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July 25, 2013

July 25, 2013

Why 7 Percent Doesn’t Bother Us

We don’t recommend driving 85 on the highway.  Nevertheless, we observe that after you’ve driven 85 for a while, 55 can feel like a crawl.  This observation applies to all the markets’ alarm at the prospect of a slowdown in China’s GDP growth rate.

As expected by many analysts, Chinese growth declined slightly in the second quarter, to 7.5 percent from the first quarter’s 7.7 percent.  This news came on the heels of June’s liquidity crunch in Chinese financial markets — which itself followed the Fed’s June communication stumbles as it attempted to sketch the possible future paths of its QE program.  In short, lots of news, in rapid succession, to spook the markets.  China is probably going to be growing at 6.5 percent soon, but worry not — that’s quite good growth for an economy as big as China’s…

China is Not the United States…

Firepower to Defend Stability During Rebalancing…

Correcting Local Governments’ Mis-Spending…

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Japan: Shifting Course After 23 Years

In 1990, Japan reached an all-time high.  But after 23 years of dealing with its moribund and stagnant economy and declining stock market, it is understandable why some investors would be skeptical of Japan’s ability to pull itself out of the malaise.  Prime Minister Shinzo Abe has been in office since December and has gone “all in” with his plans aimed at revitalizing Japan.  Referred to as “three arrows,” Abe’s plans include: 1) aggressive monetary easing and QE from the Bank of Japan (BOJ) to get to 2 percent inflation and 2 percent real GDP growth, 2) supplemental fiscal spending to be ramped up, and 3) promoting private sector investment and consumer spending by reforming Japan’s corporate tax, individual tax, regulatory, and retirement saving policies.  The first two arrows were welcomed by markets earlier this year with a stock market rally and a falling yen.  The third arrow, announced in early June, will likely produce meaningful positive results; however, they are longer-term in scope…

Doubt and Skepticism Linger…

The Data Coming Out of Japan Should Increase Optimism and Bullishness…

Bulls and Bears Are What Make A Market…

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Today’s CPI Doesn’t Resemble Your Grandfather’s CPI

It is important, when viewing the U.S. Government’s Consumer Price Index (CPI), to understand that the CPI tracks consumer spending and not the cost of living.  According to an article in Barron’s this past weekend, the current CPI basket includes prices of 71,000 goods and services — and doesn’t resemble the consumer basket of goods and services from prior decades.  Both the calculations and the selection of data itself have undergone many changes, and in our opinion many of these changes have been done to report a more modest rate of inflation.

The CPI is based on data collected from spending surveys given by the U.S. Bureau of Labor Statistics to approximately 14,000 urban families.  Among the 71,000 items the CPI includes other expenditures, such as recreation, insurance, taxes, personal care services, entertainment purchases, and consumer electronics.

The Bureau of Labor Statistics also periodically alters the contents of the basket, making adjustments to the weighting of the components, and smoothing seasonal patterns.  Such tinkering with data, as we have mentioned over the years, usually results in an understatement of the inflation rate and creates an unreliable, misleading cost-of-living index.

Guild Investment Management has long believed that the existing indices used to measure cost of living changes in the United States are inadequate.

The Guild Basic Needs IndexTM (GBNI) concentrates on four categories of primary and essential living needs: food, clothing, shelter, and energy (which is needed for heating, cooking, and transportation).  The categories and their values within the GBNI are fixed.  There is no seasonal adjusting, smoothing, or replacing of components.

This past weekend’s Barron’s discusses CPI adjustments over the decades and suggests that tracking inflation over a long period of time with a basket that frequently changes is like comparing apples to oranges.  The point they make is that CPI data going back to the 1940s doesn’t relate to today’s CPI data, as people are consuming completely different goods and services.

Our GBNI on the other hand will not change as it represents items that people have been consuming for many generations.  The Barron’s article also suggests that there is logic behind adding items to the CPI as they become significant parts of the consumers’ purchases.  For example automobiles were added in 1935, air conditioners in 1964, and cell phones in 1998.  While these items may be significant purchases, they don’t represent the basic essential needs which we are tracking in our GBNI.  Adding new items to an index that tracks consumer spending makes sense, but we maintain that some of the other manipulations to the CPI calculation over the years are harder to explain.

The modifications to the CPI introduced in the late 1990s, according to the article, suggest that inflation might be understated by 1.3 percentage points per year.  Therefore the calculation of 1.8 percent inflation over the past year could actually be closer to 3.1 percent — and going by our chart below — the CPI calculation of 2.5 percent since January 1, 2000 would actually be 3.8 percent.

Guild Basic Needs IndexTM

According to the GBNI data for June, the cost of food, clothing, shelter and energy components are up about 6.1% over the past 12 months.

GBNI June 2013.jpg

Track our analysis in these letters and at www.gbni.info.


In this week’s Premium Global Market Commentary available to Gold Subscribers, we feature:

  • Executive Summary 

 

  • As Expected, A Decisive Win For Abe: Time to Prepare the “Third Arrow”

    “Once I return to Japan from this trip, I will be busy due to the elections for the Tokyo Metropolitan Assembly as well as for the House of Councilors.  In both of these elections I hope to deliver a resounding victory to the Liberal Democratic Party.  That is my goal.  This is because there is precious little time allocated to us for transitioning reforms into execution.  And then what will I do after the elections are over?  I have positioned the next three years as a period for intense reform.  I will be a fire, burning with all the political strength I can muster…  Japan’s regulatory regime is like solid bedrock.  I myself intend to serve as the drill bit that will break through that bedrock.  If I am unable to make Japan a great country and a robust country this time around and pass it on to the next generation, then there is no meaning to the life I have lived thus far.”

    Japanese Prime Minister Shinzo Abe, speaking in London on June 19

  • Small Wins for Derivatives Regulation; More Still To Do

    The U.S. Commodity Futures Trading Commission (CFTC) and the European Commission are approaching a mind-meld on derivatives trading regulations.  Although the harmonization of regulations does include interest-rate and foreign-exchange swaps, which represent together some 90 percent of outstanding derivatives, it does not include credit-default swaps.  In the U.S., these fall under the jurisdiction of the Securities and Exchange Commission (SEC), which is not a participant in this international regulatory effort.

 

  • High Frequency Trading Gets a Smackdown From Chuck Schwab

    In further news related to HFT, we read an opinion piece in the Journal by the founder of the Charles Schwab Corporation.  Not many heads of financial institutions have weighed in on the HFT debate, but Chuck Schwab felt the need to do so because he sees HFT as one of the major factors driving small investors away from the market

 

  • Building African Airports: China’s Financial Geopolitics

  • G20 Finance Ministers Put a Nail in the Coffin of Austerity

  • Guild’s Premium Global Market Summary

Gold Subscribers have full access to all Premium content.  In addition, Gold Subscribers can participate on Guild’s periodic conference calls where participants can ask direct questions to Guild’s portfolio managers and research team.  We will be announcing our conference call date and time in the coming weeks.

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