This COLA is Flat

  • The biggest reason the inflation numbers don’t reflect your cost of living
  • How to get a “cost of living adjustment” that puts Social Security to shame
  • A secret — and unconstitutional — treaty that threatens your wealth
  • Ahead of the curve: Today’s TPP vote affirms two themes The 5 covered years ago
  • An ugly week on Wall Street, or was it?… Why one reader’s “myCPI” is off the charts… Millennials and housing and fun with numbers… and more!

  “Who is the Atlanta Fed trying to kid?” a reader writes. “Believe your mother. She knows more than Janet Yellen.”
We’ve been inundated with responses this week after we invited readers to calculate their allegedly personalized inflation rate at the Federal Reserve Bank of Atlanta’s “myCPI” website.
“My number,” this reader continues, “came out at 1.06%, which my checkbook says is a lie. I just went to the grocery store, and hamburger is almost at steak prices of last year. And I don’t suppose the California drought is having any impact on produce prices either.
“Anybody believing the numbers coming from Washington must surely be at Disney World. Our son is on Hamburger Helper, and his food expenditures are still climbing. He loves us to visit, as it’s the only time he enjoys a steak any more. And if those prices keep climbing, he can forget about that too. Us retirees are starting to have our own problems (Obamacare).”
  Well yes. But retirees also have the problem of a Social Security cost-of-living adjustment (COLA) that doesn’t keep pace with the cost of living.
Heck, that’s the reason the government started monkeying with the CPI inflation figures 30-odd years ago — to put a lid on the COLA increases.
At present, CPI registers a year-over-year decline of 0.2%. That doesn’t bode well for the 2016 COLA. We won’t know for sure until mid-October, but the 2016 COLA might well be flat — as it was in 2010 and 2011. Not that there’s been much fizz in the COLA from 2012-15, either…

Bonus points: If you have Medicare premiums taken out of Social Security and your premiums rise, your Social Security check might well be smaller next year. Good times.
  Meanwhile, the good news about Canada’s version of Social Security keeps rolling in.

“Over the 12 months ending March 31, the $265 billion fund reported a net return of 18.3%,” says our income specialist Zach Scheidt. “In other words, the fund created $40.6 billion of wealth for Canadian citizens simply by making wise investments over the past year.”
As you’re likely aware, Zach has been singing the praises of the Canada Pension Plan — professionally managed, running a surplus and growing its reserves. And he’s uncovered a way for Americans to “piggyback” the plan.
“While this one-year rate of return is certainly impressive,” Zach goes on, “the amazing thing is that 2015 caps off a 10-year period in which the Canada Pension Plan grew its assets by an average of 8% per year. Keep in mind this 10-year rate of return includes not only the last few years in which most stock markets have been moving higher but also the 2007-09 financial crisis period.
“If the Canada Pension Plan can survive a global financial crisis and still put up an 8% annualized rate of return, we should definitely pay attention to what they’re investing in.”
 That’s nice, but your editor wonders: What sort of “COLA” do you get if you piggyback the CPP?
I ran the numbers just now. They are, to say the least, intriguing…

Dang. Every one of those COLAs is higher than Social Security delivers — as much as five times higher. Nice and fizzy. The average works out to 7%. Now that can help you stay ahead of the cost of living, right?
No wonder Zach is so high on the CPP. Imagine collecting monthly “benefit” checks as high as $4,700… and getting an annual COLA of 7%.
Want to learn more? Zach walks you three a simple three-step process that gets you started when you follow this link.
  Stocks are stumbling as the week draws to a close… although we see small caps are holding up better than blue chips.
At last check, the S&P 500 was down two-thirds of a percent, back below 2,100. In lieu of any obvious explanation, the financial media have once again latched onto Greece. Oy…
Gold sits little changed at $1,180. Crude is back below $60. The dollar index is back below 95. Treasury yields continue to retreat as we write, the 10-year at 2.36%.
  The big economic number of the morning is producer prices — up 0.5% in May, says the Labor Department. The big drivers were fruits, vegetables, gasoline and home heating oil.
Could it be? Are the feds waking up to inflation? Nah… the year-over-year change is negative 1.1%. Bad news if you’re counting on that Social Security COLA…
  “Don’t look now — but the market’s actually up this week,” notes Greg Guenthner of our trading desk.
“Just a couple of days ago, the major averages looked locked in another death spiral. Then Wednesday rolls around and the entire week changes just like that.” Even today’s losses aren’t enough to put the S&P into negative territory.
That said, “I don’t think it’s safe to get your little heart set on any big pushes higher or lower right now,” Greg writes. “The market has been betraying traders and investors all year. Who said it would stop yanking our chains now?
“Consider this week’s action so far. The S&P broke below its 50-day moving average and quickly fell, only to regain all of its losses and then some by today. And that ain’t the only whipsaw we’ve seen. In fact, I could list eight similar fake-outs below the 50-day since January. What a ride.”
  This trade-deal vote in Washington today is some kind of fun to watch.

The House will vote on giving the president “fast track” authority to pursue the Trans Pacific Partnership (TPP). We first exposed this abomination three years ago. It’s hypothetically a trade treaty with 12 other nations. But only five of the agreement’s 29 chapters cover trade. The rest cover everything from draconian copyright enforcement to draconian capital controls.
It’s also an end-run around the Constitution. Article III says U.S. courts have authority over challenges to U.S. laws. But TPP allows for something called “investor-state dispute settlement” or ISDS. That is, foreign corporations could challenge U.S. laws before private international tribunals composed of three lawyers, paid by the hour.
Conflict of interest abounds: “Many of those who serve as arbitrators in one ISDS case represent investors challenging governments in another,” points out George Washington law professor Alan Morrison.
And U.S. courts would have no authority to review the tribunals’ findings.
  Meanwhile we’re enjoying the spectacle of what The Washington Post calls “the scrambled politics of trade.” That is, the politicians aren’t playing their assigned roles.
We see President Obama is headed to Capitol Hill this morning to try to persuade skeptical Democrats to support TPP. That’s extraordinary for a president who sets a modern standard of aloofness in dealing with Congress. Usually, he expects everyone to grasp the brilliance of his proposals the moment they spill from his lips.
And so left and right are making common cause against TPP — reminding us once again of a point we were making in the autumn of 2011, when the Occupy Wall Street movement was coming on strong.
Occupy and the tea party, we said, had more in common than either group cared to admit. Did we ever get hate mail from tea partiers who resented being lumped in with those dirty freaking hippies…

A relevant blast from the past…

Now here we are in 2015, and instead of left versus right, it’s “irresponsible ideologues” of all stripes opposing TPP… with the Very Serious People, including the president and the Republican leadership of Congress, on the other side. O, the irony!
In particular, we’ve gotten a charge out of seeing conservatives turn on pro-TPP Rep. Paul Ryan. Discussing the secret TPP negotiations and the fact the treaty text is classified, he said this week, “It’s declassified and made public once it’s agreed to.”
The parallels to Nancy Pelosi’s infamous Obamacare remark (“We have to pass the bill so that you can find out what is in it”) were too obvious. “At this point, very little separates Paul Ryan from Nancy Pelosi,” reads a typical critique at American Thinker.
As long as we’re in we-told-you-so mode, we’re compelled to point out we had Ryan’s number three years ago. You can see for yourself. We got even more hate mail for that one.
  “Tell these people to stop whining about their paltry myCPI figures,” writes a reader with a rather different take than most this week.
“Eight years ago when I moved to Argentina, I could buy a bottle of scotch for 27 pesos. Yesterday, that same bottle was 107 pesos.
“Everyone in the states seems to want a tiny amount of inflation. They should just contact the idiots in the Argentine government on how to do that. They are world-class masters at stealing money from the people who pay their salaries.”
  “While I agree with your assertion that millennials still cannot afford a home in places where they can find jobs, I do find fault with Bloomberg’s analysis,” writes a reader on a topic in yesterday’s episode that’s generated a lot of buzz.
“Comparing San Jose (population about 1 million) with New York City (population over 8 million) is far from the best comparison. A better comparison would be San Jose with Manhattan (population about 2 million) where ‘Silicon Alley’ [a high-tech corridor in Manhattan’s Flatiron district] is located.
“Depending on whether one uses sales prices or asking prices, Manhattan home prices would rank in either first or second place. From Zillow:

‘The median home value in Manhattan is $1,276,900. Manhattan home values have gone up 7.7% over the past year, and Zillow predicts they will rise 1.3% within the next year. The median list price per square foot in Manhattan is $1,682. The median price of homes currently listed in Manhattan is $1,595,000, while the median price of homes that sold is $774,600. The median rent price in Manhattan is $3,365, which is higher than the New York median of $2,590.’

“Comparing to San Jose with Silicon Alley would drop out less-pricy upper-Manhattan housing and leave San Jose in second place.”
The 5: Good point. Bloomberg concedes the numbers are also skewed this way: About 80% of New York metro millennials are in Manhattan, Queens and Brooklyn. If you limit the numbers to those three boroughs, the “affordability gap” swells from $6,550 to $52,262. That compares with San Jose’s $80,162.
Either way, ouch.
  “I noticed your housing affordability chart uses median income instead of average,” writes another reader.
“I’m in Denver and can say that an average would probably be higher than the median, since there are a huge number of households making $40,000-50,000 per year and a much smaller number making $100,000-plus. I’m guessing it would be a bimodal distribution with a very small peak toward the high end.
“Our homes have gone up tremendously — 25-30% in the last year. Over $200,000 for a 1,000 square-foot, two-bedroom, one-bath house in a mediocre neighborhood (would have been $160,000-180,000 last summer). Unfortunately, rents have gone up with housing prices, and rental units are probably as unaffordable as houses for those making close to minimum wage. So we have four-six adults living together and many grown children at home.
“Since many higher income noncoastal regions were supported by stratospheric oil and gas incomes, it would be interesting to see how that’s affecting things. No effects in Denver yet, regarding housing at least.”
 “It’s not clear to me what data Bloomberg used to calculate the mean of millennial salaries,” writes our final correspondent, “either data from across the country (‘national average’) or data collected locally (local communities within or around the big cities).
“Obviously, housing costs vary a lot from city to city and from neighborhood to neighborhood within a given city, consistent with the fact that total cost of the way one lives varies person to person.
“I heard the late statistician W. Edwards Deming make the point (over 30 years ago) that ‘there is no such thing as the cost of living, only the cost of the way we live’ (as individuals), which, of course, varies widely. He was responding to a question on methods of calculating cost-of-living statistics, such as CPI. He had a very deep understanding of applied statistics, both its use and abuse.”
The 5: The numbers are indeed city-specific.
And when it comes to statistical abuse, we have an overwhelming consensus that “myCPI” is a sterling example of the phenomenon. Heh…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
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Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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