Inflation Takes a Haircut

Jon Hilsenrath, normally a straight forward journalist who is the chief economics correspondent for The Wall Street Journal covering the Federal Reserve, made an argument on CNBC today essentially basing the real inflation rate on the price of his haircut. He was interviewed by Joe Kernen, who is enamored by his hair as well, in regard to today's testimony before Congress by Ben Bernanke.

According to Hilsenrath, the Commodity Research Bureau's (CRB) indexes "do not hit American households...we do a lot of other things with our money, like haircuts, which is one of the benchmarks I use, and [they] are not rising....The people who look at food and energy ignore those other things."

While the CRB puts commodity inflation well into the double digits, the CPI reports nearly no inflation (1%) excluding food and energy. Surely, between the two is the REAL inflation rate that is taking its toll on most Americans, particularly retirees.


Jon (and Joe), instead of preening your haircuts as anecdotal evidence of there being little inflation, you should walk in the shoes of a balding retiree. I just happened to have reconciled our 2010 expenses, and have accurate data going back eight years. Comparing that data our income was up only marginally as, even though social security kicked in during the period, investment income declined substantially due mostly to bonds and CDs maturing and having to be replaced by lower yielding investments (the Fed's attempt to force investors into riskier investments, the very issue that almost started a depression). Indeed, fuel and groceries were among the most significant inflationary items over the eight year period, up almost an identical 68% in our case. But what I found interesting there were also large increases in items that are not only essentially non-discretionary, but they are nearly monopolies as well, the consumer having only marginal choices, such as health care, insurance (car, home and health), water and sewage, communications (cable, telephones, Internet), and, most lately, real estate taxes. These take their toll on retirees.

But as I now generally buzz cut my remaining locks, haircut expenses were de minimis so there must be little inflation. Thanks for the fine journalism, Jon and Joe.
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Anecdotal Headlines

I haven’t done this in awhile, in fact not since December 2008 as the Dow was rushing towards its low during this recession – that is to highlight some of the headlines from the Wall Street Journal, anecdotal evidence of where the economy and the market might be heading. Back then we were in the thick of it, virtually every headline pointing to fraud, bailouts, bankruptcies, and rising unemployment.

Today, while the Dow basks in the glow of massive liquidity injections in a low interest rate environment, approaching 11,000 as I write this, and investment bankers are rewarding themselves with record bonuses, the economy swims on against the tide of high unemployment (much higher than reported), kicking the state/municipal finance crisis down the road, and rising foreclosures. (We still wait on the consequences of future resets of adjustable rate mortgages.) No one really has an idea of how this will resolve. The CNBC cheerleaders are on the side of a continuing rising market, while there is no shortage of Armageddon forecasters who advise buying gold and farmland and head for cover. No forecaster I, but we seem to be moving from headlining the symptoms, and are getting more to the heart of the matter. It’s interesting that “Fed Chiefs Hint at Low Rates Possibly Into 2011” can be juxtaposed to “Mortgage Rates Hit 8-Month High of 5.21%,” perhaps an indication that the government has less control over the outcome than it did when this crisis began. From today’s Wall Street Journal:

Foreclosures Hit Rich and Famous
Houses with loans of $5 million or more will likely see a sharp rise in foreclosures this year, according to a RealtyTrac study.

Greek Bond Crisis Spreads
Concern over a potential liquidity shortage at Greece's private-sector banks fueled a sharp selloff in Greek debt and equity markets

States Skip Pension Payments, Delay Day of Reckoning
The deferrals come as pension experts say the funds need the money more than ever

Jobless Claims Rise Unexpectedly

Cash Crunch Will Force Governments to Do Less

Fed Chiefs Hint at Low Rates Possibly Into 2011

Los Angeles Faces Threat of Insolvency
Dispute Between Municipal Utility and City Council Over Electricity Rates Deepens Fiscal Crisis; Bond Rating Cut

Big Banks Move to Mask Risk Levels
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review

Mortgage Rates Hit 8-Month High of 5.21%




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The More things Change….

…the more they stay the same. It’s as if we did a Rip Van Winkle during the past six months, awakening to the Sturm und Drang of the banker’s bonus controversy, listening to the same blather from CNBC about our stalwart bankers’ right to riches as they have paid back their TARP money, the consequences of a capitalist system at work. Six months ago I noted the absurdity of Citibank’s salary increases, their logic being they were “needed” to retain the best talent. Today’s news is record bank bonuses, even surpassing those paid out in 2007 at the top of the market: “top 38 firms on pace to award $145 billion for ’09, up 18%” per the Wall Street Journal.

We’ve become a Corporatocracy – this is not capitalism, which is supposed to reward success, not underwrite failure -- and the bonuses are just another piece of evidence that the Obama administration, while talking up change, has been conned. TARP repayments is a smoke screen, masking the myriad other ways the taxpayer is subsidizing bank profits, be it AIG back door payments, federal government guarantees, or the zero interest rate environment which gives banks access to free money (buy a 6 month CD today and see what YOU get as lender). $145 billion in bonuses while unemployment is well over 10% (if you count people who are no longer part of the labor force as they’ve given up looking for jobs)? One would think banks would grasp the PR downside of the issue, or do they live in their own amoral world?

And as brilliantly noted in a piece in Naked Capitalism, Obama’s “Get Tough on Banks” Again Tries to Play the Public for Fools, Obama’s proposed tax on banks is merely a slap on the wrist, nice political fodder to appease the masses, but it clearly falls short of the reforms that are needed in the industry. Naked Capitalism contrasts Obama’s weak stance to the soaring rhetoric of FDR when he took office: “….the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.”

However, all of this pales in importance to the tragedy in Haiti. Here is the site of the American Institute of Philanthropy, a nonprofit charity watchdog and information service, giving their highest rated charities that are active in Haiti.
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Ambushed

Jim Cramer walked into Jon Stewart’s studio last night and instead of his trademark rolled-up sleeves, he might as well have been dressed like a clown, ready to take a big cream pie in the face, intended for CNBC rather than Cramer personally, although he is emblematic of his “news’ organization deserting its traditional 4th estate role for that of an “infotainmentmercial.” Cramer at least is somewhat honest about his role. Some other CNBC “reporters” have become clandestine right-wing cheerleaders.

I deserted CNBC as a serious source for financial news the day that Lehman went under last fall as I was watching CNBC’s “Squawk Box” and the show’s Cheerleader-in-Chief, Joe Kernan, made some sort of a statement criticizing the critics of Lehman’s leader, Dick Fuld, reminding them that poor Mr. Fuld had lost a fortune in the value of Lehman stock, conveniently neglecting he had extracted $484 million in salary, bonuses and stock options since 2000, failing to mention the equity value of Lehman had been built on spurious leverage. “Squawk Box” itself has turned into quick sound bites and chatty banter, and when they do have a serious interview, they superimpose sound effects, whooshing noises of charts, stock quotes, inundating the senses akin to watching a video game. Some of CNBCs confrontational interviews border on a financial version of the Jerry Springer show.

What a reversal of roles, the host of a comedy show becoming a spokesman for the questions the supposedly serious financial station failed to ask. Stewart was unrelenting in his probing and Cramer, to his credit, simply ate humble pie. I think he knows Stewart is right asking such questions as: Who is CNBCs audience, the Wall Street traders or us stooges trying to keep our 401ks afloat in a “fast trading” environment promoted by CNBCs endless litany of buy, sell, buy, etc.? How does this help us? Shouldn’t CNBC be asking the tough questions of Wall Street instead of gaming our pensions? Wasn’t CNBC, supposedly knowledgeable about financial matters, remiss in not recognizing that consequences of infinite leveraging would surely end in calamity? Isn’t there a measure of responsibility that goes with reporting, and the freedom of the press, especially for a news platform that purports to be serious? “Let’s face it, we’re both snake oil salesman, but at least we [the Comedy Channel] label our product as such.”
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Our Financial Crucible

I was watching some of the House Financial Services Committee’s hearings yesterday with the chief executives of Goldman Sachs, JPMorgan Chase, Bank of America, Citigroup, Morgan Stanley, State Street Bank, Wells Fargo Bank, and Bank of New York sitting there like a bunch of guilty school boys, being berated by their elders. These firms were the lucky recipients of the $700 billion banking bailout.

A number questions were posed to score points for our lawmakers, questions that were expected to be answered by a show of the hands so we all can see the scarlet letter of guilt. Questions along the lines of “how many of you have received government money but have changed your credit card terms?” The perplexed guilty parties sort of looked at each other (obviously wondering what is meant by the question), and as one would timidly raise his hand, the others would slowly follow. These questions went on and on, an embarrassment to those who posed them, those who were forced to answer, and those of us who are relying on this “system” to fix the problem. (Although they did manage to get John Mack of Morgan Stanley to say, “We are sorry.”)

Most of these lawmakers are the very ones who once pressured financial institutions to make loans available to everyone no matter what their creditworthiness so they could boast their beneficence to their constituency. And the bankers are the same financial wizards who created leveraged products that passed off tremendous risk to investors, and, now, to us. We also had a Federal Reserve that fed the fire with practically free money, leaving Alan Greenspan recently wondering, “I still don't fully understand how it happened or why it happened.”

One can empathize with the feelings of outrage, especially now that we learn that some seven hundred Merrill Lynch employees “earned” bonuses of more than one million dollars in 2008 as the firm lost $27 billion. Yesterday the apologists on CNBC generally defended Wall Street bonuses because even when a financial firm overall loses money there are individual “producers” who make pockets of money. The CNBC cheerleaders went on to say that these “producers” need to be “incentified” – otherwise they will be left only with their base salaries. Most people might be content with the latter and isn’t this the kind of “incentive” which motivated “producers” to take excessive risk in the first place?

The questions posed at the witch-hunt hearings centered on why banks are not lending out all the money they received. What planet do our representatives live on? You can’t force banks to lend money if people do not have jobs or are worried about losing jobs, and that is the central element in the crucible of today’s financial times. Just a cursory look at the chart Job losses in Recent Recessions prepared by Barry Ritholtz dramatically goes to the heart of the matter:

http://www.ritholtz.com/blog/2009/02/job-losses-comparing-recessions/
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