Adjust this!
We visited the issue of BLS "Owners Equivalent Rent" in CPI back in May (and several times since). But we never did the heavy lifting as to exactly what the magical core rate would be if we back out the misleading BLS adjustment
Kudos to Tim (themessthatgreenspanmade) for rolling up his sleeves and doing the hard work of actually calculating what the core rate would be without the absurdity of the BLS hedonic adjustments: We end up with a Core Rate of 5.3%
Put that in your Hedonic BLS Modelling pipe and smoke it . . .
UPDATE: OCTOBER 17, 2005 10:26 AM
I abuse the term Hedonics to refer to ANY adjustment to price based on a rationale of logic (or illogic), rather than the focus on actually price.
It is technically more precise to say that the Owner’s equivalent rent is a decision made in the process of designing the BLS CPI model — and less a true Hedonic adjustment.
Antony Mueller of the Ludwig von Mises Institute has an excellent explanation of how BLS abuses Hedonics here.
Source:
Home Ownership Costs and Core Inflation
http://themessthatgreenspanmade.blogspot.com/2005/10/
home-ownership-costs-and-core.html
This also means that real home prices most likely declined in Q3 2005. We will not know for sure until the OFHEO price index is released.
In previous housing slow downs, inventories rose, real prices declined and then nominal prices declined.
Best Regards.
My recollection is that health care is something like 7% in the calculations and something like 18% of GNP. So there may be another false figure there.
It is about time somebody figured out the scam, thanks guys.
Barry,
CPI affects calculation of real GDP. I think if house prices were included all along we would have beed in recession for the past several years. Somehow it doesn’t feel like recession yet.
So maybe there is some wisdom in calculation of CPI the way it is done now. All these things you complain about, they average out over time.
17 October 2005
Nonlinearity as Part of Macroeconomic Fractal Progression
The current best fractal solution for the primary decay sequence of
equity valuations is a decline over the next 50 or so trading days.
By current fractal analysis nonlinearity is expected as part of this
solution with a remarkable unanticipated devolution. As commented
before, nonlinearity is part of nature’s recurrent theme and common
solution for aged structural conditions at critical stress points.
Supernovae, nuclear fission, earthquakes, and death are common
nonlinear events in an otherwise linearly operating universe. The
stress point of credit deceleration and contraction in a house of
cards financial system dependent on continuous credit expansion has
resulted in the tremors and shaking of the US composite equity
valuation since 3 August 2005. These rumblings have been the warning
quakes of the deluge soon to come.
In several months, the probable valuation decline will,
retrospectively, be seen to fit perfectly well with the emanating
economic data that is now occurring and is so very apparent to those
with eyes wide open: the bankruptcy of venerable smokestack and
airline industries; the inflationary energy cost pressure placed on
America’s new bell weather distribution industry, Walmart; the
outsourcing pressure on America’s higher paying manufacturing and
technological jobs; the saturation and overvaluation and higher
property taxes associated with the Real Estate South Sea Tulip
industry; the narrowing of long and short term interest rate spreads
decreasing lenders’ profitability; the recent bolus of bankruptcy
fillings; the massive current account deficits whose continuation is
wholly dependent on the cash strapped American consumer and his now
cresting housing valuation debit card; the sharply falling consumer
sentiment and general confidence in the future; the empty sales rooms
of American automobile distributors; the mass of hopelessly insolvent
corporate and city pension plans; the overly generous entitlement
programs whose sustainability are squarely based on continued consumer
borrowing and spending and a lower paying service economy to maintain
future GDP growth; the recent ongoing derivative dealer debacle which
is but the tip of the iceberg, and the historically low cash reserves
in mutual funds. How could anyone miss the ongoing macroeconomic data
occurring in our ENRON nation?
The primary equity value devolution can be viewed in two fractal
manners: one, a declining growth fractal sequence with an ideal
pattern of x/2.5x/2.5x and two, an inverse growing or growth of decay
fractal sequence of x/2-2.5x/x-2x.
As of Sunday 16 October 2005:
The current best estimation of the former declining fractal growth
sequence is 19/43 of 47-48/47-48 days. The first 19 days includes the
3 August Wilshire high.
The current best estimation of the latter inverse growth of decay
sequence is 10 of 10-12/25-30/16-22 days.
Gary Lammert
Wow Gary. That’s a load of data. Should I short everything? But I’d like to know more about this “Nonlinearity” in macro economics. I have never heard of it before. You put forth some interesting points, while seeming to miss some others as well. What do you think it would take to reach an equilibrium again? In your scenerio things look really bleak. I do not disagree with all of it. I just think you point out an obvious disequalibrium in the economy.
Remember:
As in the immortal words of Chuck Palahniuk:
“On a long enough time line, the survival rate for everyone drops to zero.” Movie FightClub (1998)
Barry,
I think Tim did a great thing here. But, I see things a bit differently. There has been a huge bandwagon of bloggers taking stabs at the mainstream media regarding their stance on the core rate. I’m taking a position that the core rate is equally as important as the headline AND Tim’s new inflation indicator. All three components should be viewed equally as they tell an important story. Energy prices are almost collapsing from their highs a few weeks ago. This will have a noticable effect on the headline. What the core tells us is that what inflation is there (from energy), hasn’t crept into other elements of the economy. So, if energy price fall, then the headline should fall as well, leaving the core to inch up at a normal moderate pace. From there, I’ve asked Tim what he thinks the effects of Greenspan’s cleaning up his mess of overly-loose money supply is going to have on his “inflation rate” for home ownership going forward now that interest rates are rising to normal? Perhaps you can shed some light on this.
p.s. I can’t believe someone actually said you made a “rookie mistake”. Granted, you’ve only been doing this economics thing, what… about a month or so?