March 2013 Index

May 16, 2013

Inflation — Still Held at Bay

The April 2013 inflation data in the U.S. are being released, and it shows that prices are falling…not what the Federal Reserve wants to see. Wholesale Prices, sometimes referred to as the Producer Price Index (PPI) data yesterday showed a decline of 0.7 percent in April, primarily due to a drop in energy prices. These wholesale prices, which are supposed to track the underlying costs of certain raw materials and producer costs showed an increase of only 0.6 percent for the twelve months ending April 30, 2013.

There is a lot of talk about the ‘tapering off’ the Federal Reserve’s continued asset purchases, or the end of QE – a lot of it due to the strong performance of financial markets. However, in our opinion the cessation of their QE seems unlikely as long as the inflation data remains so muted. We believe it will take more than rising stock prices to get the Fed to stop.

The Fed has indicated that it wants to see much stronger employment and higher inflation. When will the Fed see inflation numbers pick up? It doesn’t look like a 2013 issue. Nonetheless we are vigilant; and we will use our Guild Basic Needs IndexTM (GBNI) to track the costs of basic, essential needs that Americans must buy every day. We expect the prices of food, clothing, shelter, and energy contained in the index will be a harbinger for rising inflation. Having an advance warning about rising inflation expectations is crucial for all investors… in equities, bonds, commodities, and real estate. We will track it for you and publish it here.

April 25, 2013

Inflation — The Dog that Hasn’t Barked

This past week, Core CPI in the U.S. surprised many market watchers when it only showed a 1.5 percent year-over-year increase through March. An International Monetary Fund (IMF) report this week likened inflation to the dog that didn’t bark, and asked “Has Inflation Been Muzzled Or Was It Just Sleeping?” They see economic slack (in employment and industrial capacity) as the key reason inflation has been kept in check. It is true that there remains slack in the economy, and the deep 2007-2009 recession has lingering effects. We also believe that one reason inflation has been kept in check is that the official inflation measure is only telling the story that officials want told.

We have believed that higher prices around the globe (especially for basic, essential needs that have limited supply) would be driven higher. We have been tracking the prices of many of these components in our Guild Basic Needs IndexTM (GBNI) in an effort to prove our theory.

The belief that higher inflation is on the horizon is founded on several facts. The first is that many hundreds of millions of people around the globe are increasing in their standard of living — eating more and better, owning more clothes, upgrading their housing, driving more, cooking more, etc. Another fact is that in recent years, trillions of dollars in liquidity injections from governments around the globe have been created. This liquidity is intended to fight financial crises and deflationary forces from deleveraging western and Japanese banking systems.

We believe that continued monetary debasement will eventually increase the supply of money chasing such necessities. Since the year 2000, the prices of certain food, clothing, shelter, and energy (used for cooking, heating, and transportation) in the U.S. that are included in our GBNI have risen almost 89 percent. Over the same 13.25 years, the CPI inflation index that tracks a basket representing Americans’ expenditures has only increased about 38.3 percent. We do not keep detailed data on prices in China, India, Brazil, Russia, and other emerging nations — but reports published by their governments support the fact that prices are rising more rapidly in these countries than in the U.S.

Signs Point to Higher Prices… But Not Right Away

With a 1.5 percent year-over-year increase, the Federal Reserve still has a green light to keep the monetary spigots open, and to keep rates low. So while the Federal Reserve sees inflation and inflation expectations firmly anchored below their 2.5 percent targets, more liquidity is coming.

We will continue to track the prices of items that people need every day in our weekly Global Market Commentary, and here. If the markets are going to hear the inflation dog start barking, we believe our GBNI will pick up the frequency before the official data rings the inflation alarm bells.

April 04, 2013

More Americans Seek Assistance to Afford Food, Even as Employment Improves

In our biweekly installment about the rising cost of basic, essential needs, we often discuss how the standard of living in America is eroding — hurt by stagnant incomes and the rising costs of necessities. One effect of this is that more and more Americans are relying on Federal government assistance to help them feed their families. An article in last Thursday’s (3/28) Wall Street Journal by Damian Paletta and Caroline Porter discusses that even though the economy has improved after the 2008 to 2010 recession, enrollment in the Supplemental Nutrition Assistance Program (SNAP), which is the modern-day food-stamp program, has stayed high. In 2008 food-stamp recipients numbered about 28.2 million. While unemployment has fallen from a peak of 10 percent in October 2009 to 7.7 percent today, SNAP participants grow. Today, enrollment stands at about 47.8 million Americans, costing the government about 74.6 billion dollars in 2012.

Another Cause — Government’s Generosity Expanded

Since 1996, when the Clinton Administration and Congress set in motion the overhaul of the welfare system — a process that continues under the current Administration — more Americans have become eligible. At Washington’s behest, many states are opting to relax the requirements. Now, people with good income and savings can qualify… and so more are using it.

Typically as economy improves, government programs don’t have to help as many people… Yet the graphs below show that some programs keep growing

As Food Prices Climb, the Numbers of People Using Government Assistance to Eat Will Stay High

The Guild Basic Needs IndexTM (GBNI) tracks the rising costs of certain food, clothing, shelter, and energy components that people must consume every day. Food components represent 30 percent of the Guild Basic Needs Index (the other components and weights are Clothing 10 percent, Shelter 30 percent, and Energy used for heating, cooking, and transportation 30 percent). In developed countries, the average person spends 10 to 15 percent of their income on food items. In the U.S. the percentage is at the low end of that range, but we believe the percentage is going to grow. The food components that we measure in our GBNI have risen an average of about 108 percent since January 1, 2000.

Unless wages start keeping pace, or unless unemployment falls a lot more, the government’s SNAP is looking like a permanently growing budget item. In the grand scheme of things, SNAP $75 billion may not be a huge budget item, but the trend is in place for it to get out of hand. A lethargic economy, rising food prices, and the government’s increased generosity are all driving its growth.