Corona-flation

  • Because we can’t help ourselves: Revisiting “the edible iPad”
  • Fed wants higher inflation, but by what yardstick?
  • Education, health care, government: Cost of living already sky-high
  • Revamped Dow debuts while Nasdaq rally needs a rest
  • Can the “Harkles” avoid California’s proposed wealth tax?
  • Robust reaction to “The Commies Are Coming"

Nothing better illustrates the cluelessness of central bankers — how oblivious they are to the impact of their decisions on regular people — than the edible iPad.

Forgive us if you’ve heard us tell the story before, but it goes like this: It was early 2011, and the rising cost of living was on everyone’s mind.

During an ill-advised exercise in public outreach, Bill Dudley — then the president of the Federal Reserve Bank of New York — ventured into Queens to meet with the hoi polloi.

On the basis of a wonky concept known as “hedonic adjustments,” Dudley essentially told the crowd that consumer price inflation was a figment of their imaginations. He cited the iPad — which had come on the market barely a year earlier.

“Today,” he explained, “you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things.”

From the back of the room came the devastating rejoinder: “I can’t eat an iPad.”

Bill Dudley

“Never shoulda hired the PR firm that sent me out there…”

Dudley stepped down in 2018. To the best of our knowledge, he made no similar public appearances in the ensuing seven years. Heh…

We’re circling back this morning to one of our main topics last week — the Fed’s decision to revise its inflation goals.

No longer will the Fed seek to “tighten” monetary policy once it achieves its 2% inflation target. Now inflation will be allowed to rise above that level, the better to achieve average 2% inflation over time. (For perspective, the Fed’s preferred measure of inflation currently registers 1.3%.)

Fed chairman Jerome Powell made it official during a speech last Thursday. We mentioned it was coming several weeks ago. We also noted this shift has nothing to do with the corona-shock to the economy; the Fed was mooting the idea in speeches and papers last year. The depression of 2020 only accelerated the final decision.

Just one problem: As was the case in 2011, your own experience with a rising cost of living has nothing to do with the eggheads’ precious statistics.

Or as Bloomberg columnist Shuli Ren recently wrote, “What if our governments aren't measuring consumer prices correctly? Is it possible that inflation is actually a lot higher?”

To be clear, this is not a new problem. For years, we’ve been calling out the rigged inflation numbers — skewed lower by “reasoning” that makes sense only to central bankers…

  • Hedonic adjustments, mentioned previously. Another example: If the price of a new car goes up but the manufacturers add new features to the new models, well then, the price of a new car hasn’t really gone up, has it?
  • Substitution. If you start buying hamburger because steak is too expensive, well, your price of beef hasn’t really gone up, has it?

But this year brings a new twist, Ren explains: “We’re laying out less on transportation, restaurants and hotels, and splurging on food, because — like it or not — we’re all home chefs now.

“This sudden change can introduce significant biases in the consumer price index, according to a new study from Harvard Business School.”

Under the current makeup of the consumer price index, groceries get an 8% weighting… while transportation gets about 15%. But the study examined people’s real-world credit and debit card transactions and found about 11% of spending on food and only 6% on transportation.

Ren’s conclusion: “The inflation we’re feeling is quite a bit higher than the numbers suggest.”

And that’s not all: The corona-crash has scrambled the central bankers’ assumptions when it comes to those goofy “hedonic adjustments.”

“Let’s take education, which many American students have been doing online or not receiving much of at all,” says George Mason University economist Tyler Cowen, writing for Bloomberg.

“Whether for K-12 or at the university level, the cost of getting a quality education this year has risen drastically (think private tutors) — and for many individuals it may be impossible altogether. We are seeing deteriorating quality, and thus much higher real prices, yet this does not show up as either a quality adjustment or a price increase in standard calculations.

“Or consider health care. For months, Americans were afraid to visit hospital facilities, for fear of contracting COVID-19. The perceived cost of the hospital visit was thus much higher, in terms of anxiety and medical risk, even if the sticker price or reimbursement rate for heart surgery hasn’t budged.

“In many parts of the country, the lines at the motor vehicle offices are much longer, or it is much more time-consuming to get your car inspected for state approval. That is mostly due to pent-up demand from the worst months of the pandemic…

“Education, health care and government are pretty big parts of our economy,” Cowen sums up.

“If you add on the lower quality of restaurant visits, reduced sports performances (your ESPN cable package is worth less) and an inability to take preferred vacations and trips, you have many more negative quality adjustments that don’t show up in measured rates of inflation.”

For seniors, it’s shaping up to be a double-whammy: Prices are rising for medical care, prescription drugs and food… and those rising prices won’t be fully reflected in the 2021 cost-of-living adjustment for Social Security, which will be announced in mid-October.

And of course, you don’t need us to tell you how hard it is to earn anything off of fixed-income investments — thanks again to Fed policy.

Fortunately our income specialist Zach Scheidt is out with a fully revised and updated edition of his Big Book of Income. The subtitle says it all — 50 Ways to Live a Richer Retirement Without Getting a 9-5 Job. We have 450 copies available today, and they’re going fast. Access here.

The revamped edition of the Dow Jones Industrial Average is getting off on the wrong foot this morning.

Today’s the debut day of the revised Dow — a revision made necessary by Apple’s stock split that kicked in today. The Dow is a price-weighted index, so Apple’s new share price — one-quarter the old price — threw the rest of the index into a cocked hat.

So… gone are Pfizer, Raytheon and Exxon Mobil, the last of those three a steady presence in the index since 1928. Taking their place are Salesforce, Amgen and Honeywell.

With that, the Dow is off nearly two-thirds of a percent on the day… while the S&P 500 is flat and the Nasdaq is up two-thirds of a percent, once again in record territory.

The new Dow is likely to lag the Nasdaq even more than the old one did in recent months. Even after adding Salesforce to the mix, the new Dow will have less of a technology weighting than the old Dow — again a quirk of the Dow being a price-weighted index.

Gold is barely budging from last week’s close, down three bucks at $1,961.

“The market is getting frothy and the popular tech stocks won’t rocket higher every day until eternity,” cautions our chart hound Greg Guenthner.

“Don’t get me wrong — I have nothing against the mania in the mega-cap tech stocks.” But Greg has a trader’s mentality — and “as traders, we can’t just blindly buy an overextended stock simply because it’s blasting higher. That’s a ‘strategy’ that will eventually lead to disaster…

“Still, the large-cap stocks are putting on quite a show” — as Greg illustrates with this chart of the S&P 500 with eight months of 2020 now in the books…

Five Weeks of Gains

Five straight weeks of gains? “That’s an incredible streak — and another reminder that we should prepare for volatility as the new trading month approaches.”

Go figure: The “Harkles” might manage to steer clear of California’s proposed wealth tax.

As we mentioned earlier this month, California lawmakers are considering a 0.4% levy on any net worth exceeding $30 million — even if those assets are held outside of California. Even ex-Californians might be subject to the tax at reduced levels if they departed the Golden State less than 10 years ago. All told, about 31,000 people would be affected.

But weep not for the Duke and Duchess of Sussex — Prince Harry and the former Meghan Markle — who now call Santa Barbara County home.

The Hoover Institution’s Bill Whalen has run the numbers in a Washington Post column. “Harry entered 2020 worth an estimated $40 million but after he and Meghan bought their new mansion now has a reported $9.5 million mortgage to pay off.

“Add California’s exorbitant cost of living, annual property taxes and upkeep costs on a seven-acre property — all while neither Sussex is gainfully employed — and the couple may soon find themselves conveniently below the $30 million net-wealth demarcation line.”

Royal

“Ha! We skate!”

Hmmm… If, as rumor has it, Ms. Markle is positioning herself for a woke-leaning political career, she’ll have the “tax the rich” hypocrisy down pat.

Speaking of the social justice warrior set, we got potent reaction all around to Friday’s reprise of our single-topic July 17 edition, titled “The Commies Are Coming.”

“This may be one of your best 5s written to date,” says one reader. “I don’t know how many people will read it, but I reposted it on my FB page with the hope it doesn’t get censored or something. Not enough people really connect the historical dots. Not enough people care to. Thanks for helping the ‘masses’ to be ‘woke.’”

“On the money,” says another.

“Ever since the black-clad cowards of Antifaschistische (American version) reared their masked faces a few years ago, they reminded me a little bit of the Mustang Maoists of the ’60s — the upper middle-class and other rich college kids who drove up to the street barricades in the Mustangs from Mom and Dad — power to the people and all of the slogans and rhetoric – strange, though, that the dictatorship of the proletariat-working-class types like me never got a nod, but of course, power flows from the top down. 

“Most of them are in the ‘wannabe’ category, but do not underestimate their leaders and shakers. Pretty clear we are past conspiracy theory.”

“I have to call bull**** on this,” a reader counters.

“You are missing the authoritarian/fascist takeover of the country that is happening right under our noses and that is in the process of destroying the country and our future economically, environmentally.

“Trump is pouring gasoline on the fires of racism and destroying the ability of all people to pursue life, liberty and happiness.”

The 5: You forgot the part about how he’s selling out the country to Russia. Of course, the Democrats forgot that part at their convention two weeks ago. Literally no mention of impeachment or the Mueller investigation across the four nights.

Anyway, far be it from us to defend Trump or any other politician, but we’re looking around for signs of the impending authoritarian/fascist takeover and we’re just not seeing it.

Trump’s most egregious acts — kids in cages, bombing brown-skinned peoples in seven countries stretching from Libya to Pakistan — were also carried out by his predecessor, though perhaps not to the same degree.

And unlike Obama, as far as we know, Trump has not used a drone to execute a U.S. citizen overseas without benefit of arrest or trial. That’s a mighty low bar, but so far the current president has managed to clear it…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. One more critic: “The first time what we call cancel culture got my attention was when the Dixie Chicks got cancelled for opposing the actions of a certain president.

“I'll let you figure out who did the cancelling. You know your history very well.”

Indeed we do. We also remember the country’s biggest radio-station operator booting longtime friend of The 5 Charles Goyette from his drive-time talk show in Phoenix, and for the same reason — opposition in 2002–03 to an immoral and unconstitutional war.

In addition, we’re well aware that some of the more vigorous critics of lefty cancel culture have an enormous blind spot. They’re the first to howl, “Anti-Semitism!” at the mildest criticism of how the Israeli government treats Palestinians in the West Bank and Gaza.

So thanks, but we don’t need any reminders that reality is more complex than the choosing-up-sides mentalities at MSNBC and Fox News would have you believe. It’s why we cited several leftist sources to make our case — that is, if you even noticed.

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.

Recent Alerts

The Fed vs. the People

Since the Fed swooped into the corporate bond market six months ago, it’s purchased the debt of about 800 companies. So who are the real beneficiaries? Read More

First Isn’t Good Enough

Being first with a vaccine isn’t the key. It’s being first and being right. Whoever does that stands to make its investors immense fortunes. Read More

The Thing About a Vaccine…

If “economic recovery” depends on the development of a vaccine for the coronavirus, the pace of recovery might be slower than expected. Read More

Guardian Gold

“The dollar has now started its final journey to ZERO,” says Egon von Greyerz of Matterhorn Asset Management. So with inflation knocking on the door: “Gold stands as the guardian.” Read More

Battery Leak

Good thing Elon Musk doesn’t follow the dictum of never reading his own press… He reveals clues ahead of Tesla’s Battery Day event. Read More

Tesla’s Missing Puzzle Piece

We’re four days away from “Battery Day” — an event Tesla founder Elon Musk has successfully hyped… So what’s Musk got up his sleeve? Read More

Three More Years?!

The ugly reality for savers? Rock-bottom interest rates for at least the next three years. That’s where the Wall Street acronym TINA comes into play… Read More

A “Great Reset” of Capitalism (Uh-Oh)

On-again, off-again pandemic lockdown measures are just the beginning: The next phase of the elites’ power grab comes early next year. Read More

Phony Gold

What does it mean when a gold contract says you own “unallocated” gold? Jim Rickards says: “That means there are no gold bars that have [your] name on them.” Read More

Zombies on the March

The percentage of U.S. companies that can rightly be called “zombies” is near an all-time high. Read More