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PracticalDad Price Index – April 2016:  The Failure of QE

Frequently, compiling the monthly PracticalDad Price Index is less than exciting – have you ever wondered how stupid you must look when you’re on your knees checking a shelf label six inches from the floor? – and the results can be dull.  But there are times when it is exciting, and the past number of months are a case in point.  Last evening’s final calculation for April led to an audible sonuvabitch as I considered the number on the spreadsheet.  The Total Index result for the 47 item marketbasket dropped by more than a full basis point to an April level of 101.64 while the 37 foodstuff item Food-Only Sub-index declined by almost one and a half basis points to an April level of 101.40.  What does this mean?  It means that everything that the Federal Reserve has tried to achieve with three rounds of Quantitative Easing, the trillions of dollars added to the money supply and their own balance sheet in an effort to spur inflation, is being utterly wiped away in abject failure.  Unless, of course, you’re a hedge fund manager with assets in the market. 

The 47 item grocery marketbasket index began in November 2010 with a baseline index of 100 and through QE programs 2 and 3, the programs were able to induce a degree of mild inflation to offset the dread deflation.  But QE 3 ended at the end of October, 2014 and the 37 item foodstuff sub-index subsequently peaked in December, 2014 – only a month later – with a sub-index reading of 115.13 (again, November 2010 = 100).  To purchase the same 37 foodstuff items more than four years after the outset of the Index would have cost 15.33% more at the peak.  And now?  Less than a year and a half later, with no QE, that has been almost wiped away and the indices are once again back where they were in the first quarter of 2011, only months after the start of QE 2. 

Take note of one particular element of the data listed below.  The final column is labelled Spread and is literally the differential between the Total Index and Food-Only Subindex results.  For me, it’s an indication of where the activity within the marketbasket is taking place, whether the 37 foodstuff items alone (for a breakdown of the items surveyed, see here) or whether there’s more effect among the ten non-foodstuff items such as soap, ibuprofen or trash bags.  What I’ve come to find is that the foodstuff segment of the Index is more sensitive to factors than the more stable 10 item non-foodstuff segment.  Most of the rise in the Index has been fed by this more sensitive foodstuff segment and during the last months of the QE 3 program, the spread between the two was at times greater than three basis points with the Food-Only Subindex leading.  But this month is only the third time in more than 65 months of consistent pricing that the Subindex trails; food led the way as an inflationary indicator and now it leads the way as a deflationary indicator. 

It shouldn’t have been a surprise since the first part of the week brought a mailer from one of the surveyed supermarkets, which touted Thousands More Prices Just Dropped.  This market, along with the two surveyed competitors, have taken multiple steps in the past year to adjust to the economic environment of increased food stamp usage and diminished family incomes.  New suppliers have been found for their store brand offerings and cut-rate products are now sitting on the shelves for the price-conscious.  Yes, meat is still higher than it was at the outset years ago, but that kind of supply/demand imbalance brought about by decades-low herd sizes doesn’t end even remotely overnight.  It can be mitigated by factory techniques brought to the meatpacking industry and this is happening as more stores are now selling their 80% lean ground in factory-packed plastic tubes called chubs.  Yes, more temporary supply dislocations brought about by factors such as avian flu can arise, but these resolve more quickly and the products, especially eggs, are lower in price than they were.  Yes, commodities such as sugar and coffee have suffered stealth inflation so that they’re now sold in smaller containers, but even their prices have ebbed from their previous highs as the hot money of QE has ended.  But the problem of the diminished family income, further weighted by new claims upon it by higher education and healthcare costs, isn’t so easily treated.  So the grocers do everything within their power to make their products more affordable so that they can compete and this bareknuckle price competition is symptomatic of deflation…brought about by a smaller money supply amongst the general public.

Which is perversely fascinating given all of the money that’s been created by the Federal Reserve since the initial Quantitative Easing attempt began more than seven years ago.

This little datapoint of the prices at three unrelated grocery stores is fully related to the much larger issues being revealed by the chaos of the 2016 Presidential Electoral Process.  Massive amounts of money have been created out of whole cloth yet so little is reaching the general public that true deflation is being exhibited by the pricing and production behaviors of the grocers, as close to the first line of consumer spending as any line of business on the planet.  It’s this political anger, fueled by unpopular trade policies and protracted military engagements that remove living-wage jobs and detract from important public investment, that gives literal rise to the figurative middle fingers of both left and right of the political spectrum to the establishment mandarins.  Make no mistake about it, the anger from both sides is coming together as the divides are two sides of the same coin with the common element of anger directed at this government/corporate beast that we’ve allowed to be created.

So what happens to the prices going forward?  While my guess is as good as anyone else’s, the bet is that they’ll continue to decline.  Some items are more expensive than they were five and a half years ago, but there will be enough offset elsewhere that the cost of purchasing a marketbasket of the same items will actually be cheaper than they were at the outset.  Unless they either re-institute another round of QE – which would be disastrous without fundamental changes to the existing system that’s already created such divisions of wealth and class – or find a way to promote the creation of sustainable, living wage jobs, then the hemorrhaging and deflation will continue.  So, here are the indices for the past six months.

 

PracticalDad Price Index – April 2016
Month Total Index Food-Only Index Spread
4/16 101.64 101.40 (.24)
3/16 102.86 102.85 (.01)
2/16 103.86 104.27 .41
1/16 104.54 105.25 .71
12/15 104.92 106.39 1.47
11/15 104.79 105.97 1.18
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Driving Up the Cost of Higher Ed:  Bette and the New Educational Baseline

Before he departed for his freshman year in college, Middle and I were talking about student debt and the high cost of a college degree.  He looked at me and asked “How in the hell did this happen?”  This article is the third in a series that tries to make sense of what in the hell did happen to so disproportionately ratchet up the costs of higher education.

The cost of a degree didn’t just skyrocket willy-nilly over the course of decades, much as the shuttle Challenger didn’t just explode and the Titanic didn’t just sink.  In each instance, there were a variety of reasons that came together to set the stage for the events in question by guaranteeing that higher education now had a far more massive demand for its services than ever existed previously in American history.  In terms of the demand for higher education, the first factor was globalization and the knowledge-based economy.  The theory was that the lower-end and unpleasant manufacturing would be farmed out overseas and the Americans would, in their wisdom and foresight (and for those with Asperger’s, this is sarcasm), keep the higher-end technical manufacturing, administrative and service functions here.  The second factor – and the one that we’ll explore here – is also business-related:  starting in the 1970s and afterwards, the business community shifted the educational baseline for employment from the high school diploma to the college degree.

A reasonable part of the shift during the last quarter of the twentieth century was objective.  The baseline for academic performance – rightly or wrongly – is the SAT and since the the Golden Era of the 1960s, the average SAT scores on both the verbal and math components had dropped consistently.  There was also continuing criticism of the public school system and its apparent inability to prepare young people to compete in the workplace.  No, folks, what we discuss today has been around in one form or another for decades.  American business through the 1970s and 1980s was in the process of having its lunch eaten by the Japanese and Germans and entire industries were simply being destroyed.  Remember the textile industry?  Foreign competition was hungrier and the sense was that the former Axis powers had lost the Second World War but were well into the process of winning the peace.  Given these factors, the push was on in the business world to recruit more and more college graduates to work instead of those with potentially suspect high school diplomas.  Hey, our high schoolers might be idiots but the good ones go through the still-respected college system and are ready to roll in the workforce was the attitude.  If you are old enough to recall the stories about Ford Pintos catching fire and Chrysler employees sending cars out the factory doors with empty bottles rattling around inside the car doors, it actually made sense.  This gave the kids another four years to mature and gain a better education in preparation for the world.

But increasing global competitiveness wasn’t the only reason that businesses shifted their baselines upwards.  The other reason was simply a question of cosmetics and I was privileged to be intimately acquainted with two separate instances of cosmetic baseline changes.  The first instance was cosmetic in terms of appearance to other businesses.  My first real job was when an employer hired me as part of its first group of college-educated “professional” hires for a particular operational area.  It was the job that actually paid me enough money to allow myself to move out of the family household, where I’d lived for a year after my own college graduation and it pertained to ceded reinsurance.  You can certainly refer back to the link, but the best real-world example is that of a bookie laying off bets with other bookies so that he isn’t wiped out should that million-to-one shot actually pay off.  Many insurance policies were written with reinsurance provisions that allowed a company with a large loss to be reimbursed by other companies and it was my job, along with the others, to review all of these losses and first ascertain if a reinsurance provision existed, then determine the amount to be billed and finally to get the money back from them.  It is an arcane, technical arena of insurance and the hubs for such work are all in major cities such as New York, Los Angeles, Munich, Atlanta and London.  My hire came about because the operations director for my new employer had looked around and noticed that everyone with whom his department interacted to retrieve the monies had, at the minimum, a bachelor’s degree and in his mind, they’d be more willing to pay if they had faith in the competence of the people doing the billing.  It made sense cosmetically.  But the reality was that with adequate training, the job didn’t actually require a college degree as much as the capacity to focus and a simple willingness to learn and this was something that the majority of the existing non-college staff had in abundance.  We new hires did have to undergo two full weeks of classroom training before the director even allowed us onto the floor to shadow our non-degreed trainers and to say that it was uncomfortable was an understatement.  The demand for a degree was further fueled when these same staffers were told that if they wanted to go anywhere else within the company at or above their pay-grade, they would now require a college degree.

The second instance of a cosmetic baseline change was to demonstrate perceived competence to prospective customers, even if the job again didn’t require a college degree.  Hey, we’re better!  Our people have college degrees!  I left the reinsurance position to move to a smaller city where my better half was in school.  There was no hope of another reinsurance job but I managed to swing another hire as a commercial claims adjuster for a regional insurance carrier.  It is a mystery greater than the disappearance of Amelia Earhart that the claims manager and supervisor actually hired me since I had no actual experience doing this and simply had to learn on the spot, absorbing information and settling claims across a spectrum of insurance lines – workers’ compensation, commercial and auto liability.  But it was also another uncomfortable situation since that company had instituted a college-degree requirement for all claims adjusters.  That meant that any future hires into adjusting positions had to be college graduates and that any future promotion for an adjuster was predicated upon the completion of a degree; another increase in the aggregate demand for a degree.  Because I didn’t receive the home office training received by new hires with a degree, I was literally dependent upon the goodwill of those around me, most especially those non-degreed adjusters now locked into a position.  When one of these adjusters – Bette – asked me to help clarify her purported confusion about a liability case, I agreed to do so and then smuggled the file out of the office to study it that evening to find the appropriate response.  When I gave her my response the following morning, I passed her test.

Bette was the perfect microcosm for the debate on whether a degree was truly necessary.  A claims adjuster is the person who proverbially walks behind cleaning up after the elephant parade; the adjuster is dealing with those who have had a loss and it’s not uncommon to take undeserved heat arising from misplaced anger.  The questions that arise also beg answers that don’t come from calculators:  How do you compensate someone for damage to an arm or leg?  Does a person who is considered ugly deserve less for a scar than someone who isn’t considered ugly?  How much does someone deserve for pain and suffering?  It was Bette’s handling of a particular case that taught me a life lesson in assessing value, detail and negotiation.  Our insured store’s security had publicly and wrongly detained an African-American educator in a neighborhood store for alleged shoplifting, immediately afterwards releasing him when the manager realized his innocence.  A claim was filed for wrongful detention and the insured wanted to see it negotiated promptly so as to avoid a publicly humiliating trial.  The case was assigned to Bette and she visited the educator and his wife, departing their home with the skeleton of what became a mutually satisfactory settlement after only the first visit.  What she noticed on the visit was a variety of travel magazines on the coffee and end tables and she used that as a departure point for cordial conversation.  After they began to discuss their claim, it became the segue to a settlement when she tied a potential amount to the cost of a vacation in their dream locale.  The upshot was that the couple happily had a two week vacation for considerably less than a possible jury verdict.  This case demonstrated more than anything that the college degree was utterly irrelevant to performance of the job at hand.  There was nothing about 120 credits of academia that could have successfully concluded this case, or almost any other for that matter.  What was required for a successful career was simply native intelligence, good people skills and an acute ability to observe.

There is a time and a place for higher education.  I want my bridge-builder and aircraft designer to have a good basis in engineering, which can only come from concentrated study.  I want my Family Practitioner and medical researcher to likewise have skills that only arise from concentrated study.  But the simple reality is that we’ve allowed ourselves to be told that the only route to financial success is via a college degree and business hiring has now cast that into cement and again, the only winner is the institution of higher education.

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PracticalDad Price Index – March 2016:  The Human Face of Deflation

The data is collected and calculated for the March 2016 edition of the PracticalDad Price Index and once again, the Index has declined as deflation now roars through the grocery stores.  The PracticalDad Index marketbasket consists of 47 items from a standard grocery store that are commonly purchased by a family on a budget.  These items compose the Total Index and for March 2016, the Total Index for this marketbasket was 102.86 (November 2010 = 100.00) and was down a full basis point from February’s level of 103.86.  The Food-Only Subindex is composed of the 37 foodstuff items within the basket and in March was actually less, at 102.85 (November 2010 = 100.00) and declined by a considerable 1.42 basis points from February’s Subindex reading of 104.27. 

Let’s put this into perspective.  The PracticalDad Price Index began in November 2010 as a kitchen-table project to ascertain what was actually happening to food prices on a family level.  The Federal Reserve had commenced the first of three efforts at Quantitative Easing, an untried and novel approach to kickstart economic activity by flooding the financial system with liquidity.  The QE programs were the brainchild of the then-chairman Ben Bernanke, an economics professor whose academic expertise lay in the errors of his Great Depression era predecessors in the effort to fend off the deflation that laid waste to the global economy.  It was only natural that such an untried policy approach gave rise to immense debate over it’s ultimate impact and whether it would fail, create the unicorn-like moderated inflation of 2% or tear the economy a new one that spewed a raging storm of inflation.  Yeah, good times…  But for all of the conversation about isolated items rising or falling in price, or the closely followed CPI, how would this play out in the marketbasket composed of items purchased by the common American family?  And so the PracticalDad Price Index was born. 

So in five years and trillions of dollars created and injected into the Financial system by the Federal Reserve via three separate QE programs, what has been the result?  From the period of November 2010 to November 2015, the Federal Reserve more than doubled the asset holdings on its balance sheet, seeing an increase from approximately $3 Trillion to $7 Trillion while the DJIA during the period of November 2010 to March 2016 rose by 60%, from 11124 to 17829.  The gap between the uber-wealthy and the average American increased in terms of amount of assets owned by the top .1% – that’s top one-tenth – now equals that owned by the bottom 90%.  So Ferrari and other luxury car firms sold more, and the prices taken by collector’s artwork at auction increased as well.  But that’s on the upper end of the spectrum.

What’s happened on the lower end of the spectrum is a far, far different thing.  By 2014, the most recent year for which Census Bureau figures for median household income are available, the median household income was 6.5% lower than the same category in 2007 ($53,657 vs $57,357), the last year prior to the Financial Crisis.  The number of Americans receiving SNAP benefits rose from 44 Million in December, 2010 to 45.4 Million in November, 2015.  This is the human face of deflation:  deflation isn’t just prices mechanistically declining on a grocery-basket basis, it’s the result of thousands of grocers and suppliers working to maintain sales and profitability in the face of lower incomes, competing demands and increased hunger amongst millions.  Deflation occurs by substituting lower priced brands of food from cheaper suppliers across a broad range of foodstuffs.  And if the quality has to suffer, so be it.  Deflation is not a sudden event but instead a steady grind as economic pressures sand down incomes with the result that the suppliers and producers have no choice but to lower their prices so as to maintain sales and hopefully, profitability.

When economists talk about inflation and deflation, it’s treated much as any other abstract principal and the essential humanity behind them is lost.  When I finally saw The Big Short with Middle the other week, I noted the scene in which two young hedge fund managers are in Las Vegas and break into celebration when they find that their mentor, Ben Rickert (Brad Pitt), has been able to secure the credit default swaps that will – hopefully – pay off massively when the housing market breaks.  But Rickert simply stares at them and reminds them that for all of the statistics, there are people who will suffer.  Lost homes and bankruptcies, broken families and dislocation, and the two become more grave at the reality.  And so it is with deflation.  Prices will fall, but there is a cost to it.  The human face of deflation within the PracticalDad Price Index is one of hunger and quiet desperation.  It is the face of millions of Americans requiring government assistance to put food on their tables.  It is the face of the Food Bank manager who has to once again search out donors to help replenish the shelves for those in need.  It is the face of the elementary school student who receives a backpack each Friday afternoon during the school year, filled with enough food to sustain her through the course of the weekend until she returns to school and a free lunch the following Monday.  It is in the face of the elder who has to choose whether to spend precious funds on food or medication.  It is the face of the Boy Scout who participates in an annual national food drive to replenish food banks, and whose family is possibly going to have to utilize that food in another week.

This project began out of an intellectual interest in what was occurring on a policy level.  But maintaining it for the past five years – following the same 47 items – has become more than an intellectual exercise.  It has brought an awareness of the faces within those stores and with that, a frank anger at the hubris and detachment of so many of the political and financial elite.  Listen to what is being said and the manner in which it is presented.  But most importantly, try to move beyond the language and see the effects upon the humanity which will ultimately feel the impact of the proposals.  This affects our neighbors, co-workers and classmates.  This affects us and most importantly, it affects our children.  Because God forbid that the face of the youngster looking at the stark choice is our own child.