The Monday Morning Reading List
Caterpillar warns on global uncertainty (FT)
Only 3 years behind the curve as usual: Moody’s warns on California city defaults (FT)
Bundesbank Reiterates Objection To New Bond Buying (ZeroHedge)
German Finance Minister: No New Aid For Greece (Reuters)
German Politicians See No Leeway On Greece Reforms (Reuters)
Spain Seeks Commitment From Central Bank on Bond Buys (WSJ)
Finnish Euro Doubts Hide Business Plea to Commit to Currency (Bloomberg)
ECB Crushes Spiegels "Absolutely Misleading" Monetization Report (ZeroHedge)
Niall Ferguson: Obama Needs To Go (The Daily Beast)
FHA's 30X Leverage On Mortgages Is Creating New "Subprime" Market (Sober Look)
Fannie Mae / Freddie Mac: The Walking Dead (Bloomberg)
From the King Report this morning:
The Is A Lot Of BS In The BLS Inflation Data
"Though rents are soaring in the US, the BLS is greatly under-reporting this inflation because about 30% of CPI is derived from rents and Core CPI is 40% rent.
If the BLS accurately reported rent inflation, CPI and Core CPI would be substantially higher – CPI by approximately .75 and Core CPI by approximating 1.00%.
NY Times: According to the real-estate website Trulia, U.S. rents in July increased 5.3% from year-ago levels. Government data show June rental income was up 12.4% over the past year, compared with a 3.5% gain for all personal income…
The BLS for July has Rent +2.8% y/y and OER +2.0% y/y. The obvious question is why is Owners’ equivalent Rent so much lower than rents, considering OER is based on Rents and it is supposed to account for real estate taxes? Rent includes utilities; OER doesn’t. More importantly OER is 23.766% of CPI and Rent is 6.432%. So it is essential to keep OER as low as possible.
The methodology for determining OER is so absurd and flawed that it defies common sense and decency.
Weights for OER and Rent The expenditure weight in the CPI market basket for Owners’ equivalent rent of primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence:
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
The following questions, asked of consumers who rent their primary residence, are the basis of the weight for Rent:
“What is the rental charge to your [household] for this unit including any extra charges for garage and parking facilities? Do not include direct payments by local, state or federal agencies. What period of time does this cover?”… http://www.bls.gov/cpi/cpifacnewrent.pdf
Do you know how much rent you could demand for your home? How many people could accurately answer this question? Few if any – And this is the largest component of both CPI and Core CPI! Yet it is based on a supposition at best, and more accurately, an uninformed guess!
Ladies and gentlemen, the largest determinant of CPI and Core CPI is based on guesses!!!
‘Tis another reason that ‘quants’ are having difficulty these days. Garbage in is garbage out, no matter how great you think your model is.
Minneapolis Fed President Kocherlakota made a very insightful comment last week whose importance was missed or ignored by the QE desperados as well as most others.
Kocherlakota said, “That 8.3 percent isn’t translating to as much downward pressure on prices as we would normally think.”
The Phillips Curve, the tradeoff/relationship between inflation and employment has broken apart –again.
The Phillips Curve was discredited in the seventies because inflation and unemployment both soared. The model calls for a tradeoff between the two factors.
In the eighties, the Phillips Curve was thoroughly discredited because employment soared while inflation collapsed. The model called for inflation to increase in conjunction with employment. So the model was discredited in two different, actually diametric, environments.
Now, the model is discredited again because the current level of unemployment should induce disinflation or even deflation. Instead, inflation has appeared and is escalating – despite hokey CPI data.
Some Fed officials fear that inflation could surge with QE 3.0 without a corresponding employment benefit. And they have good reason to fear that because that’s precisely what occurred last year."