December 2013 Index January 30, 2014 2013 Was A Tame Year – On The Inflation Front Earlier this month, the U.S. Bureau of Labor Statistics published the inflation data for December and all of 2013. The items contained in the BLS’s Consumer Price Index (CPI) were up 0.3 percent in the month of December. At first blush, it struck some people as a large number as extrapolating a series of 0.3 percent monthly increases would get you to a nearly 4 percent annual inflation rate. The truth is that the prices of the hundreds of items tracked in the CPI’s ‘basket’ of goods can be erratic, and you can’t extrapolate individual monthly data points. 2013’s 12-month inflation number was a quite tame 1.5 percent — well below the Federal Reserve’s 2 percent target. Actually, the inflation measure that the Fed memebers watch more closely than the CPI is the Personal Consumption Expenditures (PCE) price index, and it has been running even lower than CPI. Even though the central bank has plenty of room — from an inflation perspective — to continue to be accommodative, the central bank has announced in the past two months that they will be scaling back their quantitiaive easing (QE) by 20 billion per month. After yestarday’s announcement from the Fed, they will ‘only’ print 65 billion dollars each month to buy treasuries and mortgage backs securities. This does not mean and end to the cheap, easy money that can lead to rising prices in the
September 2013 Index December 5, 2013 U.S. Energy Production Helps Keep Inflation Under Fed Targets Inflation in the U.S. has been ticking lower recently in large part to a decline in domestic U.S. energy prices. October’s Consumer Price Index data from the Bureau of Labor Statistics showed a 1 percent increase in the prices of items in their basket The prices of basic, essential needs tracked in our Guild Basic Needs IndexTM — which includes certain food, clothing, shelter, and energy components — actually showed a year over year decline of 2.9 percent. The low inflation has given the Federal Reserve a green light to continue their extraordinary monetary stimulus of bond purchases and near zero percent interest rates. It is no secret that the QE program will be scaled back, but thus far the signals from the central bank suggest that they prefer a 2 percent inflation rate and a 6.5 percent unemployment rate before they remove their QE accommodation. Perhaps the Fed’s Targets Are Not So Far Out Into the Future… U.S. economic data continue to improve, and we expect GDP to keep rising throughout 2014. It is GIM’s view that this is the stage of the economic cycle where corporate boards start to spend to expand their factories and to hire more employees. Our vies is increasingly supported by economic data on employment, capital spending, etc. We expect to see an upward revision of Q3 U.S. GDP and expect good GDP growth over the next several quarters.
August 2013 Index September 19, 2013 Inflation in the Developed Economies Remains Muted — But Globally Appears to Have Turned Higher We, along with many others, have been expecting that all of the monetary debasement in recent years would create inflationary spikes. In the U.S., Europe, and Japan, some of the most aggressive debasers — inflation has been stubbornly low. In spite of the many calls for rising inflation, it has been held in abeyance by deleveraging in the developed world’s financial system. The developing, faster-growing economies, however, have been experiencing rising inflationary pressure for years. India, for example, seems always to be fighting high inflation. In our research, we are seeing more data suggesting that a turn is at hand. Credit Suisse recently wrote that “Global inflation continues to pick up gradually in recent months…” Global inflation turned higher in recent months… Their report added that there are “signs of a bottom in core inflation” in the U.S. After declining for more than a year, U.S. core inflation (which excludes food and energy) inflation picked up this past summer. Based on your GBNI data below, inflation including food and energy bottomed sooner. When Inflation Picks Up, Will it Look Like the 1970s? The Economist recently printed an article discussing how inflations and inflationary cycles differ. The article discusses that the 1970s super-inflation in the U.S. may have been the result of U.S. demographics (and the desire to have full employment), rather than the result of loose monetary policies. The
July 2013 Index August 22, 2013 Are Interest Rate Increases Signaling Higher Inflation on the Horizon? Since bottoming in 2012, U.S. interest rates have been rising — the exception being short-term interest rates, which are set by the Federal Reserve. There are a few key reasons for the rise in rates. The most often cited reason is the feared end of QE by the Federal Reserve. If the Fed stops buying bonds, who else will fund the U.S. government. The bottom line is that after declining for 32 years, interest rates got too low, and now the interest rate that investors require to buy bonds maturing in three years or more have gone up significantly…and look like they are headed higher still. Another reason for the rise is the fact that investors believe the low returns on bonds in recent years are not enough to protect their principal from the purchasing power decline that comes from a rising cost of living. This is not just a U.S. phenomenon. The rapidly rising U.S. interest rates are having important effects on world markets; one of them is the sudden decline in certain emerging market currencies. India, Brazil, Turkey, Indonesia, and other countries have seen their currencies slide in recent weeks. Central banks are acting to slow currency declines to fend off uncomfortable increases in inflation that result. Inflation can be hard to contain and can spill across national or regional borders. Last year and earlier this year, we wrote about how inflation
June 2013 Index July 25, 2013 Today’s CPI Doesn’t Resemble Your Grandfather’s CPI It is important, when viewing the U.S. Government’s Consumer Price Index (CPI), to understand that the CPI tracks consumer spending and not the cost of living. According to an article in Barron’s this past weekend, the current CPI basket includes prices of 71,000 goods and services — and doesn’t resemble the consumer basket of goods and services from prior decades. Both the calculations and the selection of data itself have undergone many changes, and in our opinion many of these changes have been done to report a more modest rate of inflation. The CPI is based on data collected from spending surveys given by the U.S. Bureau of Labor Statistics to approximately 14, 000 urban families. Among the 71,000 items the CPI includes other expenditures, such as recreation, insurance, taxes, personal care services, entertainment purchases, and consumer electronics. The Bureau of Labor Statistics also periodically alters the contents of the basket, making adjustments to the weighting of the components, and smoothing seasonal patterns. Such tinkering with data, as we have mentioned over the years, usually results in an understatement of the inflation rate and creates an unreliable, misleading cost-of-living index. Guild Investment Management has long believed that the existing indices used to measure cost of living changes in the United States are inadequate. The Guild Basic Needs Index TM (GBNI) concentrates on four categories of primary and essential living needs: food, clothing, shelter, and energy (which is