Just wanted to step into the fire for a moment and comment on a subject that may require more space than we can offer it here.
The topic is inflation or, rather, official inflation or, rather, official core inflation.
The lid is off; worms are flying
The point we'd like to make is simple, and it goes like this.
Officialdom offers a headline CPI rate that includes the 'volatile' food and energy sectors, along with a core CPI number, which cuts out those same wildly fluctuating elements to get its reading.
And this, for some reason, gets peoples' tummies knotted.
The average gentleman reads about this sinister government attempt to hide the real cost of goods and services, to maliciously deceive the public (which consumes food and energy in a rather meaningful way), and thinks he's being railroaded. Why do the Feds want to con him into believing that prices aren't skyrocketing, as he knows they are? Are they that desperate to keep him docile and obedient?
So goes the conspiracists' argument. Big, bad government fibbing to serve its own ends.
But the reality, we're sorry to say, is somewhat different.
Big, bad economic hacks spouting off to serve their own ends
Core CPI is simply a hands-down better indicator of coming inflation than the headline number that includes food and energy.
Like it or hate it, it's a fact.
The swings in food and energy make reading the long term trend in inflation almost impossible. Yes, we're certainly paying more for butter and gas today (most of us, anyway), but that may not mean that inflation – a genuine rise in the overall price of goods and services – is either taking place or, indeed, will take place in the near future.
Why? Because food and energy invariably revert to the core CPI reading, not the other way around. And for that simple reason they're factored out for the purpose of determining which way the general trend of inflation is headed.
No one is trying to deny you bitching rights over the latest sizzling rise in the price of bacon.
Speaking of which
Do the Chinese Pay More for Pork?
Here's one to consider:
Ham and eggs and coffee. Side order of bacon. Another side of pork fried rice. All for one yuan.
Beat that.
The Topic is China, Not Bacon!
China just reported CPI and GDP numbers Wednesday, and the markets there – and around the world – are beginning to react.
To put it bluntly – it isn't pretty.
From our perch, it looks as follows:
Chinese market down 3%, Japanese down 1%, Russian down 1.4%, and FTSE down 1%.
S&P 500 and Dow futures are currently down marginally, but it's unclear how long that will last, or from where the impetus will come to turn things around.
Abroad, preparations for a Greek sovereign debt default appear now in the works, while all over the emerging market world, inflation and interest rates are on the rise, making the emerging market asset class, as a whole, less appetizing.
Domestically, earnings from the financial sector disappointed yesterday, and here's the way one particularly high flying, financial firm looked on Wednesday afternoon:
The company is MBIA (NYSE:MBI), at-large insurer of financial products to the stars and now under pressure from the whacking of the muni market and the ongoing Greek bond drama.
We say the company is also likely headed lower. And the technicals support that.
- Look first at the spike reversal day that occurred just over a week ago on very high volume – 7x the average daily trade. The excitement came on news the company could separate its muni bond business from its structured finance section.
- The day's trading range speaks volumes. The stock moved from a low of $12.24 to a high of $14.96 before settling at $13.53. Range of trade on the day was in excess of 22%(!), and the stock closed down 9.6% from it's high.
Granted the stock is volatile, but let's not get ridiculous.
- The speed at which the RSI is diving toward the waterline and the imminent MACD crossover also look bearish. And while neither of these events has yet occurred there's little to be enamoured with here.
A U.S. financial in the business of insuring debt? Today?
Throw some ketchup on it and call it breakfast.
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
