Mish's Global Economic Trend Analysis |
- Housing Prices, "Real" Interest Rates, and the "Real" CPI
- Law of Excuses: It's Always Something (But Never the Right Thing)!
- The Moderate's Prayer; Applications Now Being Taken; Distinguishing Friends From Enemies
| Housing Prices, "Real" Interest Rates, and the "Real" CPI Posted: 24 Sep 2014 01:35 PM PDT With housing prices still rising, albeit more slowly, inquiring minds might be wondering about "Real" interest rates and the "Real" CPI? CPI Distortions I believe the CPI is hugely distorted, but not for the same reasons as everyone else. Home prices used to be in the CPI but the BLS now uses OER (Owners' Equivalent Rent). OER is a measure of actual rental prices as well as fiction. The BLS determines OER from a measure of rental prices and also by asking the question "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?" If you find that preposterous, You are not the only one. Regardless, rental prices are simply not a valid measure of home prices. OER Weighting in CPI OER has the single largest weight of any component in the CPI, at 23.957%.  Let's play "What If?" Specifically, "What if the BLS used actual home prices instead of OER in calculating the CPI?" HPI-CPI Periodically, Black Knight Financial Services provides the actual data behind their HPI (Home Price Index), a measure of actual prices. We can use that data to see what the CPI would look like if we put actual home prices in the CPI instead of OER. I call this the "HPI-CPI". I passed on an Excel spreadsheet of the Black Knight HPI aggregate housing prices to Doug Short at Advisor Perspectives and we produced the charts below. Notes
Let's start with a look at the rate of increase in home prices vs. the rate of increases in OER. Comparative Growth in HPI vs. OER  From 1994 until 1999 there was little difference in the rate of change of rent vs. housing prices. That changed in 2000 with the dot.com crash and accelerated when Greenspan started cutting rates. The bubble is clearly visible but neither the Greenspan nor the Bernanke Fed spotted it. The Fed was more concerned with rents as a measure of inflation rather than speculative housing prices. Two Inflation Indexes Year-over-Year  The above chart shows the effect when housing prices replace OER in the CPI. In mid-2004, the CPI was 3.27%, the HPI-CPI was 5.93% and the Fed Funds Rate was a mere 1%. By my preferred measure of price inflation, real interest rates were -4.93%. Speculation in the housing bubble was rampant. In mid-2008 when everyone was concerned about "inflation" because oil prices had soared over $140, I suggested record low interest rates across the entire yield curve. At that time the CPI was close to 6% but the HPI-CPI was close to 0% (and plunging fast). As measured by HPI-CPI real interest rates were positive from mid-2006 all the way to 2010, even when the Fed Funds rate crashed to .25%. That shows the power of the housing crash and how badly the Fed misplayed the housing bubble. Real rates went positive again in mid-2010 until early 2011. CPI and HPI-CPI Variance From Fed Funds Rate  The above chart shows two measures of "Real" interest rates. The Blue line is the Fed Funds Rate minus the CPI. The Red line is the Fed Funds Rate minus the HPI-CPI. Both measures show how the Fed has pushed real rates into negative territory. However, the rate of growth in home prices is slowing. If home prices actually start to decline, which I believe likely, HPI-CPI will show outright deflation. And even with the Fed Funds rate at 0.25%, real rates will again be positive as measured by HPI-CPI, but perhaps not by the Fed who uses the CPI as its measure of price inflation. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Law of Excuses: It's Always Something (But Never the Right Thing)! Posted: 24 Sep 2014 10:11 AM PDT The out-of-the-blue excuses countries come up with for not making budget deficit targets are rather amusing. For example and via translation from La Vanguardia, France Blames Deficit on Jihadist Terrorism, Lack of Inflation. French Prime Minister, Manuel Valls, said today that his country's military missions against jihadist terrorism, along with public investment in education and security make it difficult to meet deficit limits.In regards to "where are we going?", I have a proposal: If France would cut public spending in general, by a third, reduce taxes by as much, and roll back all socialist regulations, I suggest "up", and in a very dramatic fashion. Instead, Valls proposes Wimpy's philosophy Eat Now, Pay Later. The "spiral of debt" which is France, which has not achieved a balanced national budget in four decades, is "unsustainable".2017 - I Can Hardly Wait I will gladly pay you in 2017 for a hamburger today. Between now and then, how how many excuses can France come up with to push the date back further? Valls vs. Wimpy  Law of Excuses Shockingly, no one has yet proposed "The Law of Excuses", so I get to claim it. I dedicate the law to France: It's Always Something (But Never the Right Thing)! Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| The Moderate's Prayer; Applications Now Being Taken; Distinguishing Friends From Enemies Posted: 23 Sep 2014 11:39 PM PDT Distinguishing Friends From Enemies It's tough distinguishing friends from enemies, especially when allies don't agree who the enemies are, and our enemies have the same primary goal as us! For example, please note Syria Rebels Dismayed by US Air Attacks on Non-Isis Groups. In the course of Syria's nearly four-year civil war, Ahmed Hamadi an anti-regime rebel, often hoped western intervention would help his cause. But when it finally came, it killed his neighbours and their children.Collateral Damage to Moderates The problem for Ahmed Hamadi was that no one could possibly tell him and the moderate 3-year old kids from real extremists and their extremist 3-year old kids. This may be shocking news, but not even John McCain can tell the difference. Want proof? Well, who doesn't these days? So here goes: Oops! Sen. McCain Met Syrian Rebels Accused of Kidnapping. If you want more proof, please see Strange Bedfellows: To Fight ISIS, US Now Supports Iranian Revolutionary Guard, Other Terror Groups. Solution Offered Far be it from me to stand back and criticize others without offering solid proposals at least as good as those coming from Washington D.C., especially senator McCain, president Obama, and Hillary Clinton. The clear solution to the problem at hand is to come up with a simple scheme that will allow us to identify the good guys and the bad guys. I propose shirts that say "I am a moderate", or better yet "I am a good guy" and "I am a bad guy". In addition, I also propose shirts that say "I am a 3-year old Potential Extremist" and "I am a 3-year old Probable Moderate" to separate the bad 3-year old kids from the good 3-year old kids. Shirts may be difficult to read, so we need to color-code them. Finally, before we can pass out the color-coded shirts, we need to take applications. Moderate Rebel Application Form New Yorker columnist Andy Borowitz devised the perfect Moderate Syrian Rebel Application Form. To eliminate potential mistakes by all involved, there are only six questions on the application: 1. As a Syrian rebel, I think the word or phrase that best describes me is: A) Moderate B) Very moderate C) Crazy moderate D) Other 2. I became a Syrian rebel because I believe in: A) Truth B) Justice C) The American Way D) Creating an Islamic caliphate 3. If I were given a highly lethal automatic weapon by the United States, I would: A) Only kill exactly the people that the United States wanted me to kill B) Try to kill the right people, with the caveat that I have never used an automatic weapon before C) Kill people only after submitting them to a rigorous vetting process D) Immediately let the weapon fall into the wrong hands 4. I have previously received weapons from: A) Al Qaeda B) The Taliban C) North Korea D) I did not receive weapons from any of them because after they vetted me I was deemed way too moderate 5. I consider ISIS: A) An existential threat to Iraq B) An existential threat to Syria C) An existential threat to Iraq and Syria D) The people who will pick up my American weapon after I drop it and run away 6. Complete the following sentence. "American weapons are…" A) Always a good thing to randomly add to any international hot spot B) Exactly what this raging civil war has been missing for the past three years C) Best when used moderately D) Super easy to resell online Sheer Brilliance If the above application form by Andy Borowitz is not brilliant, what is? Coupled with passing out color-coded shirts based on the results, the overall process seems foolproof. A couple of questions will easily explain: Q1: If this plan had been in place would McCain have had his picture taken with kidnappers? Q2: If Obama had this plan in place, would he have blown up the friends and neighbors of Ahmed Hamadi? The answer of course is "clearly not". Fallback Plan Nonetheless, I can hear the naysayers spoofing my plan already. For example, some may claim color-coding will fail because Obama, McCain, and some fighter pilots are color blind. Others may wonder if Obama can read without a teleprompter. As for ability to read, rest assured, Obama is not going anywhere near Syria. Admittedly, color-blindness is a legitimate concern. However, I am quite sure if we all pray hard enough, color blindness can be cured overnight. It takes the perfect prayer, and I penned it just this evening. The Moderate's Prayer Al Qaeda Who Art in Syria Moderates Be Thy Name Damascus Come Assad Be Done The Almighty Obama Has Said Give us this Day Our John McCain And Lead us Not into China But Deliver us from Russia Amen It's Foolproof! My plan is not only far better than anything Obama and McCain have come up with, it's actually foolproof! In fact, the Moderate's Prayer alone is so good, I now propose we not waste money on applications, shirts, or bombs. All we have to do is recite the above prayer enough times and moderates will win the day. Please do your part! Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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