By Keith R. McCullough, Hedgeye
"Poverty wants some things, luxury many things, avarice all things."-Benjamin Franklin
Yesterday, one of our young Jedi analysts at Hedgeye, Kevin Kaiser, sent me a highlight from The Grocer (an industry trade rag) that inflating food prices are making ordinary breakfast items like orange and apple juice a "luxury."
Now a Wall Street analyst at a sell side investment bank would find a way to dress this data point up with a pig's lipstick and call it an "affordable luxury." Someone working for Federal Reserve Chief Ben Bernanke probably calls something like breakfast "non-core" or "free." But we simpleton, non-recipients of government bailout moneys, just call it what it is – inflation.
Six months ago we didn't have global inflation accelerating. We had a US dollar index that wasn't being debauched (7.7% higher at $83), a CRB Commodities Index (19 commodity basket) that was 30% lower in price, and we didn't have Quantitative Guessing Part Deux either. Back then, free markets pricing in a strong U.S. dollar and low inflation was a bullish signal to buy U.S. equities. Today, the latest big government intervention scheme is debauching the dollar and perpetuating higher inflation. Back then, I dropped my cash position to 46%. Today, I've raised it to 67%. (And understand that I'm not one of these perma-bulls who needs to be invested trying to get back to a 2007 high-water mark gone bad.)
Yesterday, we saw a new high-water mark established in the real-world inflation reading. With the U.S. dollar getting burned at the stake (down 1% on the day, making a move towards a 6-month low), the CRB Commodities Index was hitting a freshly squeezed 6-month high. All luxury things considered, if you are one of the 44 milllion Americans who lives on food stamps, how do you like them apples?
Now setting aside the inconvenient truth that there's never been a global economic powerhouse that has devalued its way to prosperity, let's give the Bernanke a little something to bring to his dance with America's new chair of the US Financial Services Sub-Committee on Domestic Monetary Policy, Ron Paul, on February 9th. Here are the 6-month price percentage moves in some of the things people need to live with:
Yeah, I guess for the sake of professional policy makers in DC who get dinner for free and a car service to work, I should stop there. To make the Top 10 things that may or may not be considered "luxury things," you really need to have inflated on the order of 25% or more. Pork bellies are only up 10.7% in the last 6 months – so go have yourself some powdered Keynesian Kool-Aid with some sausage links for lunch and like it.
Over that same 6-month period the dollar has droppred almost 6% and now has an inverse correlation to the price of rice and wheat.
So where does that leave the almighty American Consumer? That's easy, pull up some charts of U.S. consumer stocks – and pull up some big ones like Procter & Gamble (PG), McDonalds (MCD), and Target (TGT).
Sure, since most people in this business read points of view in terms of how it directly addresses their personal positioning, I'm sure you can find me some US Consumer stocks that used to look like Coach (COH) -- before the man-purse idea didn't take CEO Lew Frankfort to the moon -- but overall, Consumer Staples (XLP) and Consumer Discretionary (XLY) are the 2 worst sectors in the entire US stock market all of a sudden for a reason, down 1.84% and 0.97% in the last 3 weeks of trading, respectively.
On a more positive note, Hosni Mubarak turned on the internet. So now all of our Egyptian friends can start tweeting Hedgeye's 6-month table of real-world inflation to their friends again. Social networking tools are going to continue to revolutionize the transparency and accountability standards that the people of this world hold their governments to. That's a luxury thing of personal liberty that I can believe in.
Hedgeye 6-month commodity index
A given percentage change in a commodity price in no way correlates to a similar change in the price of the item.
Once again the writer of this article is confusing the stock market with reality.
On top of the increased menu prices, one thing I can't stand is the 10% sales tax and 15% tips. The expensive insurances (health and car) and gasoline. Plus the deflated US dollar caused me to lose much of my US asset value this year. I am seriously thinking moving back home to Asia (where there are low cost nationwide health insurance and easy metrolink and buses access) before I lose all of my saving that I made the past 30 years.
As a consumer & the main shopper for my family I was appalled 3 yrs ago to see container ounces reduced by 4 ounces - ie from 16 to 12. Look at your frozen veg section, coffee (again), cereal, toilet paper, & many more. So what you may say - suppose the price for an item was $5.00 at 16 ounces and now it is $5.00 for 12 ounces - can I still buy the same & forget that I just lost 4 ounces? No, I may have to buy 2 boxes/cans. If you cook then the recipe may be messed up because you can/box of - is 4 ounces short - so again I must buy 2 or a bigger size. What to do with the rest of the can's contents? Will it stay in the fridge until thrown out or be on the pantry shelf till outdated? We are losing money here more than your article stated.
This is a result of all those Bush trade deals that we signed allowing importers to charge a premium for their junk products. We are getting %50 if not more of our food items from other countries that claim to have cheaper labor costs yet we see the prices going up. It's one thing if the items were produced here, then we would understand why prices would be higher. But produce, and sugar, cotton picked and produced in cheap labor countries should cost us less that's what we where told these trade deals would give the American consumer. LIES ALL LIES. We killed our own industries and now have to rely on communist countries for our food, clothes, electronics, Steal, wood, and every piece of cheap junk we are stupid enough to buy.
The author is overstating their case. Commodity prices are volatile because of changes in supply and demand fundamentals, particularly when short run supply curves are highly inelastic (you don't grow a beef overnight).
In 2008 oil prices were over $140/bbl and natural gas was over $12/MMBtu. I don't recall people screaming inflation at the time. Today natural gas is und $5/MMBtu. Deflation? No, technical innovation making natural gas extraction more efficient, hence more supply.
Beef has been rallying strongly, but cattle herd size shrank last year (production was up slightly).
Check out the Bureau of Labor Statistics' detailed consumer price index report for Dec 2010. You can find highly detailed information on price changes for very specific consumer items and see how the higher commodities have translated to final consumer prices. They are nowhere near the magnitude of the recent commodity price rises cited by the author and in some cases have moved in the opposite direction.
The fed monetary policy is putting downward pressure on the dollar, hence upward pressure on internationally traded commodity prices, but the dollar decline is not to blame for the rise in commodity prices.
If you want to know why the commodities are going up, look at their respective supply and demand fundamentals first. You will make better decisions.
How is it that only traded commodities are experiencing this rapid inflation? Follow the money, and it is pouring into commodities from investors. Investment profit from increased commodity prices can essentially be simplified to a tax levied by the private sector on products that society can not [easily] go without. There is much outrage about governments' excessive taxation but where is the outrage against the limitless taxation allowed to be levied by investors on basic necessary commodities? This article fails to explain the reason for the inflation food commodities are experiencing; cheap money being bet on the fact that people have to eat.
Give me a break. These price increases -corn (due to ethanol)-are much more serious in other countries. Most people can still afford their cell phones, cable and lattes...Take those away and then we might riot.
The commodity markets need reigned in. Look at those price increases and realize that we're just now entered a new growth cycle for the non-emerging markets. What will inflation be like if the US and Europe start growing at a rate of 5+%
Still less expensive than that $1.99 (Plus the 7% Massachusetts 'Meals Tax') bagel (with nothing on it) and small coffee (also subject to the 7% 'Meals Tax)
This is just the begining. If we continue to use corn to feed our cars, there will be shortage of food supply in addition to inflation in the world. I don't know what this administration is thinking, at leat they have changed there tone 360 degrees since 2008 election.
Commodities prices are not the same thing as inflation. Commodities prices are going up because of increased demand in countries like China and Brazil. This is not inflation.
Gee, you left out commodity prices that have gone down, what a shocker. Milk prices are down more than 15% from 2008. Rice is DOWN 30% off of its 2008 peak. We have some weather related issues for some commodities (Sugar b/c of what's happening in Queensland and Wheat b/c of what happened in Russia last year) and some structural changes as the Chinese get richer and want to eat more meat, and thus demand more feed for cattle, poultry and hogs. And Cotton? Do you know how much of the retail price of a t shirt is the cost of cotton? It's a small percentage and increases are hardly noticeable to the customer.
Inflation? Here in Brazil we have horror history about it. In the lows nineties years it was around 30% per month!!!
It is non-news that inflation is on a steep upward path. Also non-news is that the U.S. government lies through its teeth about inflation. What is future news is that two more years of inflation can well lead to mass demonstrations in U.S. cities.
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