Inflation: Eliminate “Substitution Theory” And Use The Old Formula. Result? Inflation Is 11%
May 30, 2008 10:19 AM
I have been harping on the fact that the inflation data that we have been getting is wrong. I knew that eventually people were going to openly question it. Now we are getting more and more people coming out and saying the data is flat out wrong (as I have said for 6 months). Recently, Bill Gross with Pimco said that the inflation numbers were understated by at “least 1%”. Uhhh…thanks for going out on a limb there Bill..
Today there is a report on CNBC that someone used the old inflation formula where the “substitution theory” did not exist, it is real inflation on identical products. This formula was used forever until they changed it about 10 years ago I believe. The result showed that REAL inflation on identical products is running at 11%. This is the same thing that I have been saying. If this view is ever widely adopted, rates are going to skyrocket. Is inflation really 11%? Probably not as people will “subsitute” to some degree. Is it 4% or 5%? No chance.
The point being, if we used the same formula that was used in the 60’s, 70’s and 80’s the inflation number would be 11%. The new formula “magically” says it doesn’t exist. The substitution theory is only correct if everyone chooses to dramatically lower their standard of living. Instead of eating steak you choose chicken legs…etc, etc. True, if we all choose to live like third world peasants, then we have no inflation. If you want to live like you used to, then inflation is a problem.
Comments
2 Responses to “Inflation: Eliminate “Substitution Theory” And Use The Old Formula. Result? Inflation Is 11%”
Got something to say?
-
Recent Commentary
- Site Update: It Has Been Fun, But Closing It
- Morning Call: Open Sold
- Market Recap: GM News Was Not Really A Deal, Dow Low Cleared Late and Down She Goes
- Morning Call: Open Sold, Dow 7773
- Market Call Revisited: Sell Asia
- Market Recap: Not Good
- Market Update: Doesn’t Look Good, 818 and 826
- Market Recap: Buyers Above 818
- Morning Call: Open Gap Bought
- Market Recap: Buying On A Big Number, Now What?
- Morning Call: Still Uncertainty
- Market View: GM Holds The Cards
- Stock Charts VS Market Charts
- Market Recap: Somewhat Predictable, Low Came Where I Said Was Likely
- Morning Call: Unclear, Risk Is High
- Huge Rally: Now What
- Market Comment: Does News Even Matter?
- Market Recap: Close Day Craziness
Our Mascot Trading Goal: Ferrari 599
If the real inflation numbers are used bonds would collapse IMO. Do you agree?
People are “choosing” to ignore real inflation. This is fine but is dangerous to say the least. Here is the problem, the false numbers are causing distortions that normally would balance out.
If we were reporting actual inflation data, rates would be far over 10%, probably 12% or higher. This would plunge oil, plunge food, etc and everything would eventually balance.
But as far as bonds, i agree, bonds are in trouble, in a big way. They are all an avoid here. We cleared a key “must hold” today on the 30 year treasury. Any bounces - like today - are just that…bounces and should be sold.