. u get an hour to eat or run errands. get the kids to school, cook thier meals. this is not the 50's. both parents work.

u get up at 5am and by 6pm when u get home from work, do u have the energy to cook, clean, cut the grass, etc etc etc.

the american dream gets harder to live by the day.

i definitely agree the sense of entitlement in this country will kill it.

but ya everyone has a cell phone, but landlines r going away very fast. big article on that yesterday. and telecom is deflationary, so r almost all durable goods.

the problem is the stuff we need. food, gas, education, health care, other energy besides gas, those r going at a 90 degree angle, up.

about 20 to 30% of the rise in price of corn is becuase of ethanol, the rest is genuine demand from CRIB. at least that is what the govt says. so if u believe the CPI is up 3.9% in the last 12 months, u wud have to believe all the other kaka coming out of its mouth.

i honesly, seriously wud be afraid to sit at any watering hole in the country, get all shitty and start blabbing that inflation is not existent. i firmly believe i wud kick the shit kicked out of me.

hell i practically saw a guy get into a fight at my waterholing hole over being charged 99 cents for an order of fries.

oh and i saw a fight at WMT last week and the cops had to come.

tensions r high, unless your net worth is in excess of 5 mil.

if u got a mil, no debt, no kids, life is gud to.

if u have 2 kids and make 200k in your house. u r making it but not saving a dime. im quite sure i cud go through those peoples lives and find areas where they cud save, but it wud not be a lot.

the pinnical of our society was 1999, now we r on the backside, just like romans.

clinton took us to the end. bush pushed us off the cliff with a lot of help from sir alan greenspan.

and now hillary thinx she can fix what she doesnt understand. this is not the futs market!

mern said...

maybe i shud call my boy specter.

hey arlen, i hate the pats with a passion but WTF r u doing?

how about a congressional hearing on the CPI?

3.9% i cud just see that one now. it wud be more sickening than clemens.

imo, these r distractions so they dont have to focus on the real issues.

SPYGATE, STEROIDS, what a bunch of bullshit. it freaking entertainment, y is DC involved?

Bunkerman said...

I suppose I could tell how my wife's parents both worked and she cooked dinner for the family beginning about age 12,

or how I cleaned up dog shit beginning at age 8 to work at Dad's vet clinic, and gosh walked to work, too.

[lol that always made the NYC beggers mad !]

or on and on.

hmmm 99 cetns for fries ... uh ... I think I psoted a price of $2.99 for 10 pounds o fpotatoes a few weeks ago.

and just bought turnips for 69 cents a pound - huge

Bunkerman said...

lol spin.

hmmm come to think of it, the Amish do without electricity ;-)

and go to Lehmann's site at http://www.lehmans.com for lots of non-electricy appliances.

uh yes I buy some stuff there.

Bunkerman said...

barn/garage has 220, and lots of big amp circuit breakers for the welder, etc.

Bunkerman said...

I agree DC is screwing everyone ... all they do is vote for bribes.

If they had drilled that oil in Alaska 15 years ago it would be in the gas stations now.

But the DC dopes wanted to stop it to create gtrouble for the common man and pay off the greenies. Caribou love oil pipelines - I've been to Prudhoe Bay.

Frosty said...

spin and I save money on haircuts, unlike mlf who tosses $17 to the local barber like it's nutten...mrs frost uses a mixing bowl to cover my thick lush locks and trims around...mrs spin fires up the palm sander daily on spinny's dome to keep the stubble in check.

Bunkerman said...

yes, the bowl cut - looks rugged, like a Norman knight ;-)

Mine cost $17 plus $4 tip - I treat my barber ... uh ... barberette ... well

mfl59 said...

uhhh, that includes a shave on the last friday of the month......

Bud goes to the same stylist as Johnny Edwards...$400 indeed....

Spin-em said...

How is Bob doing btw mfl(spin writes stuff down on Bunky index cards)..lol

mern said...

ya a very strong work ethic is the only way to go.

i have worked my ass off since i was 14, except for the 4 yrs of heaven known as college.

i had a job in college but it involved staying home, instead of going out, and the cash was insane.

and i used to sell nitrous in the parking lots of shows. 100 bucks for an 80 gallon tank. wake up in the am with about 2 grand, no brain cells, and a deep satisfaction of flying high.

get that? 2 grand and free gas all day and night, for 100 bucks.

probably the most important variable for the next president is fiscal discipline. screw the war on terror. that shud be over in 15 minutes. GLASS BABY, LOTS AND LOTS OF GLASS!

in 2000 i walked into the booth thinking GORE or BUSH, BUSH OR GORE (i knew both sucked). so i voted for the guy who i thought wud be fiscally conservative.

OPPS I WAS WAY OFF. he has been the worst fiscal president by 10 country miles. seriously carter did a better job.

Spin-em said...

Bunk what was the Wow site for you of Rome and what was the cheesiest?(like..thats all there is?)

Bunkerman said...

agree Bush is a knave ... let the R's vote huge payoffs to contributors via earmarks.

Worst president since ... LBJ.

And I even contributed to him and took old chat roomsters out to dinner in Vegas to celebrate his election.

Arghhhh I still need to do penance for that.

Bunkerman said...

for concentrated spectacular art - the Borghese Gallery. The best.

2nd - but larger - Vatican museums. We didn't come close to seeing all. Probably need three trips.

Forum & colusseum.

St. Peter's. St Paul's (I bought some Benedictine from the monks)

Trevi Fountain and many other fine fountains by Bernini all over the city.

Capitoline Museums.

trip to Pompey was great.

And Tivoli fountains & Hadrian's villa excursion.

A church called Church of St. Mary del Popolo.

intellectual interest - the Etruscan museum in the Borghese gardens.

Barbarini Palace.

Church of St. Mary della Vittoria.

I had prepared with a DVD art course so I could learn more & understand the art & sculputres better.

hmmm I missed a few good sites.

gotta go back in a couple years.

Bunkerman said...

guidebooks let one skip the cheesy sites.

no way was I going to walk a few miles up & down hills on bumpy streets to a site not guaranteed to be great.

best guide book is "Eyewitness Travel Rome" published by DK - $25.

Tours - "Green Line" were very good. Online they call themselves "Viatour"

Walking self tours of Frommer's are good.

Bunkerman said...

ok, if you want to spend $500 on a dinner for two, go to The Terrace of Hotel Eden - super good, super expensive.

Spin-em said...

attaboy...good for you sir

Bunkerman said...

Rome means art, sculpture, sites of antiquity, great food, etc.

Not for recreation or sports, etc.

Frosty said...

did you avoid a bath while in Rome...you know, common man an all...a lil' splash of olive oil and garlic, good to go.

Bunkerman said...

lol frosty ... no, we stayed at Hotel Eden for $800 a night. Very fine bathrooms with showers & tub in marble, etc. This Hotel is super good with great service but very expensive.


lol, that included an fine breakfast buffet daily with plenty of smoked salmon and croissants, fine coffee.

Bunkerman said...

I really didn't notice bad smells much at all.

Spin-em said...

no SeaWorld in Rome?...you know you can get a free 6ouncer beer there...

mern said...

costa rica was the best adventure vacation i had.

climbed up volcanoes. surfed the west coast, and went white water rafting (class 5 rapids, almost died, still have scars on my ankles from smashing against the rocks)

but the cliff diving is to die for in jamaica


next month i have boot camp for 2 weeks starting at 530 am.

ive cut back on the drinking and finally got down below 160. now to get those six pack abs the worden likes.

im like rosie odonell. i simply cant have 1 or 2 beers. its either 10 or none. so im starting to become a weekend warrior.

i just cant drink during the week anymore.

getting old sux!!!!!!!!!!!

Bunkerman said...

also refilled my plastic water bottles for free at the fountains - fine to drink.

hehe ... saved about $2 every time ;-)

Bunkerman said...

5;30 am ... hmmm that's about when I finish the blog every day.

I just drink 3 glasses of wine a day (1/2 bottle) with dinner and maybe a highball pre-dinner if in the mood.

Amount control varies with stress.

Bunkerman said...

trick is to put the wine away after 3 with a vacuum rubber stopper.

and put the whisky back in the cabinet afer the highball.

Drink cold water after the ration.

Bunkerman said...

no SeaWorld ... hehe ... but plenty of great sea bass ;-)

turbot, too.

mern said...

we have a filter on the kitchen sink.

much better than that bottled water crap, and i wud never use a bottle of water more than once becuase once exposed to sun or heat, the plastic bottle releases a lot toxins into the water.

35 bucks for 3 filters that lasts for about 6 months. and between the dogs, cindy and myself, we drink a lot of h20.

Frosty said...

base jumping from K-2 was a real was a highlight adventure for me and cheap as well...with my knowledge of tools I was able to form a fine parachute from a goat hide...still have scars on my knees from paying the sherpas in trade.

Spin-em said...

ROFLLLLLLLLLLLLLLLL

Bunkerman said...

I normally drink tap water here ... but in Rome it was warm and carrying a bottle of water in a bag with the guidebook was a savior on the long treks.

Spin-em said...

my last vacation.....I was searching for the Arch of the Covenant... armed with only a whip and my favorite hat....I fought for my life against other fellow searchers ...at one point..I was nearly flattened by a large stone ball...I'd go back

Bunkerman said...

ROFL frosty.

mern said...

ive jumped out of plane twice.

the 2nd time, i really didnt see the point. so i never did it again.

ive bunged off a bridge and that was very fun.

i think base jumping (and i know frosty didnt) is insane, but id probably try it, once

Bunkerman said...

my next vacation is in Vermont in July capping a few thousand rounds into Jap cars, shooting dynamite, etc', with the MGs. Heaven on Earth.

POE ... OPE ... that's the code prefix, sir ?

Bunkerman said...

I like my feet on the ground with my E-3 60 and a belt draped over my arm like Rambo, hosing down the opfor. With a cool bandana, too, of course.

Spin-em said...

Bunk 1,4,5
Mav 3,7,8
Spin 2,4,7

Frosty said...

4-7-12 for me sir.

mfl59 said...

3-5-7 please sir

Bunkerman said...

just picked up my roast chicken for the weekend dinners - $1.99/lb for organic free range chicken.

no inflation ;-)

Frosty said...

welcome home bunky...have a good weekend men.

Bunkerman said...

sold a bit of CVX for 50% LT gain.

I don't trust these oils after this move.

Still have a lot as I can't sell or would get ST gains ... ugh.

Bunkerman said...

If it's Friday PM, then it's Martini time :-)

have good weekend all.

mern said...

smoke a big one for me, bob!

i better call bud this weekend make sure he aint dead.

WAR!

Spin-em said...

MOOOOO!!!!!!!!

thanks guys ill get those triples in the morning.....great weekend and hope Bunky's brings...... it...... home..lol

Spin-em said...

The Arch?ppfftttt...The Ark..LMAOOOOOOOOOO