Are your lights on upstairs?

We're talking inflation this week. It's a much bandied about subject around here. I believe it is significantly higher than the 2-3% the BoC likes to claim. Apparently I'm not alone:

Good investors check things out for themselves as Ronald Reagan recommended when he dealt with the Soviets: "Trust, but verify."

To take a concrete example: What do you think is the level of inflation? This is critically important, both if you invest, and if you plan for your retirement. In the case of investing, the rule of thumb is that the proper market price-to-earnings multiple is 20 less the inflation rate. So if inflation is 3 per cent, a PE of 17 times is reasonable. On the other hand, if inflation is 10 per cent, as it was in the late '70s and early '80s, then even a PE of 11 or 12 would be too high. As for retirement, no need to elaborate on the need to figure just how far your dollars would go in your golden years.

So, you may ask, what's wrong with taking Statscan's consumer price index figure? That number usually ranges between 2 per cent and 3.5 per cent. But is this the real inflation figure? No it isn't. In fact, the government says so specifically - although in very small print: The CPI is merely a measure for indexing civil service employees' pensions.

Seymour Schulich, in his wonderful book Get Smarter: Life and Business Lessons, says that in his experience, money loses 90 per cent of its value every 30 years. For example, a La-Z-Boy chair for the TV that costs today $2,000, had cost $200 about 30 years ago. A house that had cost $50,000 30 years ago, would cost today $500,000, and so on. A growth of 10 times in 30 years comes out to about 8 per cent a year.

Therefore, the best indicator for food inflation I have found is the price of yogurt. Yes, that simple, plain food item that - unless you buy it flavoured - is about the same everywhere. Since I have a good memory for prices, I know that eight years ago my family paid 29 cents for one of those little plastic containers of yogurt. Today we pay 79 cents. (You'd probably pay $1.29, but I am a value buyer.) This comes to 2.7 times the price in eight years, or a growth rate of 13.2 per cent a year!

How high is real inflation today? It is certainly not 3 per cent a year. Even if it is "only" 6 per cent, the market's PE is too high. But if inflation is really 8 to 10 per cent a year, then the market next year may see some reckoning, because its PE is way too high.

So why does everyone figure on inflation of 3 per cent a year, 3.5 per cent, tops? Because, as you probably realize by now, few people bother to check things out for themselves. Most rely on printed numbers and stats, instead of opening their eyes to physical reality. If you, on the other hand, start checking things for yourself, very soon you might know what no one else does - and could take advantage of it by acting on what few others see.

Kind of reminds me of when I talk RE with my peers. They keep saying the market has no where to go but up. They keep saying all the Realtors keep telling them so. And CMHC. And VREB. And the TV. And the Newspapers. Funny that.

VREB numbers should be out tomorrow. I'm thinking that the October numbers will prove to be a downward blip. I think, just from watching the low-end that prices will be up from October, but still below September's high. Sales will be the highest seen in November.

As an aside. I read that Schulich book two weeks ago. It's a great read. No chapter is longer than 5-6 pages. Well written, good thinking, plain lessons.

Why inflation is already an issue much bigger than you read about

Except here of course. I've long been touting that inflation is bad. I'd wager it's as bad as it was during1979-1981. Of course, it's not reported as such. Nor are the interest rates indicating as much. But remember that inflation was only 3% lower than interest rates in 1981. Guess what? Same as today.

Here's an article. H/T to Mohican at Financial Planning/Personal Sanity... who has a great rant today by the way...

Take this key paragraph:

This is the precise point of entry for the new money that the Fed creates out of thin air. To repeat: When the Fed buys (say) $1 million in bonds from Bank XYZ, Bank XYZ surrenders ownership of the bonds but sees that its deposits of reserves at the Fed go up by $1 million. But the Fed didn't transfer this money from some other account. No, it simply increased the electronic entry representing Bank XYZ's total reserves on deposit. There is no offsetting debit anywhere in the banking system. Bank XYZ now has $1 million more in reserves, while no other bank has less. Bank XYZ is now free to go out and loan more reserves to other banks, or to make loans to its own customers. (In fact, due to the fractional-reserve system, the bank could make up to $10 million in new loans to customers.) The money supply has increased, putting upward pressure on prices measured in dollars.

If you think this problem is isolated to the US, think again. Over the last few weeks, and quietly over the last few days, the Bank of Canada has been doing much the same thing in Canada. Billions, I say that again, Billions of dollars have been DUMPED into the overnight financial system in order to defend the key overnight interest rate. What does this mean? If the BoC had not printed money, it would of either triggered a catastrophic financial event that would send the markets reeling or it would have had to lower the interest rate and increase inflation.

This underhanded move--quietly dumping cash into the system to keep lenders liquid--has the same effect, without the psychological ramifications of an interest rate drop. Look out. The BoC using the CPI has turned steak into hamburger, lobster into prawns, SUV's into sub-compacts, and chicken into tofu. This has had the effect of artificially driving inflation rates down. Inflation is high. Much higher than you and I would like to admit. This has huge economic ramifications. Do your homework. And then teach the rest of us here at HHV.

Friday Night Lights

I'm like a teenage football player in Texas right now: jacked up, trash talking and looking for a target for this linebacker. Ah, there he is.

Apparently, some don't believe that inflation should be the primary concern of the central banking system.

The Canadian Labour Congress has added its voice to those calling for the Bank of Canada to match the interest rate cut made earlier this week in the U.S.

CLC president Ken Georgetti said the role of Canada's central bank isn't confined to fighting inflation.

National Bank Financial issued a call for a trim, noting that the loonie has gained 16 per cent against the U.S. buck this year and 5.5 per cent in just a month.

"In our opinion, the [Bank of Canada] should release some pressure and lower rates on Oct. 16."

Let me say two things: the bank's role isn't confined to inflation fighting; and the bank's role doesn't include bailing out corporations that have uncompetitive workforces. That statement is only one of the two things I have to say. The other is this: lower rates will not have the effect of "releasing pressure." The banks artificially low interest rates are partly responsible for why we are where we are today. Do the right thing Dodge and fix this mess.

Inflation is, was and has been much higher than the BoC reports through the CPI. Don't take my word for it. Take Paul's.

Yes, we are shortchanged

The latest inflation numbers have been released by the U.S. Commerce Department and the annual level of consumer price inflation was 1.9 per cent.

Canadian statistics are essentially the same. Astonishingly, the media rhymes off these numbers as if they are legitimate.

Don’t these reporters buy food and gasoline, pay assorted taxes and such?

In the early 1990s, the U.S. government realized it had a problem with rising entitlement costs for government social and pension programs.

These payments were indexed to the annual inflation rate. With inflation on the rise, it meant these costs would drive government deficits into uncharted territory. To keep government deficits under control it would be necessary to bring entitlement costs down. Hence, it was necessary to bring inflation down.
The solution: change the way inflation is measured.

A federal commission was appointed to change and re-calculate the Consumer Price Index. Several tricks managed to reduce these increases.

Substitution: if a particular item became too expensive, substitute a cheaper alternative — remove steak, add hamburger.

Hedonics: adjust the prices of goods as a result of the increased innovation and pleasure a consumer derives from a product. Benefits of a new plasma television would reduce the price of a basic tube TV by say, half. It drives down the index but if one wanted a new TV, one must still pay the going rate of the new standard plasma.

Seasonal adjustments, the core rate and other deceptions, spin a tall tale.

With true inflation running closer to 10 per cent, is your income keeping up? On a fixed income, relying on the CPP? Preserving capital in money market funds? A three per cent return means a loss of 6-7 percent a year.

At the lower end of the wage scale, if you earned $10/hour last year, it’s close to $9 this year and heading to $8 the next.

Meantime, MLAs are getting for a net a pay raise of 29 per cent and the premier a 53 per cent increase.

If you’re feeling a little shortchanged, it’s because you are.

Paul Stuart
Parksville

Listen to the union bosses and drop the interest rates Dodge. Devalue the currency so manufacturing jobs can be saved and those unfortunate souls who should retrain with the ample EI dollars available to them to do so don't have to. Who cares about the rest of us? As for the working poor, we should follow the same left-wing "economic" thinking and just give everyone on minimum wage a raise. (SARCASM INTENDED)

I've got a novel idea. Let's raise rates. Let's tighten lending rules. Let's pay off some debt. Let's save some money. Let's invest in sectors that can provide long-term jobs that don't require a cheap currency. Let's, I don't know, take some freakin' financial responsibility people.