Real Inflation: Trimmed Mean PCE

It looks like the real inflation rate in May 2008 was 5%. See

http://dallasfed.org/data/pce/index.html

The United States still uses a grossly fallacious measure of inflation called, "core inflation," which excludes food and energy prices. This "core inflation" is reflected in a widely-used metric called the CPI, or Consumer Price Index. Using CPI numbers that exclude food and energy, if a tomato goes from 80 cents to 5 dollars each, but a Dell laptop gets cheaper by 100 bucks, the CPI would indicate that overall inflation was going down--which would be inaccurate. Thus, as a statistic, most "core" CPI numbers bring to mind the comment about "lies, damn lies, and statistics."

The Dallas Fed Reserve has bucked this misinformation trend by publishing a more accurate inflation statistic called "Trimmed Mean PCE," which includes energy and food prices. The Trimmed Mean PCE (personal consumption expenditures price index) more accurately reflects the real rate of inflation is because a) it usually includes food and energy prices; and b) it trims, or cuts, unusual numbers that are indicative of generalized noise rather than a long-term inflation signal. The United States' continued use of certain CPI numbers over a more inclusive indicator of inflation means that it is misleading the public, which still has not fully grasped how much money America has printed recently for extraneous expenditures.

For example, if annual inflation is at 4%, and your assets increased by 3%, you lost purchasing power. Money, after all, only has value because it is a means to buy things. If your ability to buy things decreases in the real world, even though the quantity of your money increases, you have fallen behind. America is currently experiencing about 5% inflation while the stock market has caused many portfolios to decrease by 10%, a double whammy. 5 dollars a gallon gas is just one obvious indicator of how massive federal expenditures have harmed the American Dream and Americans' ability to plan ahead financially. Still, if you look at most government figures for CPI, the government's numbers appear understated. The Fed Reserve is telling us that inflation is running at 4.2%, including food and energy, and 2.3% excluding food and energy. See CPI-U for 12 months ending May 2008 (link goes to PDF file):

http://www.bls.gov/cpi/cpid0805.pdf

But the Dallas Fed Reserve believes that inflation is running at 5%. Even the Fed Reserve member banks cannot get their story straight. Using several conflicting CPI numbers allows the federal government to keep printing more money, destroying its real value in the process, and then telling the public everything is okay and the government is properly evaluating inflation. Using a more focused, more accurate indicator of inflation would force the government to be more prudent in its expenditures. The public should be able to log onto the BLS website and get one or two numbers showing real inflation, instead of fifty different numbers. Other figures may still be listed on the government's website, but currently, there is no quick or obvious link to any PCE figure showing real inflation for the month of May 2008. Without such numbers, savers and workers cannot plan ahead to see how much they have to earn to maintain their standard of living.

Without accurate and easily accessible inflation information, a reckless government will print money to satiate the public in bad times, which allows the government to hide failed or short-sighted policies. The Medicare scheme is one such example of a failed government policy that is not being fixed partly because the government can mask the true cost of printing money in a barrage of irrelevant CPI statistics. As a result of public ignorance, the government can delay a real solution to Medicare's underfunded trillion dollar liabilities because it has the political go-ahead to print money to pay benefits if necessary. But, as one of my favorite quotes goes, "a few billion here and a few billion there, and pretty soon, you're taking about real money." That "real money" is the real value of money that savers have toiled to earn, and without more accurate inflation numbers, the United States makes it harder for its citizens to plan ahead and to justify delayed self-gratification.

There is one other interesting side note--the U.S. issues TIPs, or Treasury Inflation Protected Securities. These bonds are linked to inflation as measured by the "core" CPI numbers. These are very popular bonds, and the government may continue to issue billions of dollars' worth of them. As a result, the government has less incentive to shore up its CPI numbers, because doing so means it has to pay more money to the buyers of these bonds.

At the end of the day, a melange of irrelevant CPI figures favors spenders over savers because the more inflation statistics the government publishes that are irrelevant or not fully accurate, the easier it is to shield the public from the true consequences of government spending. The Federal Reserve should heavily advertise only a few inclusive inflation numbers and consider eliminating CPI, especially when PCE offers a more accurate inflation rate.

Update on July 11, 2008: according to my T Rowe Price newsletter, "inflation, as measured by the Consumer Price Index, was up to 4% for the one-year period ending March 31, 2008...U.S. inflation has historically averaged 3.1% for the 80-year period from 1926 through 2006."

Economics and "Common Sense" Quiz

There's a website that allows you to write your own quizzes--it's a little difficult to navigate, but it's quite good for a beta version. Here is my econ quiz--bonus points if you recognize the picture:

http://www.helloquizzy.com/tests/the-basic-common-sense-and-capitalism-test

Good luck!

Econ Calendar: Oh, Baby, Baby, It's a Wild World

GE releases earnings this Friday, and the day before, the unemployment numbers come out. So today, July 7, 2008, will either be the definitive bottom of the bear market, or we're in for a slow, somber decline if this week's numbers don't look good. Value investors might be salivating now, but as for me, well, I think Cat Stevens'/Yusuf Islam's lyrics are particularly apropos:

Now that I've lost everything to you
You say you wanna start something new...

Mr. Market has taken investors' money but now appears to be starting a new upward trend. And yes, I am being melodramatic--I called the recent market decline and got most of my money out, and if I hadn't jumped back in so soon with Pfizer (PFE), I'd be all smiles. As it stands, I still like PFE, GE, and CNB, because I can hold these stocks for the next five years or more. For long-term investors, perhaps today's V-shaped day can be the start of something new. Of course, "remember there's a lot of bad, and beware," and "a lot of nice things turn bad out there." To see Mr. Stevens in all his glory, check out the video after the jump:

http://www.youtube.com/watch?v=DHXpnZi9Hzs

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

Pinnacle Entertainment (PNK)

Jake Fuller of Thomas Weisel Partners agrees with me on choosing Pinnacle Entertainment over the Vegas casinos. See CNBC's article titled, "Casino Stocks: Don't Bet On the Biggies." Of course, I made the same call weeks ago, only to see Pinnacle Entertainment become a victim of the overall market decline:

PNK is Pinnacle Entertainment Inc. Although their HQ is in Las Vegas, they don't own casinos there. The six casinos they own are in Louisiana, Indiana, Missouri and Reno, NV; in addition, they operate casinos in the Bahamas and Argentina. This is a fairly small company--its market cap is still under 1 billion. So why choose this stock over WYNN, LVS, or MGM?

I watched a PBS documentary on Vegas recently, and let me tell you, Steve Wynn and his vivacity are a hoot to watch. The documentary reminded me of how cool Vegas used to be, starting with the Mafia and the Rat Pack, moving to JFK/RFK and Howard Hughes coming in to clean up Vegas, and then ending with shareholders and Wall Street finishing the job. What struck me most during the documentary is that Vegas seems like it's all out of gimmicks. The old Sands, where the Rat Pack used to play, is gone. Steve Wynn's Mirage is no longer the epitome of cool. By focusing so much on the future and demolishing anything older than a decade, Vegas has neglected to preserve its history, which would have been a tourist draw (who wouldn't want to walk on the same stage that Sammy Davis Jr. danced on?).

To be fair, when I went to the new Wynn hotel in Vegas, I was impressed. I wasn't impressed in the sense that this hotel was something wild, something fun--but it was a darn nice hotel and casino, and the no-smoking sports book didn't hurt (of course, it's impossible to find a seat). Would I fly out from California to Vegas just to see the Wynn hotel? That's the million dollar question, isn't it? I wouldn't--and if I did, there's nothing in that particular hotel that I couldn't get by staying at another hotel nearby and, say, walking over to view the Wynn's Ferrari display. The problem with sinking so much money into these hotels is that it's based on the hope that the high rollers will come to you and make up for the initial costs. But other than Charles Barkley, it's unclear why an international client would fly to the Wynn rather than another more exclusive resort, say, in Macau.

The next stage for Vegas hotels is to do what the Hard Rock Hotel has done--make each room unique so that customers are paying for the inside of their room, not the outside. I genuinely look forward to staying at any Hard Rock Hotel (HRH), because you don't necessarily know ahead of time which rock star your room will be based on. The problem with the HRH is that they don't have good locations (the one in Vegas is off the strip), and it's harder for them to expand in an already saturated market. But Vegas as a whole doesn't seem too much different than it was ten years ago, and so far, other than making its hotels more lavish, there's no new major attraction. With a looming recession, people might go to Reno or a cheaper hotel instead.

PNK is building casinos in areas where casinos are a unique, new attraction. It's like a Walmart coming to a tiny town--even if it's not fancy, even if it's just downright ordinary, the lack of competing attractions will still promote a steady stream of business.

Also, labor costs are cheaper in Indiana, Missouri, Louisiana, etc. A major cost of any Vegas casino is their unionized workforce and sheer number of employees needed to run all the attractions (or did you think the lions at the MGM fed themselves all day?). Especially in a slower economy like Indiana, casinos won't have as hard of a time finding cheaper labor and good employees. That's good news for the Midwestern and Southern-based casinos and PNK.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

Dave Barry Has a Blog

Dave Barry has a blog:

http://blogs.herald.com/dave_barrys_blog/

My favorite Dave Barry column is at this link:

http://findarticles.com/p/articles/mi_qn4188/is_20030720/ai_n11403113

I used to enjoy reading him every Sunday, but either the San Jose Mercury News stopped running his syndicated column, or he stopped writing for the Miami Herald.

I heard him speak at UC Davis about ten years ago. He was entertaining, but not laugh-out-loud funny. One audience member asked him about his height (he is not very tall), and although he was not happy about that question, he was classy enough to brush it off in a laid-back style.

American Anti-Immigration Fervor as Old as Benjamin Franklin

Some people view America's immigration scenario with trepidation; others with resigned acceptance; and others with open arms and optimism. While it is easy to write off the Minutemen and others as ignorant rednecks, none other than Benjamin Franklin expressed unease at immigration into America. Mr. Franklin was concerned about Germans. My point in sharing his letter and concern is to show that every single wave of new immigration brings fear, even to educated people, but years later, such fear is always forgotten. America's ability to incorporate all manners of people has been absolutely stunning and most likely the key to our success. 

  "Inconveniences may one day arise among us. Those [immigrants] who come hither are generally of the most ignorant, stupid sort of their own Nation... [F]ew of the English understand the German language; and so cannot address them either from the Press or Pulpit... Few of their children in the country learn English...they will soon so outnumber us, that all the advantages we have, will not, in my opinion, be able to preserve our Language and even our Government will become precarious." 

Mr. Franklin shows some humanity at the end of his letter when he says, "I say I am not against the admission of Germans in general for they have their Virtues; their Industry, and Frugality is exemplary." Do those traits remind anyone of the current crop of immigrants? 

I still say Thomas Jefferson's Louisiana Purchase was the single greatest achievement in American history--for what good is the Constitution without a large canvas for its implementation? America's vast landscape has allowed and will continue to allow more immigration for many more decades. The major issue is not whether America needs more immigrants--it has always had them--but how we can incorporate new immigrants and minimize wage losses in the industries they impact.

© Matthew Rafat (July 2008)

Reading List: Pensions, Global Econ, and Spending

We're approaching the holiday July 4th weekend, so I thought I'd share some book tips on my list:

1. While America Aged, by Roger Lowenstein.

Mr. Lowenstein echoes exactly what I have been saying about the inherent corruption in government, more specifically, how government workers are slowly bankrupting the younger and unborn generations.

http://www.amazon.com/While-America-Aged-Bankrupted-Financial/dp/1594201676

2. When Markets Collide: Investment Strategies for the Age of Global Economic Change, by Mohamed El-Erian.

Mr. El-Erian ran Harvard's multi-billion dollar endowment fund and was lured away by Wall Street.

http://www.amazon.com/When-Markets-Collide-Investment-Strategies/dp/0071592814/ref=pd_sim_b_4

3. Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire, by Laurence J. Kotlikoff.

This is a recommendation from Laura Rowley, who has a blog on Yahoo Personal Finance.

http://www.amazon.com/Spend-Til-End-Revolutionary-Standard-Today/dp/1416548904/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1214860083&sr=8-1