GBR Market Wrap: Inflation Disorientation

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In this Week’s Issue: October 14, 2011

Weekly Snapshot

• Federal Reserve Vice Chairman Janet Yellen hints at possible QEIII
• European Union considers a 60% haircut for Greek government debt
• Germany slashes 2012 GDP growth forecast from 1.8% to 1% next year
• Fed’s Beige Book shows slight economic improvement in September and early October
• Leading economic index for the U.S. increased 0.2% in September to 116.4
• U.S. consumer prices rose 0.3% in September; up 3.9% since last year
• U.S. producer prices jumped 0.8% in September, following no change in August
• CFTC gave its approval to restrictions on speculating in commodities
• Australia’s central bank may cut interest rates as soon as November
• China’s 3rd quarter GDP rose 9.1% (annualized) down from 9.5% in Q2

Market Barometers

st-2011-10-21fx-2011-10-21

Weekly Chart
It’s the time of year when health insurance providers send out their customary letters to announce rate increases for the upcoming year. It was no surprise that I received one such letter announcing yet another roughly 10% rate increase for health insurance premiums. It has become painfully obvious that the amount of these rate increases cannot possibly continue given that wages have been stagnant for more than a decade. Using the handy Rule of 72, we can derive that a 10% rate increase will double insurance premiums every seven years. If that trend were to continue, health insurance rather than housing would be the major component of an average family’s cost of living. And yet, deflation has been the voiced concern of public officials who continue to focus on housing. First in line, a slim but rather vocal majority of central bankers who see salvation in propping up asset prices. Cheap money has not been able to improve housing prices but it has had its effect on a number of asset classes. While the debate over inflation versus deflation continues, official inflation figures are now slowly falling in line with a sort of “felt-inflation” the average consumers experience in their daily lives.

Forget official CPI figures for a moment and recall that the basket of goods that makes up the components for the consumer price index has been adjusted a number of times, most significantly in the mid ’90s. This was done to simply minimize the cost of living adjustment for wages and social security as some critics suggest. Please consider our weekly chart below, courtesy of www.dshort.com and www.shadowstats.com who contend that actual inflation is substantially higher than currently reported via the CPI. An inflation rate of 11.45% sounds alarming but it certainly feels closer to the financial pinch consumers have been experiencing and it is very much in line with those dreaded rate increases of health insurance premiums.

Monthly Inflation 1872-present

Recommended Read
The PEW Charitable Trust recently published a report with lots of visuals explaining how the choices made over the last 10 years contributed to our nation’s debt. Please consider: Ten Charts Essential to Understanding the Federal Debt.

Recommended Audio
After numerous delays, intense lobbying, and ongoing battles fought through lawyers and accountants representing various interest groups, a recently issued first draft of the Volcker Rule has been summarized by the FDIC & SEC and is now awaiting comments and more legal battles before actual rules can be implemented. This draft of the Volcker Rule a.k.a. PROHIBITIONS AND RESTRICTIONS ON PROPRIETARY TRADING AND CERTAIN INTERESTS IN, AND  RELATIONSHIPS WITH, HEDGE FUNDS AND PRIVATE EQUITY FUNDS” is available here.

Perhaps some of our readers feel compelled to read the 298 pages of beautifully drafted legalese and if so, might we receive some comments on the proposed rules?  For those of us who are otherwise occupied, there is a convenient audio summary courtesy of Market Place. Please consider: The Problems With The Volcker Rule.

Good luck and good investing!


Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also authored the book, Money Music 101, available on Amazon and Kindle, in addition to publishing the popular investment blog www.fxinvestmentstrategies.com along with a weekly newsletter.Disclaimer

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Author of the article
Clemens Kownatzki, MBA
Clemens Kownatzki, MBA
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