The Insider Versus The Average Joe

Something weird happened in the markets earlier this week. About 60 seconds before the November Consumer Price Index data was released, there was a sudden surge in trading of stock futures and Treasury futures–both of which inevitably would be affected by the report that the CPI for November was a bit lower than what economists had forecast. You can see the spike in trading in the chart above, published by Bloomberg in its story about the trading that occurred only moments before the release of the report.

It’s good news, of course, that the November CPI report indicates that inflation appears to be cooling, and we should all hope that trend continues. But the jump in trading activity in the minute before the CPI report was released is obviously suspicious, and suggests that someone who received the report prior to the release tried to profit from the good news. (In fact, the activity sounds vaguely like the plot of the movie Trading Places, where the Duke brothers tried to make a killing from getting an early copy of a government report, only to be foiled by the Dan Ackroyd and Eddie Murphy characters. In this case, however, Dan and Eddie weren’t around, and neither was the guy in the gorilla suit.)

The Biden Administration denied that the White House leaked the report, and downplayed the trading data as “minor market movements”–when, as the Bloomberg article linked above points out, it clearly was nothing of the sort. The Bloomberg article notes: “over a 60-second span before the data went out, over 13,000 March 10-year futures traded hands (during a period when activity is usually nonexistent) as the contract was bid up.” And even if we accept that the White House didn’t leak the report, it’s obvious that something happened that requires an investigation, to see who was making those trades, and why.

Under these circumstances, in fact, I would argue that an investigation is mandatory. Trust in the markets is a delicate thing, and an insider trading scandal coming on top of the stories about the inner workings of now-collapsed FTX doesn’t exactly instill confidence in the integrity of the markets. If there is no investigation or prosecution, it will go down as just another example of the fundamental difference between insiders who get to profit from a sure thing and the average Joes who must accept the ups and downs in the accounts that hold their hard-earned retirement savings.

Californinomics

Inflation has affected everyone in the country this year, but it has had a particularly acute impact in California: according a recent article published by a local Los Angeles TV station, food prices are up 13.5 percent and energy prices, including gasoline, have shot up 25.6 percent. With price increases like that, it’s not surprising that the article also reports that inflation is a significant and growing concern for citizens of the Golden State.

California has come up with a very California-like response to the inflation problem. The state is sending out what state legislators are calling “inflation relief” payments pursuant to a tax refund program that was enacted over the summer. All told, some 23 million Californians are expected to receive payments that will range in size from $200 to $1,050. The total cost of the inflation relief package is $17 billion, which will come from a state tax surplus fund. Governor Gavin Newsom said the payments will result in “more money in your pocket to help you fill your gas tank and put food on the table.”

Is sending money out to millions of Californians with the idea that they will promptly spend the funds a good idea? Critics say the plan is “economic illiteracy” that will feed the inflationary spiral by stimulating demand–and, according to the law of supply and demand, when demand increases and supply remains static, prices will increase. If 23 million Californians suddenly are ready to spend their inflation relief payment, it’s not hard to see that having a meaningful impact on the demand side of that basic economic equation.

Inflation is a concern for everyone, but sending out checks doesn’t seem like a wise, long-term, sustainable approach to the problem. The latest inflation data, for a rolling 12-month period that includes September, is supposed to be released this week. If it shows that the inflation rate has increased, will California simply shell out additional payments?

Hot, Then Not

The classic real estate saying is “location, location, location.” The 2022 supplement to that adage might be “timing, timing, timing.”

For the last few years, we’ve been hearing about how hot the housing market has been in many places. Now there are many signs that the hot markets across the globe are abruptly cooling off, according to a Bloomberg article. It reports that increasing costs of borrowing, with central banks raising interest rates sharply to try to deal with inflationary pressures, are causing potential borrowers to think twice about paying big bucks for houses. As a result, houses in the formerly hot markets are looking at double-digit percentage declines in asking prices, and economists are forecasting a significant housing market downturn in 2023 and 2024. That’s a real problem for those people who have a significant chunk of their assets tied up in their houses–especially if they’ve paid “hot market” prices for them.

Yesterday’s consumer price index report in the U.S., which showed inflation is still far above targets, won’t help matters. The higher-than-forecast inflation numbers, notwithstanding recent declines in fuel prices, not only caused the stock indexes to tumble dramatically, it also is expected to convince the Federal Reserve to ratchet up interest rates again next week to try to wring the inflation out of the economy. That move would increase borrowing costs still farther and put even more pressure on potential buyers who would need to finance any home purchase. As interest rates rise, those potential buyers become more and more likely to stay put in their current housing and stay out of the housing market.

History teaches us that hot sellers’ markets don’t stay hot forever, and yet when such hot markets are here, some people expect them to continue indefinitely. It doesn’t take much for a sellers’ market to turn into a buyers’ market–especially if you are a buyer with ready cash who doesn’t need to take out a mortgage to make a purchase. It looks like that is the process that is underway right now, and as long as inflation remains high, that shift is likely to accelerate.

The Cookout Cost Check

We’re in the middle of one of the great cookout weekends of the American summer season. The three-day Fourth of July weekend is traditionally a time for families to gather together, for the kids to frolic in the yard, and for Dad to fire up the charcoal and then produce hot dogs that are so burned they resemble black tubes of carbon and grossly undercooked cheeseburgers for all to enjoy.

That’s why it’s also been traditional for the American Farm Bureau Federation to conduct a market survey of the cost of items that might be part of a traditional Independence Day cookout as an illustration of food prices. The Farm Bureau Federation July Fourth menu includes classic items like cheeseburgers, pork chops, chicken breasts, chips, lemonade, potato salad, and ice cream with strawberries for a group of ten people. And this year, the news on the cost front is not good. After a 16-cent reduction in costs last year, the price of the cookout has shot up 17 percent in 2022, making the hypothetical feast more than $10 more expensive than last year.

The cookout cost check is a good illustration of how inflation is rippling through the economy, and won’t come as a surprise to anyone who has been to a grocery store lately. And of course that test doesn’t tell the entire inflationary story. Because the focus is just on the food, the Farm Bureau Federation doesn’t account, for example, for the cost of gas that would be needed to drive to the cookout.

People on budgets can’t simply accept 17 percent increases in food costs and the spike in gas prices that we’ve experienced this year; they’ve got to make adjustments to deal with the cost increases. One way to do that is to modify the cookout menu. This year, we may be seeing fewer pork chops and chicken breasts on the grill, and more hot dogs instead.

At The Far End Of The Comparative Pain Scale

If you’ve ever had any kind of painful injury, a doctor probably asked you to assess the extent of your pain using a smiley face scale like the one shown above. Often, quantifying pain is difficult, and you may have mulled over whether your condition came in at a four or a five on the scale.

Sometimes, though, the pain scale assessment is easy. For example, right now pretty much everyone involved in the investment world is at 10–suffering through the worst possible pain with the reddest, most anguished non-smiley face. In fact, if there were an 11 on the pain scale, like the speakers on This Is Spinal Tap, the current market conditions would qualify.

Words don’t adequately describe just how awful the investment markets are right now. Across the board, every form of investment is getting creamed. The S&P 500 has fallen more than 20 percent since January, moving into “bear market” territory, and bond prices have “tanked.” Cryptocurrencies have gotten crushed. Even good old cash in the bank isn’t safe, as inflation rates continue to climb–and the New York Times reports that the May inflation results suggest that the inflation rate may be “accelerating.”

If it is any consolation, everyone is getting pulverized. The Bloomberg Billionaires Index shows that the world’s 500 richest people have lost $1.4 trillion this year. It may make you feel better to know that Mark Zuckerberg, Elon Musk, and Jeff Bezos have all reportedly lost more than $60 billion this year. Of course, even those staggering losses leave them plenty of money to fall back on–which isn’t the case for most of the people who are investors.

If you are a retiree or someone who is getting close to retirement who sees the value of the portfolio and savings that you are counting on to fund your retirement years falling every day, you wonder what to do. There doesn’t appear to be any safe harbor in any of the standard, or even not-so-standard, investment options. With no viable options, most of us will just try to ride out this intensely painful period, avoid making decisions that lock in the impact of the current downturn, try not to constantly check the market indices, and hope that the needle on the pain scale starts to move in a more favorable direction.

Shrinkflation

We’ve all noticed the impact of the current inflation–7.9 percent for the 12-month period ending in February, which is the highest annual rate since January 1982–at the gas pump, at the grocery store, and in countless other elements of our daily lives. In addition, some observant consumers have noticed that inflation is having a less obvious effect on certain products. The effect isn’t as apparent because it isn’t reflected in the listed price for the product, but in the amount of the product that is being supplied.

In short, we’re not only seeing higher prices, but product shrinkage as well. Some have dubbed the phenomenon “shrinkflation”: it occurs when the consumer pays the same amount as before, but gets less. And because most busy consumers don’t carefully read the disclosures on the products they buy, or notice the weight and size of the packaging, the effect of “shrinkflation” may have escaped your attention–which is kind of the goal of the manufacturers that use this tactic. (Of course, this option isn’t available for products that are sold in standard sizes, such as a gallon of gas; imagine the reaction if you went to the pump and saw that the listed price was for a quart of gas, rather than a gallon.)

The article linked in the last paragraph provides examples of shrinkflation that occurred in 2021 in products as diverse as paper towels, toothpaste, and snack chips. A bag of Doritos, for example, went from 9.75 ounces to 9.25 ounces, which amounts to five fewer chips than the price bought before. The article quotes a representative of Frito-Lay, which makes Doritos, as explaining: “Inflation is hitting everyone…we took just a little bit out of the bag so we can give you the same price and you can keep enjoying your chips.”

There’s nothing intrinsically wrong with this practice; companies are entitled to package their products as they see fit. As long as product packaging disclosures are accurate, consumers can figure out that they are getting less than they used to for the same price. But the practice of “shrinkflation” shows that inflation can get you in two ways: you can pay more, or you can get less. It’s also a good reason to pay attention to the packaging of what you buy.

The Upward Downward Spiral

The Labor Department reported earlier this week that the Consumer Price Index–which attempts to quantify prices of a broad swaths of goods and services in the American economy–increased 0.9 percent in October, resulting a 6.2 percent increase in the CPI since last year. That’s the highest annual increase in the CPI in more than 30 years, since December 1990. And the CPI increase measured in some metropolitan areas was even worse: the Atlanta Journal-Constitution reported, for example, that the CPI increase in that area was 7.9 percent, the highest increase in any city in the country.

It’s pretty clear that inflation is back as an area of significant economic concern. Just hearing that word sends a shudder of dread through those of us who lived through the high inflation period of the ’70s and early ’80s and the belt-tightening days when the Federal Reserve took draconian steps to halt the inflationary spiral and wring the constant price increases out of the economy.

The big question right now is just how persistent the inflationary spiral will be. The Federal Reserve says we’re in the midst of “transitory” price increases, but the most recent CPI data has increased market skepticism of that rosy outlook. The data showed price increases pretty much across the board, and not limited to more volatile areas that can react to temporary shortages, like fuel and food. Even if food and fuel prices are stripped out of the analysis, leaving only “core CPI” to be considered, prices are rising at a 4.6 percent annual clip, which is the highest “core CPI” rate since August 1991.

Even worse, the Labor Department reported that the CPI surge meant that real wages, after inflation, fell 0.5 percent from September to October. That’s a familiar scenario for those of us who lived through the country’s last big inflationary period, in which wage hikes and salary increases never quite seemed to catch up with the CPI. In those days, the upward spiral in prices put many people into a downward spiral in terms of their personal finances and debt situation and really hurt seniors and others living on fixed incomes.

Perhaps the Fed and Treasury officials who reassuringly contend that the inflation spike is temporary will turn out to be right–but what we’ve been reading about “supply chain” seems calculated to feed into more price increases, not less, and shortages that the law of supply and demand dictates will produce higher price tags as we head into the holidays. We need to do something about inflationary pressures and fix the supply chain problems before we find ourselves trapped in another upward-downward spiral.

The Inflation Watch

The U.S. got some economic news yesterday that is designed to unsettle those of us with more than a few years under our belts. The Consumer Price Index rose 5.4 percent in June, year over year, which was higher than analyst expectations. It’s the highest year over year increase since 2008. And while economists expected some inflation—it’s hard to avoid when stimulus checks are being sent to millions and government spending has exploded—the magnitude of the increase shown by the June data was greater than the forecasts.

Inflation data can be broken down in many ways, because of course prices for all goods and services don’t rise at uniform rates. Some observers noted that the “core” inflation rate, which strips out more volatile food and energy costs, was 4.5 percent—the highest increase since November 1991. Others argue that the rates are being driven by increases in some sectors, like in the cost of used cars, that seem to be reflecting a short-term imbalance of supply and demand that will work itself out. And still others note that the energy sector, and the skyrocketing cost of fuel, will have a ripple effect that can be expected to drive further increases in other areas, like food and many consumer goods, where transportation costs are factored in to prices. Nobody quite knows what might be coming next month, or later this year.

If, like me, you lived through the ‘70s, news about growing inflation is like fingernails on a chalkboard. An inflationary cycle means your paychecks buy less, because pay increases never quite catch up to prices, and it means the money that you’ve carefully saved and invested is worth less—a result that punishes prudent and responsible behavior. Retirees and people on fixed incomes get crushed and find that their nest egg has become a lot smaller than they thought.

And we veterans of the ‘70s and early ‘80s also remember that the cure for inflation—high interest rates and tight monetary policy that consciously stifles economic growth and produces high unemployment rates—is no treat, either.

Economists will be watching to see if this price spike is transitory, or is the first sign that we are on the road to a bad long-term inflationary period. I’ll be watching, too, and hoping that our economy isn’t cycling back to the ‘70s mode.

When A Dollar Was Worth A Dollar

We stumbled across this fading barfront sign as we walked through New Orleans to the Bywater neighborhood.  Imagine!  Cold Dixie bottled beer for only 13 cents each — and highballs for only 35 cents a pop.  Of course, that was back when people actually drank a drink called a “highball.”

The beers that we drank in New Orleans this past weekend all cost more than $5 a bottle.

Argentina Follows The Familiar Downward Spiral

George Santayana famously observed: “Those who cannot remember the past are condemned to repeat it.” We’re seeing that wisdom play out, again, in Argentina.

Argentina is an economic basket case. Under the government of its leader, Cristina Fernández de Kirchner, Argentina has spent lavishly on social programs and nationalized some industries. Argentina doesn’t have access to global credit markets since it defaulted on its debt obligations in 2001 and 2002. So the government is spending its dwindling reserves and seeking to devalue its currency — and in the meantime the Argentine peso is plummeting in value against the dollar and inflation is raging. The peso lost 19 percent of its value in January alone and inflation is somewhere above 25 percent.

Rather than learning the obvious lesson and ending the policies that are preventing free markets from operating, Argentina has gone in the opposite direction. The government blames supermarkets and oil companies for the inflation, and it placed caps on the prices of certain common goods sold at stores. Not surprisingly, those stores promptly began reporting shortages of the price-controlled items, because manufacturers and other suppliers obviously aren’t going to be pumping out goods that they can’t sell at a profit. Why would any business ship its goods to be sold in a price-controlled hyperinflation zone when it could just as easily send those goods to be sold in countries with rational economic policies? In Argentina, however, the government responded by fining the retailers and blaming their executives for raising prices.

We’ve seen this story again and again, in Latin America, in the Soviet Union, and in every other country that has adopted economic policies that interfere with the law of supply and demand and hinder the operation of free markets. Argentina will eventually experience a crash, as inflation spirals out of control and shortages become even more acute. But will it actually learn and take to heart the lesson it should have learned before?

Wherefore Art Thou, Cheap Date?

Saturday afternoon Kish and I went to see a movie.  The tickets cost us $10 a pop.  $10 to see a movie?  We’ve apparently crossed one of those product cost thresholds; theaters must feel there is no longer meaningful price resistance to two-figure ticket prices.

We shelled out the $20, but I found myself wondering about high school and college kids looking for the proverbial cheap date.  Unless you go to a second-run $1 cinema (with the change in price thresholds, maybe now it’s a $5 cinema) going to the movies certainly doesn’t qualify.  Between $20 for tickets and the standard inflated candy, popcorn, and soda prices, going to the movies has become an expensive proposition.  In this time of high unemployment among young people, how many kids have $35 to blow on a few hours entertainment?

Bowling is a perennial cheap date option — but many bowling alleys have gone upscale, with video screens, elaborate sound systems, disco balls overhead, and strobe lights down the lanes, and the prices for a game have increased as a result.  And you’ve got to drive there, which means you’re burning some of that $4 a gallon gas.  During the fall you can go to home football games on your student ID and make do with reasonably priced food from the band booster concession stand, but what do you do the other 47 weekends of the year?

I’m guessing that kids these days spend a lot of time in their parents’ houses, watching videos and playing video games.  Having somebody over to your parents’ house seems more like awkward hanging out than a date; I always thought the appearance as a couple in public, where your friends could see you together, was an integral part of the true dating experience.  Staying at your parents and sponging their food doesn’t exactly seem calculated to produce much self-respect on the part of the would-be couple — and it’s got to be exhausting for parents who have to come up with lame excuses to go down to the basement every five minutes or so to make sure nothing untoward is going on down there.

Maybe modern would-be Romeos and Juliets are just resigned to making do with less, or maybe they just “go Dutch.”  Either way, it’s too bad.  There was fun and inner value in the cheap date; I always felt good when I took my girlfriend out and paid for her movie and popcorn out of my own pocket, from my earnings at whatever job I had at the time.  I always thought my girlfriend appreciated being treated, too.  It’s sad to think those positive feelings aren’t being experienced by today’s jobless, house-bound youth.

The Fifty-Buck Fill-Up

Don’t look now, but gas prices in Ohio are spiking.  The cost for a gallon of unleaded regular has increased by more than 60 cents a gallon over the last three months.  This morning, with the gas gauge firmly on E, I stopped at the neighborhood Duke station for a fill-up.  To my chagrin, it cost $50.24 to top off the tank — and I had experienced the dreaded fifty-buck fill-up.

Gas prices are notoriously volatile.  Nevertheless, experts expect the prices to continue to rise, and rapidly.  The fact that prices are going through the roof during the dead of winter, traditionally a slow time for driving, is not a good sign.  The predictions are for $4 a gallon prices by spring, and even higher prices by the summer driving season.

The last thing our battered economy needs right now is a gasoline price spike.  People don’t budget for it, and if you are a commuter, as many Americans are, it is a cost you can’t avoid.  The money that consumers use to pay for most costly gasoline will not be spent on other goods and services and therefore won’t be used to create new jobs.  And the rising fuel costs will necessarily result in higher costs for goods delivered by truck — a category that includes everything from food to electronics — which means we may see an inflationary ripple effect in prices for a broad range of products.  This is not good news for an economy still trying to recover from a recession, or for a worker who took a faraway job because he needed to do so to feed his family.