February 2018 was a month of declines in the S&P 500 and the Dow Jones Industrial average. The NASDAQ, however, closed about at the same level that it began the month.
Losses today (March 1) were substantial as the president announced that he would put a 25% tariff on imported steel and 10% on aluminum. This decision is utterly ill advised and will likely trigger a trade war. How big that trade war will be maybe more a matter of one man’s ego than appropriate trade policy. The subtext that trump is hoping that his base will hear is that he was getting “tough” with China. Sorry folks, but China is not even in the top 10 list of steel importers. Canada is the largest steel exporter to the US, followed by Brazil, South Korea and Mexico.
Canada promised today to retaliate against this ill-advised policy. Some countries are threatening to target specific US industries and swing states. For example, a high tariff on Wisconsin cheese will hurt a state that trump won. Bourbon is also a target. And American agriculture is a fat target for trade actions.
It was also reported that trump is considering a tariff on European cars out of little more than spite. Or maybe because he cannot have a shooting war against another country, he can get his little hands busy with his trade war.
THE FED CHAIRMAN IS CALMING SOME NERVES
New Federal Reserve Chairman Powell spoke before a Senate committee. All indications are that the Fed will follow the path of three predicted rates hikes this year. This is the number of increases that the market is discounting.
STILL…many think that the dogs of inflation will soon be let slip. And the unemployment rate of 4.1 is extremely low. Still, wage increase pressure is not causing the pot to boil over. In fact, the low employment rate may mask the major problem of poor employment. In fact, one in four jobs are low-wage jobs, meaning that median earnings are not enough to bring a family of four out of poverty. In some states, mostly southern states, one in three jobs is a low-wage job.
Nationally, 4.1 is a low unemployment rate. But in at least a few places, the labor market is over-boiling. The unemployment rate in Elkhart and Lagrange counties is probably around 2%. But never fear, these areas will fall hard when the next recession comes. These are boom or bust economies. These bell weather counties lead the country, into and out of, a recession.
In fact, the shortage of workers in these counties are causing restaurants to close down for a day or cut hours.
SO HOW IS INFLATION CALCULATED?
The Consumer Price Index (CPI) represents a “market basket” of good s that is continuously tracked. From the changes in CPI, inflation is determined. Never mind that many economists think that the CPI fails to capture baseline inflation, it is what we work with. Many contracts are pegged to the CPI so monthly and yearly price increases are determined by the CPI.
The CPI takes into effect many factors. First, it excludes the volatile price of gas and food. Secondly, it makes “hedonic adjustments” to durable goods based upon improvement in manufactured goods. A hedonic adjustment captures the improvements to a good based upon technological improvements over time.
Think about a personal computer. In 1996 a decent desktop cost over $1000. These state-of-the art boxes had less computing power than a recent Android phone. So over time, the Bureau of Labor Statistics, the government agency that tracks the CPI, has adjusted the price based upon the improvement of the product. A computer is not the only durable good that can be hedonically adjusted. Consider a Blue Ray player. Twenty years ago they likely cost more than $200. Now you can get a far better player for $40-50. So when the CPI is calculated, these product improvements will be baked into the formula.
Below is a graph of price changes in goods with hedonic adjustment for features, functions and technical improvements. It tells quite a tale.
Services that have skyrocketed in price are healthcare services and college tuition. Healthcare, as we know, is an American train pile up. So this is no surprise. College tuition increases as states withdraw tax support. But we will save these topics for other days.
More enlightening are consumer goods, especially technologically products. New cars, clothing and household furnishings are unchanged. Automobiles keep improving in performance, reliability, safety and durability. The next old schmuck that tells me cars were better built in the 60’s,70’s and 80’s, should get a kick in the ribs. Cars of that era are junk relative to what is manufactured now.
Cell phone services have decreased 50%. No surprise here. The cost for minutes in the 1990s were confiscatory compared to today. Software also has much greater functionality today. But the product that I find most interesting is televisions.
Televisions, per the graph, cost dramatically less. Some of this has come from cost reductions gained in technology and the manufacturing process. But a lot of it comes in the form of the hedonic adjustment. Twenty years ago, rear projection screens were the top technology. Now, $200 can get you a decent set for the bedroom. One-thousand dollars can get you a magic carpet sized convex TV that looks more real than reality.
Next month, we may have a better handle on where inflation is going. And in next month’s Desert of the Real Economics Investment Newsletter, we will take a look at some solid arguments that the current CPI greatly understates inflation.
MORE BREAKTHROUGH TECHNOLOGICAL PRODUCTS FROM THE DOTR
Continuing on the successful investment products already launched by the Desert of the Real Economics Strategic Investments, March brings us our newest product, Robbing Hoods Free Online Trading Platform.
Currently, there is an online trading app called Robinhood.com. It is a free, online trading app that allows users to exercise simple stock and ETF transactions. It is targeted at Millenials, who are apparently to cheap to pay for anything. One way that Robinhood makes money is interest on unsettled funds. (It takes stock trades three days to close so there is a pile of money out there waiting patiently.)
Robbing Hoods takes this free trading app to a grossly under-served community, robbers and burglars. Robbing Hoods will be a free app connecting criminals with purchasers of stolen property (fences). It will operate much like E-bay, bringing buyers and sellers of stolen merchandise together in one seamless application. It will operate on a distributed operating system, using the blockchain network of illicit prison cell phones that hosts another Desert of the Real Economics’ product, “Bitchcoin”.
Using the already-existing blockchain prison network will save on hardware, software and network services costs. Robbing Hoods will be funded by interest on unsettled fencing operation sales. An ancillary benefit will be that owners of blockchain nodes (illicit prison cell phones) may learn the valuable skill of stock trading. Both our product and the criminals will benefit from this conflation. Criminals can move up from street and gang crime to white-collar crime and enjoy all of the benefits of CNBC, Bloomberg and Fox Busiiness Network notoriety.
SAFE AND WARM FROM THE STORM IN THE DESERT OF THE REAL
SAFE AND WARM FROM THE STORM IN THE DESERT OF THE REAL