Replies to post #306927 on Zeev's Turnips Patch-No Politics (ZEEV)

[Must Be Patient]

OT Firefox - the flash blocker is especially useful for certain sites <G>

[Sherlock356]

thanks TJ...

[basserdan]

The King Report

M. Ramsey King Securities, Inc.
Thursday Oct. 7, 2004–

Issue 3011 "Independent View of the News"

CPI fraud is far worse than Bill Gross’s hedonic lament. Impugning Mr. Gross for questioning the BLS use of hedonic adjustments is like impugning someone for questioning Al Capone’s character because he evaded income taxes. The truth of the matter is the compilation process is extremely flawed but the vested interest of Wall Street, The Fed and US politicians is to understate CPI and attack foes.

The BLS’s substitution principal abrogates the logic of hedonic adjustments. BLS and permabulls believe it’s okay to not reflect higher steak costs in the CPI because people will substitute ground beef. And if grounded beef prices surge, people will substitute KenLRation. Where is the hedonic adjustment to the downside for the reduced pleasure of ingesting the inferior product?

Furthermore, where is the negative hedonic adjustment for food that contains pesticides, steroids and preservatives? They impact health and a healthcare cost…Anyone with a modicum of common sense understands the BLS’s claim of a 4.4% y/y in healthcare costs is a blatant fraud…Yesterday’s WSJ, hidden on its penultimate page (D-13), noted that a John Hopkins study showed 2/3 of nonprofit groups had at least an 11% increase in healthcare costs, while 9% reported unchanged or lower costs. PS -Accounts of double-digit healthcare cost increases appear regularly.

Services have gone to hell to save costs for business. What’s the hedonics for doctor house calls, gasoline adjusted for 3 guys servicing your car plus lovely parting gifts, crawling under desks and performing service functions under direction from someone in India, waiting on/wading thru automated phone menus, bagging your own groceries? The BLS web site states that they ignore price spikes, and they even admit that consumers pay different prices than what the CPI reports. http://www.bls.gov/cpi/home.htm

Housing is the largest (32%) CPI component, yet few people’s housing costs change per year and even less change monthly. 70% of the US own homes. Their housing costs change if their mortgage rates change. Those with ARMs will change more often. Rents change once or twice a year, unless there’s rent controls ala New York. And BLS uses imputed rents for housing prices. Why the heavy weighting?

The more important variable housing costs are maintenance (plumber, electrician and home service rates as well as the hedonic adjustment for the long wait for their appearance) and real estate taxes. Most elementary and secondary tuition costs are actually in real estate taxes, and those are absent in CPI.

The CPI scam gained critical mass with the explosive inflation of the late ‘70s. Carter’s chief economist, Al Kahn, devised ‘core’ CPI to obfuscate the continual price increases in the necessities of life.

Few people talk about the dubious BLS practices of substitution, hedonics and seasonal adjusting, but even fewer claim that there sampling and compilation methodology is absurd. BLS methodology to determine IBM’s price last month would entail sampling the various markets between the 10th and 14th of September. It tells you little about IBM’s actual price for September. There are means to ascertain an accurate IBM price for September, and that methodology can be utilized to determine goods prices in the economy. (We aren’t going to detail it here, because it’s something we intend to pursue.)

The current environment of soaring oil, industrial commodities, freight transportations, tuition and healthcare costs compels an increasingly number of people to realize just how bogus the CPI is.

We recently were forwarded a piece from an economist who is on his third decade of deflation warnings. He tried to support his contention that CPI should be lower because the hedonic adjustments aren’t large enough by stating people are oversensitive to purchases they made most recently. They forget how much water heaters have improved in price-quality. NO S^%# SHERLOCK! We’ve bought one new water heater in the past 26 years of home ownership, as well as 3 new washers and driers, a couple refrigerators, perhaps 3 dish washers. We pay for the necessities of life monthly and those costs have been increasing much faster than the CPI – energy, food, utilities, tuition, healthcare, real estate taxes, drugs, etc. And in any contest between under and over-stated CPI advocates the final arbiter is the checkbook, which is not hedonically, seasonally or chain-weight adjusted. Reality, what a concept!

Fed Gov Poole also felt threatened enough by Gross’s modest hind that CPI is not kosher that he had to inveigh against Mr. Gross…Understating CPI (and overstating GDP) has allowed the Fed to perpetuate the productivity fraud and to keep pumping money recklessly. That’s all the Fed’s can go now.

Some reporters are nothing more than conduits – political, financial, etc. And their biggest fear is getting cut out of a loop because they have little or no actual industry experience. Perhaps this accounts for some of the attacks on Mr. Gross. He has the stature to expose official misdeed or malfeasance; and those officials would be held responsible, even culpable. Ergo, they must debunk Gross’s claim.

-END-