Perspective

Greetings from Sedona…

This is an excellent time to step back from the depressing deluge of data and try to gain some perspective and context. 

You all have undoubtedly heard or seen articles purporting to prove that the middle class is no better off than forty or fifty years ago.  As proof they will invariably cite inflation adjusted, median per capita income data generated by the government.  You will be inundated by more of the same claims of long term real income stagnation as the economy deteriorates over the next five years or more.  My mantra dating back to my radio days is, “But is it true?”  The answer is – as was the case the majority of the times I posed the question – no!!

When analyzing any data, I subscribe to a twist on Ockham’s razor, which we will call Steve’s scalpel:  When two or more pieces of data appear to contradict each other, use the simplest one to draw any conclusions.  For the purposes of determining the long term trends of middle class well being income and inflation data are complex at best and bogus at worst.  Therefore we must look elsewhere for simpler, easier to understand data.

Fortunately, most of the work was done for us by W. Michael Cox and Richard Alm, both former members of the board of governors of the Dallas fed, in their book MYTHS OF RICH AND POOR.  This is a must read for anyone who wants to have a true perspective on our economy.  They collected simple, easy to understand data, with predictably surprising results.  For example, only 34% of new homes were built with central heating and air conditioning, which means the percentage of all homes with those features had to be considerably lower back then.  By 1997 new homes with central heat and air soared to 81%.  Today that figure would be virtually 100%!

Back in 1970 there were only 53 cars and trucks per 100 persons 16 years and older.  By 1997 that number was 94, and is higher today.  Of course, from and environmental and sustainability perspective this may not be a good thing.  The same thing could be said about air travel per capita which flew from 646 miles in 1970 to more than 2200 miles in 1997, and again, higher today.  The best measure of economic well being (even better than life expectancy which is heavily influenced by lifestyle) is living space per person.  In 1970 the average new home was 1500 sq. ft., in 1997 it was 2150 sq. ft. and in 2008 the average new home was 2500 sq. ft.  Since the average size of American households dropped sharply during that time, average living space per square foot for new homes expanded from 478 in 1970 to 814 in 1997 and to an amazing 962 in 2008!  Again, this is not necessarily good news to the sustainability crowd.  For further discussion on the perspective of economic policy, prosperity and sustainability see my post GOLD IS GREEN.

The concept of GIGO (garbage in, garbage out) long predated the computer crowd claiming its origin.  Those interested in the truth above pushing an agenda have always understood that in order to make sound conclusions you must start with good data.  Measuring square footage, or counting households with central heat and air conditioning is far easier than indexing inflation – something nobody has done very well and which von Mises often said was an impossible task.  The argument that we are worse off today than X years ago depends entirely on calculating rates of consumer price increases. I leave it to you to draw your own conclusions from here.

Comment on News of the Week (Very Briefly)…

This was that time of the month again where everyone goes into a dither about jobs and the BLS data barf.  No real change in either the bogus numbers or the true state of the labor market (bad, really bad).

Black gold is closing in on $120 per barrel, wholesale gasoline is now over $3.10 per gallon (hello to $4 at the pump very soon except for Californians who have it now).  More disturbing is that corn popped big time to new multi-year highs, with the entire agricultural complex coming along for the ride.  How many ways can we spell STAGFLATION?

Purchasing managers are purchasing away with gusto at ever higher prices, housing continues in the crapper, consumers lack confidence, Portugal is comatose, Ireland is in the ICU, inflation is running away in Argentina, and our government will not shut down over the debt ceiling debacle thanks to a last minute deal.  Now all of this comes as a shocker – no?

For you market timers out there, copper has been acting like it has a bad case of pms cramps and has not been keeping pace with the stock market.  This is an early warning signal, even for those with longer perspectives than next Tuesday.  Here, as in so many instances, China is the elephant we all want to dodge.  Will they or won’t they really clamp down on the greatest real estate bubble ever?  Only their hairdressers have a clue.  When the bubble does pop, gazillions of tons of copper hoarded by millions of Chinese will hit the market.  It will be fun to watch if you are not long copper when it happens.

Moron of the Week Award…

David Sokol, an heir apparent to Saint Warren Buffet at Berkshire Hathaway, bought $10 million of Lubrizol stock just weeks before recommending that Berkshire buy Lubrizol.  Sokol netted a cool $3 million when Berkshire followed the advice.  Ironically, this was not insider trading and is perfectly legal.  Nevertheless, Sokol resigned this week for the usual personal reasons.

Now I am no prude, but one thing I cannot abide is unbridled stupidity.  How nuts can anyone be to think he won’t get caught?  Even stupider, Sokol already makes millions, so he has to be a mega moron to pick up a crappy three mil this way.  I am sure St. Warren felt the same way.

All the best to you all,

Stephen Reiss
[email protected]

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