(For more posts from Keith, be sure to check out the Hedgeye Blog)
Ex-Carlyle-Blue Wave maestro and Hedgeye strategist Keith McCullough has a fascinating manifesto of sorts based on the latest Lehman news.
He points out that even with frequent government fiddling with the CPI calculations, inflation is still showing up in the China and US’s “Made-off” numbers.
What if we were waking up to the headlines of the Bank of China’s executives being accused of the same? Well, sadly, we know the answer to that question too. Some people in the hedge fund community who are currently short China, would be forwarding the email – “did you see this?”
That’s what people in this business do. Do they see themselves in the mirror? Sometimes. Do they, collectively, understand the hypocrisy of some of their narrative fallacies? Sometimes. I think David Einhorn called this “fooling some of the people all of the time.”
Let’s shift gears to a more actionable matter that considers the umbrella of the same theme – lying about inflation. As my defence partner Daryl Jones pointed out in yesterday’s note, the most obvious problem about reported inflation is that governments report the numbers.
Let’s set aside that problem for a minute and simply consider that even if China and the US are making up the numbers, that the last reported monthly Made-off number is at least apples-to-apples against the current one. Then, lets back that data series up… chart it… and, for another minute, consider that even if these are Made-up numbers, that they have intermediate TRENDS to discern, relative to themselves.
Now let’s take this a step further and consider both the interconnectedness of global price inflation and two countries that are, for the sake of our standing argument, lying about inflation:
1. China’s year-over-year Consumer Price Inflation (CPI) – deflation bottomed in July of 2009 at -1.8%; went positive y/y in Q4 of 2009; and is currently running up +2.7% as of January.
2. USA’s year-over-year Consumer Price Inflation (CPI) – deflation bottomed in July of 2009 at -2.1%; went positive y/y in Q4 of 2009; and is currently running up +2.6% as of January.
Wow. Maybe these guys are in cahoots with one another and making up the numbers together!
At a bare minimum, no matter what your definition of truth, you can’t tell me that China or the USA is experiencing year-over-year DEFLATION in prices. Sure, you can ex-out things that normal people buy, like say gas and food, and say what you will about prices on Park Avenue – that’s fine. But the truth is that, even on your compromised and conflicted calculation, CPI is running up +450 and +470 basis points in China and the USA, respectively, in the last 9-months.
Since March 9th of 2009, the SP500 is up +70.1%. Is that deflationary? Or were Americans so bubbled up on this side of the ocean that we can’t stop lying to ourselves that the 2006-2007 price comparison that Groupthink Inc. will have you believe is the next “great depression” is nothing but just that – another lie?
Depending on how one’s portfolio is positioned this morning, they could well argue that I am making up the numbers to fit my thesis here too. That’s fine. I’ll one up you and suggest then that I am making up numbers about Made-off numbers…
If you want to take the authority on everything that really has scared the life out of people in the last 6-weeks (Sovereign Debt), take Reinhart & Rogoff’s word for it rather than mine. Chapter 12 of “This Time Its Different” is called ‘Inflation and Modern Currency Crashes’ and there’s a great chart on page 181 that shows the median inflation rate (5 year-moving average) for all countries from the year 1500 to 2007.
I know. It’s funny how politicians and liars alike have left out this part of the Piling Debt, Upon Debt, Upon Debt story out of their recent narrative fallacies. This, unfortunately, is how the story always ends – with inflation.
Milton Friedman was right when he said that “inflation is taxation without legislation.” And Mr. Macro Market is right on the pin with this again this morning. Global bond yields have done nothing but go up since the Chinese CPI report from last night. Next week, prepare for India and the USA to make up more of the same trends in their CPI numbers. They’ll be inflationary again too.
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