Zeev's Turnips Patch-No Politics (ZEEV)

[kahlua]

TIPS may not be a very good idea either (from the latest contraryinvestor site - link below)

One last comment on how the CPI is interpreted and often used in mainstream analysis. As you know, we often see analysts use the "core" rate of CPI as the real indicator of consumer price pressures at any point in time. The core rate, of course, being the headline number stripped of the influence of food and energy costs. As we stated above, food and energy components of the CPI account for roughly 22% of the total weight of the index. If we assume that the owners equivalent rent component is also being understated quite meaningfully in the current environment in terms of the true inflation in residential housing costs, we need to remember that this component again represents a substantial 23%+ of the total headline CPI weight. So, although this might sound like a stretch, when we're looking at the supposed "core rate" of inflation, we're really stripping out food, energy, and by academic definition of being understated meaningfully, housing. In other words, the current "core rate" quotes are really excluding the true costs of food, energy and housing. That being the case, how can we really consider this a "consumer" price index when it is essentially excluding the true nature of the three largest and most important consumables, so to speak, in any consumers life? Although this is really a point in time comment more than anything else, the current CPI is telling us very little about real world cost pressures at the consumer level. And, as you know, we haven't even ventured down the path of exploring the hedonic price adjustments likewise influencing reported CPI data to the downside.

Don't Ask, Don't Tell...Let's get to the matters at hand that affect us as investors each day. Also some comments about what may lie ahead. First, do you really believe that the Fed and the Administration are unaware of the extremely simple data and calculations presented above? Do you really think they are that out to lunch? Do you really think they are complete idiots? Of course you don't. After all, everything above just happens to be their data. Although we're not wild fans of Fed policy over the last decade+, we indeed do give them credit for being able to carry out simple addition, subtraction, multiplication and division. That we're pretty darn sure of. The Fed knows that residential real estate prices are inflating meaningfully and rents are not. They know the CPI at the moment is not indicative of true inflationary pressures when it comes to consumer prices in the here and now. But they and the Administration have a vested interest in appearing ignorant.

As you know, the headline CPI number is the key ingredient in annual Social Security COLA's (cost of living adjustments). Moreover, the CPI is the principal adjustment factor in annual TIP (Treasury Inflation Protected securities) total rate of return payouts (some protection, right?). Military and civil service wage COLA's depend on the CPI. And so do levels of Federal Income tax tables in terms of potential "bracket creep". (A lower CPI does not allow absolute dollar thresholds of incremental tax brackets to "creep" up much at all, academically meaning a higher total absolute dollar level of taxes collected.) The bottom line is that the higher the CPI rises, the more the absolute dollar cost to the government annually. Let's face it, we have a massive Federal deficit already (both on and off balance sheet). Does the Fed or the government really want to see that move meaningfully higher due to a CPI calculation that perhaps would be a bit shocking if indeed it reflected reality? And finally, a substantially higher headline CPI could, in all sincerity, push the Fed into raising short term interest rates much faster than has been the case up to this point due solely to financial market perceptions. The Fed knows the current US economy is highly levered. They know a rapid Fed Funds rate acceleration would absolutely cause some real damage and perhaps immediately burst a number of financial and real world bubbles they themselves fostered in the first place. From our standpoint, they and the Administration (responsible for the CPI calculation) are playing a game of "perceptual chicken" with the markets when it comes to reported inflation. They are practicing a "don't ask, don't tell policy". Dangerous? Yes. But what is their alternative at this point given their failure in terms of lack of financial discipline many moons ago?

http://www.contraryinvestor.com/mo.htm