Gyroscopic Investing

Desert wrote: This has been mentioned several times already, but MIT's Billion Prices Project confirms the CPI-U numbers.  This group collects half a million online prices daily, and uses these data to estimate inflation.  Their estimates are very close to the CPI-U, currently around 2%.

Wow.  It is amazing that if you use prices for the same items, and weight them in the same proportions, you will get very close to the same results.

And it is precisely the selection of which prices, and what weighting, that raises the questions about the CPI-U.  Not that their data gathering is broken.  And data gathering is the only thing that MIT is doing differently.

Slotine wrote:

Is this infallible?  No, but the statistical chance of it being an invalid average is far lower than people cherry picking anecdotes that support their preliminary biases.

If the CPI is based on what people actually bought rather than the price of a set basket of goods then it's definately going to understate rising prices. Higher prices equal lower demand given everything else stays the same. If steak goes up in price and hamburger is now the price that steak used to be, it's kind of silly to say there's been no price increase because people are just eating hamburger instead.

So prices could triple and poor people could start living on cat food and potatoes and the CPI would still say about 2% right? Ehh....some cat food is actually really expensive (fancy feast and such).

If the cost of an airline ticket goes up so much that people fly a lot less that isn't the same as stable prices. I can't believe I'm even typing this. I hope I misunderstood the BLS definition of the CPI because it sounds laughable.

Kshartle wrote:

Slotine wrote:

Is this infallible?  No, but the statistical chance of it being an invalid average is far lower than people cherry picking anecdotes that support their preliminary biases.

If the CPI is based on what people actually bought rather than the price of a set basket of goods then it's definately going to understate rising prices. Higher prices equal lower demand given everything else stays the same. If steak goes up in price and hamburger is now the price that steak used to be, it's kind of silly to say there's been no price increase because people are just eating hamburger instead.

So prices could triple and poor people could start living on cat food and potatoes and the CPI would still say about 2% right? Ehh....some cat food is actually really expensive (fancy feast and such).

If the cost of an airline ticket goes up so much that people fly a lot less that isn't the same as stable prices. I can't believe I'm even typing this. I hope I misunderstood the BLS definition of the CPI because it sounds laughable.

Kshartle,

Tracking a fixed basket of goods is not a good strategy for trying to track the cost of living. As the relative price of a good rises there is a substitution affect away from that good. People start consuming less of it, so to hold its weighting in the basket at the same level is mistating the cost of living.

For example, let's say that white button mushrooms go nearly extinct due to a terrible virus. The cost of a fresh button mushroom goes to one trillion dollars. If the weighting of mushrooms in your basket remains constant than you will state the cost of living as rising thousands of percentage points. This is an extreme example, but highlights the intuition of substitution. I would probably shift towards shitake. Would the entire meteroic rise in white button mushrooms really need to dominate the index if I stop eating them?

There is a lot of microeconomic principles that guide the creation of the CPI that are rarely appreciate by the casual observer. Constructing the index is an extremely difficult process that uses a lot of assumptions and some theory. Its kind of crazy how people on the internet think they have better ways of constructing it after thinking about it for three minutes, when it is something economists have spent decades trying to create.

Finally, inflation is defined as a rise in the general price level. That is the definition you will find in an economics text book as well as the dictionary. Talking about growth in the money supply is a different thing and it certainly isn't "inflation." There is a causal relationship there, but to entirely conflate the two simplifies away the complexities of the system, complexities that are extremely important when understanding how the economy works.

melveyr wrote:
Tracking a fixed basket of goods is not a good strategy for trying to track the cost of living.

I agree. Tracking a fixed basket of goods is a decent way of tracking the value of a dollar relative to those goods. Cost of living is a lot trickier for a bevy of reasons.

It doesn't really matter what you define inflation as, or what I define it as or what some else defines it as. It only matters that when two people discuss something they agree on the concept. If I'm talking about the growth in the money supply (which I would call inflation) and you're talking about rising prices or the CPI (two different things) it's just going to be a confusing mess.

Ohhhh yeah, just because something is difficult doesn't mean it's correct or intelligent. More than likely it's the opposite. In practical purposes the CPI is used to make sure the government makes money on TIPs and welfare payments don't keep up etc. They aren't revising it to be more accurate, they're trying to mask how much they are debaseing the dollar.

Kshartle wrote: If I'm talking about the growth in the money supply (which I would call inflation) and you're talking about rising prices or the CPI (two different things) it's just going to be a confusing mess.

Yeah. I'm glad we agree on that. But I still don't see how defining inflation as the growth in the money supply actually helps you at all. Seems kinda like conflating the price of oil with the price of gasoline. Imagine one person says, "gas is more expensive!" and the other person says, "What are you talking about? The price of oil has been falling for a year!" It would be ridiculous.

It seems like the money supply and CPI are a lot like oil and gas prices in that one has a causal effect on the other, but they're not the same. And in the end, what you're really concerned with is the final prices that you actually pay, not the intermediate variables that go into determining those prices. I am, at least. When I walk into a grocery store, I pay the sticker price, not some abstract formulation of (last year's sticker price * last year's money supply growth).

Kshartle wrote: If the CPI is based on what people actually bought rather than the price of a set basket of goods then it's definately going to understate rising prices. Higher prices equal lower demand given everything else stays the same. If steak goes up in price and hamburger is now the price that steak used to be, it's kind of silly to say there's been no price increase because people are just eating hamburger instead.

The CPI does make substitution and hedonic adjustment, but probably not to that extent, at least not subtly.

However, this underscores the point that the CPI is a Consumer Price Index, not a Consumer Inflation Index.

melveyr wrote: Constructing the index is an extremely difficult process that uses a lot of assumptions and some theory. Its kind of crazy how people on the internet think they have better ways of constructing it after thinking about it for three minutes, when it is something economists have spent decades trying to create.

Blah, blah, blah.  This is nothing more than the greasy side of the appeal to authority fallacy with a nice coating of hero worship.

1) "people on the internet" are not limited but some special group of economists is by definition limited.

2) Some "people on the internet" have spent far more hours on it than any single one of those special economist gods, and some likely as much as the entire group.

melveyr wrote: Finally, inflation is defined as a rise in the general price level. That is the definition you will find in an economics text book as well as the dictionary.

That is a relatively recent change ca. the mid-1960's to 1970's.

I suspect the change was made because it is easy to measure changes in prices.  (Not so easy to define what prices are important and in what weighting.)  Witness the disagreement about what measure of the money supply and how much money actually exists and it is obvious that the old definition of inflation is far harder to measure.  And it could be argued didn't matter as much.  Kind of like getting rid of M3.

Some more empirical evidence in support of true inflation being around 5% annually since 2000:

Campbell's Condensed Tomato Soup  (10.5-ounce can, data collected in Indiana. Each data point was averaged across at least 3 grocery stores.)
1950: 10 cents
1960: 15 cents
1970: 17 cents
1980: 21 cents
1990: 33 cents
2007: 39 cents
2008: 40 cents
2009: 45 cents
2010: 51 cents
2011: 60 cents (11-28-2011)
2012: 87 cents (09-21-2012)

From 1950 to 2012 the price of Campbell's Tomato Soup has gone up on average 3.55% per year.
From 1970 to 2012 the price of Campbell's Tomato Soup has gone up on average 3.96% per year.
From 2007 to 2012 the price of Campbell's Tomato Soup has gone up on average 17.40% per year.


Source: http://www.familyfriendsfirearms.com/fo ... ostcount=1

income salaries didn't grow at the same rate

people is loosing purchase power

frugal wrote:

income salaries didn't grow at the same rate

people is loosing purchase power

Yup 

It's quite a disaster a true inflation of 5%. And I do NOT think I am exaggerating!

I was surprised to see that prominent pp supporters believe true inflation is 2% per year. From my experience it's so out of touch with reality. If you remember any price from when you were younger and calculate how much it has gone up, it is almost without exception more than 2% per year.


I still challenge them to give EMPIRICAL evidence to prove that they are right: price histories!

In this thread I gave 13 price histories to proof prices have gone up by 5%:

From 1971 to 2011 the price of oil has gone up on average 8.66% per year.
From 1971 to 2011 the price of natural gas has gone up on average 5.76% per year.
From 1971 to 2011 the price of coal has gone up on average 5.36% per year.
From 1971 to 2011 the price of gold has gone up on average 9.68% per year.
From 1971 to 2011 the price of silver has gone up on average 12.32% per year.
From 1971 to 2011 the price of real estate has gone up on average 5.46% per year.
From 1971 to 2011 the price of a new Corvette car has gone up on average 5.67% per year.
From 2004 to 2012 the price of a Mc Donald's Big Mac has gone up on average 5.50% per year.
From 2007 to 2011 the price of a Hershey chocolate bar has gone up on average 4.19% per year.
From 2004 to 2013 the price of Nabisco's Oreo cookies has gone up on average 6.19% per year.
From 2000 to 2013 the price of Kellogg's Corn Flakes has gone up on average 5.08% per year.
From 2002 to 2013 the price of Coca Cola has gone up on average 6.55% per year.
From 2007 to 2012 the price of Campbell's Tomato Soup has gone up on average 17.40% per year.


So far I have seen no price histories from them.

“It is not what the man of science believes that distinguishes him, but how and why he believes it. His beliefs are tentative, not dogmatic; they are based on evidence, not on authority or intuition.”? - Bertrand Russell

Marc De Mesel wrote:

frugal wrote:

income salaries didn't grow at the same rate

people is loosing purchase power

Yup 

It's quite a disaster a true inflation of 5%. And I do NOT think I am exaggerating, to the contrary!

I was surprised to see that prominent pp supporters believe true inflation is 2% per year. From my experience it's so out of touch with reality.


I still challenge them to give EMPIRICAL evidence to prove that they are right: price histories!

In this thread I gave ... price histories (Hershey chocolate bar, Nabisco's Oreo cookies, Kellogg's Corn Flakes, Coca Cola, Campbell's Tomato Soup).

I still have to see their first one.

My friend Marc,

I am happy to follow PP because I'm having more time to dedicate to other activities that at the end are much better than finances.

I stopped to think about money and enjoy more LIFE.

PP since my inception is not good, but I hope it will have better days 


My best regards!

frugal wrote:
My friend Marc,

I am happy to follow PP because I'm having more time to dedicate to other activities that at the end are much better than finances.

I stopped to think about money and enjoy more LIFE.

PP since my inception is not good, but I hope it will have better days 


My best regards!

Good for you

The PP does offer a lot of safety and time to do other stuff.

For that it remains the best solution, no question.

Equal warm regards

MangoMan wrote: I think that personal experience may vary here a lot. I just returned to the US from Barcelona, and was shocked at how expensive basic sundries were in the pharmacies and food in the grocery stores. Perhaps there are cheaper places to buy these things if you know where to go [Walmart?] but there were certainly none visible. Considering that gas is also around $9/gallon and median income is well lower than in the US, I can see how it would feel like the cost of living has gone way up for Europeans.

You visited one of the most expensive cities in europe . In Barcelona MCDonalds menus where twice as expensive as in my home city in germany.

@Marc You have only compared products with top brands. I think that they get more expensive over time than non-branded products because companies use more of the brands power. (and want to please their business owners)

But if you are so worried that you can`t afford the same amount of coke in a decade, than simply buy KO. You can assume that dividends are raised around the same amount as the prices of a coke. 

Marc De Mesel wrote:It's quite a disaster a true inflation of 5%. And I do NOT think I am exaggerating!

I was surprised to see that prominent pp supporters believe true inflation is 2% per year. From my experience it's so out of touch with reality. If you remember any price from when you were younger and calculate how much it has gone up, it is almost without exception more than 2% per year.

I don't think inflation has been 2% a year for very long.

I believe that CPI probably understates inflation by about 1% in terms of how it is reported. So if inflation is reported as 2%, I'm thinking it's actually 3%, 3% is really 4%, etc.

But each person's inflation number will be different. It depends how much they drive, what they eat, where they live, health insurance, etc. But mostly, a 1% fudge factor is close enough to avoid any obvious arguments that there is a problem. Wider gaps between actual and reported CPI will be disputed heavily by all these groups that use COLA calculations for payments, pensions, unions, etc. It would be a huge issue for them. Obviously if the price of a can of soup was $1.00 and next year is $1.03 or $1.04 is good political arguing territory (3% vs. 4%). But a can of soup that goes from $1.00 to $1.10 has a lot less wiggle room when spread over an entire economy.

Yet a smaller number which may be insignificant for a citizen (3% vs 4% actual), is a big deal when you have trillion dollar budgets. It's also close enough in the gray area that it would be hard to prove one way or another. This as compared to places like Argentina that report 10% inflation but on the street prices could easily be 20%+ inflation at times. Everyone knows and acknowledges their inflation figures are a lie.

When Obamacare goes into effect, my inflation rate on health insurance will be 370%.  It's Affordable™!

craigr wrote:

Marc De Mesel wrote:It's quite a disaster a true inflation of 5%. And I do NOT think I am exaggerating!

I was surprised to see that prominent pp supporters believe true inflation is 2% per year. From my experience it's so out of touch with reality. If you remember any price from when you were younger and calculate how much it has gone up, it is almost without exception more than 2% per year.

I don't think inflation has been 2% a year for very long.

I believe that CPI probably understates inflation by about 1% in terms of how it is reported. So if inflation is reported as 2%, I'm thinking it's actually 3%, 3% is really 4%, etc.

But each person's inflation number will be different. It depends how much they drive, what they eat, where they live, health insurance, etc. But mostly, a 1% fudge factor is close enough to avoid any obvious arguments that there is a problem. Wider gaps between actual and reported CPI will be disputed heavily by all these groups that use COLA calculations for payments, pensions, unions, etc. It would be a huge issue for them. Obviously if the price of a can of soup was $1.00 and next year is $1.03 or $1.04 is good political arguing territory (3% vs. 4%). But a can of soup that goes from $1.00 to $1.10 has a lot less wiggle room when spread over an entire economy.

Yet a smaller number which may be insignificant for a citizen (3% vs 4% actual), is a big deal when you have trillion dollar budgets. It's also close enough in the gray area that it would be hard to prove one way or another. This as compared to places like Argentina that report 10% inflation but on the street prices could easily be 20%+ inflation at times. Everyone knows and acknowledges their inflation figures are a lie.

So 3% true inflation, almost half of my estimate, any price evidence to back that up?

frommi wrote: @Marc You have only compared products with top brands.

not true

frommi wrote: I think that they get more expensive over time than non-branded products because companies use more of the brands power. (and want to please their business owners)

irrational counterargument

frommi wrote: But if you are so worried that you can`t afford the same amount of coke in a decade, than simply buy KO. You can assume that dividends are raised around the same amount as the prices of a coke. 

not funny

TennPaGa wrote: http://bpp.mit.edu/usa/

Quoting other people's conclusions is not evidence in support of those conclusions.

Did you know that shadowstats does not follow any prices of goods/services/assets? (they just add the same percentage every year to the CPI based on estimates how the CPI is underreported due to new calculation techniques)

Did you know that the CPI does not publish any prices that they 'measure'? (neither do any other inflation indexes to my knowledge)

Marc De Mesel wrote:So 3% true inflation, almost half of my estimate, any price evidence to back that up?

3% right now, not in the past as a constant of course. 5% inflation is entirely possible depending on a lot of variables.

Evidence is largely anecdotal based on my own budget and those I know. I am not seeing 10% a year inflation. Again, this is largely a personal figure for people. For instance, I live in a city and drive very little so gasoline increases hit me less. I'm also in a temperate area so I don't have big energy bills, etc.

I also think the Billion Price Project serves as good proxy to check on things (assuming it's not compromised politically based on their university association in the future).

I don't think inflation is near 10% across the board as shadowstats implies as that would be quite noticeable.

craigr wrote: I don't think inflation is near 10% across the board as shadowstats implies as that would be quite noticeable.

And such an inflation rate would presumably be reflected in Shadowstats' own subscription charges as well, which AFAIK haven't risen in many years.

TennPaGa wrote:

Marc De Mesel wrote: Quoting other people's conclusions is not evidence in support of those conclusions.

The BPP (Billion Prices Project) provides additional data on price inflation.  How is it a conclusion?

link to historical price data?

I couldn't find it.

craigr wrote:

Marc De Mesel wrote:So 3% true inflation, almost half of my estimate, any price evidence to back that up?

3% right now, not in the past as a constant of course. 5% inflation is entirely possible depending on a lot of variables.

Evidence is largely anecdotal based on my own budget and those I know. I am not seeing 10% a year inflation. Again, this is largely a personal figure for people. For instance, I live in a city and drive very little so gasoline increases hit me less. I'm also in a temperate area so I don't have big energy bills, etc.

I also think the Billion Price Project serves as good proxy to check on things (assuming it's not compromised politically based on their university association in the future).

I don't think inflation is near 10% across the board as shadowstats implies as that would be quite noticeable.

MediumTex already did the whole 'personal inflation' argument the first 10 pages. Counterarguments against that are available there also.

The discussion here is about real returns of the pp. For that we are estimating average true inflation (at what rate money is losing purchasing power). I say 5%, which gives PP only real return of 2.5% before costs.

You say 3%, giving PP attractive real return of 4.5%, yet you are also unable to back it up with price data. 

Marc De Mesel wrote:If you think average true inflation is 5% then you agree that average real returns of PP is only 2.5% before costs?

No.  The returns average a few percent over inflation historically, whatever that rate is.

Stock and bond holders will not allow those investments to trail inflation for long before they tire of the situation and prices adjust. Companies will not let their prices sit still when workers are demanding wage increases to deal with inflation, etc. When all of those factors come into play the portfolio will move ahead of inflation. The only real losing investment over time to inflation is Cash, but even that historically tends to tread water with inflation if kept in high quality government notes of very short maturity.

Marc De Mesel wrote: So 3% true inflation, almost half of my estimate, any price evidence to back that up?

We can all throw down anecdotal evidence of individual prices that support or refute any possible conclusion. For the last few years, my rent inflation rate has been about 10%, but my car insurance inflation rate has been about -10%, and my electricity, water, sewer, and garbage collection inflation rates have been 0%.

Inflation is an inherently personal thing because none of us buys the same things. I never buy Campbell's soup so any inflation in the price of Campbell's soup is irrelevant to me.

I don't care about the average inflation or the average PP return. I care about MY inflation and MY PP return.