6 Things To Ponder This Weekend (9/27/13)

Submitted by Lance Roberts of STA Wealth Management,

I have been in New York this past week doing a whirlwind media tour rolling out our new firm STA Wealth Management.  I will have some video and audio posted shortly.   In the meantime here are this week’s things to ponder this weekend.

1) Inflation Debate Continues

“We commissioned a corporate research arm of the University of Illinois to analyze the veracity of CPI and more importantly the BLS’s methodology in tabulating CPI.  The results of the research by IBC (Illinois Business Center) confirm some of our long-held views.

  • Sampling and surveying are a problem, especially when accurate ‘big data’ is available.
  • CPI weightings are incorrect with housing/OER being the most egregious example.
  • Retail sales have correlated closely to CPI-U for over a decade, implying that inflation is boosting sales more than increased unit volume.
  • Medical Care is understated and could have a higher weighting.
  • Healthcare spending closely correlates to Medicare & Medicaid premiums

After determining these potential (in)accuracies and performing analysis of the CPI and CES, several recommendations were produced, including:

  • Update the weightings of the CPI more frequently
  • Use automated data collecting and track online purchases
  • Update the CES to be online
  • Create additional indices in the family of the CPI to help better decipher changes in spending among different demographics
  • Regarding housing, use actual transactions instead of Owner’s Equivalent Rent

The Bureau of Labor Statistics (BLS), the statistical federal agency that is responsible for measuring the CPI, identified some limitations to the CPI, namely:

  • Does not represent a price-change experience of any one individual, household, or family.
  • May not be applicable to all questions about price movements of all population groups.
  • Cannot be used to determine relative living costs.
  • Does not indicate the difference in price level among various geographic areas.
  • Does not show whether price or living costs are higher or lower in that area relative to the US as a whole.
  • Is not a complete measure of price change because it possesses sampling and non-sampling errors.

The IBC report thoroughly analyzes and depicts the main components of CPI, including graphic displays.

There are also comparisons to CPI methodology of other countries. The UK updates its CPI weightings five times a year.

IBC’s comprehensive CPI report also mentions the MIT Billion Price Project. We mentioned this inflation-tracking model several years ago.

The MIT project commenced in October 2010. It tracks 500,000 items that are sold on line globally. There are no services or food in the tracking. MIT provided indices for individual countries.

We noted years ago that MIT’s US inflation gauge was running much hotter than CPI. But in Q1 2011, MIT quit providing the data. In 2011, due to QE 2.0 inflation started roaring and the necessities of life soared in price. This fomented global unrest and exacerbated the Arab Spring. The Fed was extremely sensitive to inflation and inflation commentary back then because it could usurp its grand experiment.

MIT re-opened the site later in 2011 but would provide only a World Inflation index. MIT’s transparent excuse is that it is too costly to provide individual country indices – even though you must tabulate individual country indices to comprise the global index. This is likely arguing that it’s too costly to provide the grades on individual courses so only a person’s GPA will be issued.

[MIT]: “The world inflation index will replace the country-level indexes we have been computing for the past 6 months. Although we understand that the country-specific inflation indicators have become quite successful in the financial sector, we are overwhelmed by the amount of time and resources involved in updating them…We must focus on our research, but we will soon be partnering with another institution that can take over the job of updating these series on a regular basis…”

You see, the last day I looked at it, the inflation rate for the US went straight up- not to an insane degree, mind you- maybe 2 or 3 percentage points, and it was only one day…

2) The Obama-Care Nightmare:  Scott Grannis of California Beach Pundit blog wrote an excellent piece pertaining the upcoming disaster known as the Affordable Care Act.  In his post he cites the following points:

“If the thinking members of the Democratic Party (there’s at least one) don’t wake up soon and decide that Obamacare’s individual mandate needs to be postponed for at least a year—in order to fix its many egregious elements or, better yet, start all over from scratch—then the country is on the verge of entering what could be its worst nightmare: a healthcare train wreck of epic proportions.

Let me list some of the biggest problems with Obamacare:

Monumental hubris: For starters, it is inconceivable that any government body could, by fiat, reorganize and re-regulate one-sixth of the U.S. economy and have the results be anything like what was promised or intended. (If government could work miracles, the Soviet Union would be eating our lunch today.) 

Huge cost increases for many young people: The Manhattan Institute estimates that next year “Obamacare will increase underlying insurance rates for younger men by an average of 97 to 99%, and for younger women by an average of 55 to 62%.”

Huge marginal tax rate increases on the middle class and on married couples: In light of the higher premiums occasioned as a result of the government’s insistence that qualifying health insurance policies provide much broader coverage that current high deductible policies, and as a result of the inability of insurers to charge more for those with pre-existing conditions, and in order to entice people to enroll, Obamacare provides generous tax credits (subsidies) to those earning less that a certain amount. The subsidies phase out, however, as income increases. But once income exceeds the threshold (e.g., $46K for singles and $62K for couples), the complete phaseout of the subsidy can equate to a marginal tax far exceeding 100%, causing many to lose over $10,000 in subsidies when they earn just one additional dollar. 

Additional taxes that fall mainly on the middle class: There are a variety of new taxes that are already in effect starting with the 2013 tax year.

  • A new 2.3% excise tax on gross sales of medical devices, which “will make everything from pacemakers to artificial hips more expensive.”
  • A new cap on deductions for high medical expenses equal to 10% of adjusted gross income, which replaces the previous cap of 7.5%.
  • A new tax on Flex Spending Accounts, equal to $2,500 (formerly unlimited), will affect 30-35 million people who currently use FSAs to pay for basic medical needs. This will severely impact parents of “special needs” children.
  • A new Super Saver Surtax of 3.8% on investment income earned in households making at least $250K.
  • A higher Medicare Payroll Tax of 2.35% (formerly 1.45%) on wages of married couples earning over $250K, and 3.8% (formerly 2.9%) on income of the self-employed earning over $250K. 
  • And starting next year, a non-compliance tax for anyone not buying qualifying health insurance, estimated to impact at least six million families, most of whom are middle class.

Meanwhile, the list of companies that have downsized their workforces, and/or pushed people into part-time jobs, and/or no longer offer healthcare insurance to their workforce is long and growing, and making headlines almost every day. 

3) The Disconnect Between “Main Street” and “Wall Street”.  Jeffrey Snider at Alhambra Partners did an excellent piece on the continuing statistical recovery versus real economic recovery in the U.S.  

“Earlier today, Bloomberg highlighted its national poll results that stood in stark contrast to the prevailing opinion of the professional economist subset.

“Fewer people anticipate improvement in the economy’s strength over the next year than in the last survey in June, with 27 percent saying the expansion will be more robust, down from 39 percent who expected improvement three months earlier.”

The comments in the article are very telling, though anecdotal, about this dichotomy between what “Main Street” feels and what economists are seeing and, more importantly, predicting.  Even the wording of the link to the article suggests something deeper, as the actual title reads only, “Americans In Poll Doubt Economy Rebound”, where the actual link adds the phrase “in defiance of forecasts.”   The reactions of economists and central bankers to this “defiance” is worrisome.

“While economists in the Bloomberg forecasting survey say the expansion will reach a 3 percent rate by the third quarter of next year, that would come as a surprise to Wendel Smith, 39, of Alpine, Utah. A serial entrepreneur, Smith says he’s focusing on online businesses that are less U.S.-centric.”

It’s the same old story again, namely that the recovery is just around the corner because some central bank did something. The difference between 2013 and 2012, as the retail segment reminds us, is that fewer are actually “buying” the narrative anymore because they consistently fail to live up to the promise. The economist who cried recovery has done so one too many times.”

4) Payroll Number Become Even More Manipulated:  Economist John Williams recently commented about the ongoing problem with the Bureau of Labor Statistics employment measures stating:

“The quality of U.S. economic reporting continues to deteriorate rapidly.  With the U.S. economy unable to generate normal growth, the Bureau of Labor Statistics (BLS) has joined the Bureau of Economic Analysis (BEA) (see Commentary No. 546) in creating the illusion of current economic growth by redefining key series, in this case, payroll employment.  Economic activity, despite official GDP reporting, never recovered from the formal 2007 recession, and there is no recovery pending.  Those areas are explored here, as usual, with the latest GDP revisions, which were no more than statistical noise.  Nonetheless, year-to-year growth in real (inflation-adjusted) GDP has declined to a level that always has been followed by a formal recession.  In a related real-word area, consumer structural liquidity issues continue, per the August 2013 measure of real median household income (www.SentierResearch.com), which held near its cycle lows.

Payroll Employment Benchmark Revision Estimate.  Then there is the announcement this morning (September 26th) by the BLS of its estimate of the annual benchmark revision to payroll employment.  As it has been configured, the payroll employment level in the benchmark month of March 2013 was found to have been overstated by 124,000 jobs, requiring a downside revision to the series in that month, with adjustments back to March 2012, and with adjustments forward in time through the reporting of January 2014 payrolls (to be released in February 2014).  In the later months of the revision cycle, the downside revisions to monthly levels likely would have topped 200,000.

In a turnaround, the announced benchmark revision was restated so as to be to the upside by 345,000, thanks to the inclusion of 469,000 in employment that previously had not been counted as part of the nonfarm payroll survey.  Aside from excluding agricultural employment, the payroll survey excluded those on household payrolls.  Now 469,000 of the household payrolls have been moved into the payroll survey, into the education and healthcare industries, and there is no indication that the BLS plans to restate prior history so as to have a consistent historical series.

Further, this is an area that is not surveyed easily by the BLS on a monthly basis, so it becomes a new fudge-factor for re-jiggering the headline payroll numbers.”

5) Congress Living The High Life At The Taxpayers Expense:  Michael Snyder recently discussed 21 ways that Congress is living large at the taxpayers expense.

“If you want to live the high life, you don’t have to become a rap star, a professional athlete or a Wall Street banker.  All it really takes is winning an election.  Right now, more than half of all the members of Congress are millionaires, and most of them leave “public service” far wealthier than when they entered it.  Since most of them have so much money, you would think that they would be willing to do a little “belt-tightening” for the sake of the American people.  After all, things are supposedly “extremely tight” in Washington D.C. right now.  In fact, just the other day Nancy Pelosi insisted that there were “no more cuts to make” to the federal budget.  But even as they claim that things are so tough right now, our politicians continue to live the high life at the expense of U.S. taxpayers.  The statistics that I am about to share with you are very disturbing.  Please share them with everyone that you know.  The American people deserve the truth.”

6) What If The “Fear Trade” Bubbles Up?  My friend Cullen Roche recently posted a very interesting note about the potential of a fear trade bubble from John Hussman.

“This is a pretty interesting perspective from one of Wall Street’s biggest bears – what if the market is in the late stages of a bubble?  In other words, what if the wall of worry continues to fuel the most hated bull market in decades to levels that become truly absurd?   John Hussman discusses the logic:


‘My impression is this. Based on numerous past speculative episodes in the financial markets, we know that financial bubbles have often proceeded in an oscillating pattern featuring increasingly frequent cycles of advance, punctuated by gradually shallower declines reflecting an accelerating eagerness to buy dips. This can produce what Didier Sornette has called “log-periodic” oscillations (see Increasingly Immediate Impulses to Buy the Dip). Given the negative return/risk estimates we observed in April and early-May, I believed that this series of oscillations was ending several months ago. In order to preserve a log-periodic pattern, further oscillations needed to exhibit an even faster alternation between steeply-sloped advances and shallow declines. Yet despite the strongly negative return/risk estimates we already had in April and May, this is unfortunately what has unfolded. With the Fed’s decision last week, we can’t rule out one particularly extreme version of a log-periodic bubble that is consistent with price fluctuations to date. That version is pictured below, and would comprise an advance above 1800 in the S&P 500 over a period of about 6 weeks. Again, this is emphatically not a forecast, but the conditions for a final wave of speculation may have been created by the Fed’s decision last week, and it leaves us unable to rule out this admittedly hypothetical possibility – particularly in the context of what has been a classic Sornette-type bubble to-date.'”

Have a great weekend.


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