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My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.
A Quick Way to Measuring Price Inflation between any Two Years
Jason Brizic
Mar. 11, 2011
The Federal Reserve, the US central bank, inflates the money supply by purchasing assets with money it creates out-of-thin-air. An increase in the money supply (inflation) leads to higher prices of goods. Think “more money chasing the same amount of goods” when you hear the word inflation.
Housing, stock, bond, and commodity prices are affected by central bank inflation of the money supply. Long term investors must understand the horrible effects of inflation on their savings/investments. Inflation erodes the purchasing power of your money. Your savings/investments that are denominated in dollars are exposed to dollar inflation such as QE1 (late 2008), QE2 (late 2010)…QE3 (2012?).
The government’s Bureau of Labor Statistics intentionally understates real price increases by changing the method of CPI calculation. They do this because it makes their ponzi schemes (e.g. Social Security, Medicare, and government pensions) solvent a few years longer. There schemes would go into the red many years earlier if the BLS kept its methods of calculating the CPI constant since the Carter administration. Here is the link the BLS inflation calculator:
http://www.bls.gov/data/inflation_calculator.htm
I double the result that I get from the BLS inflation calculator as a rule of thumb because of their deliberate understating real price increases.
Here are a few examples:
According to the US Census Bureau the median US home price in January 1973 was $29,200. What is the equivalent price in today’s 2011 dollars due to 38 years of central bank inflation? Answer: $144,831.34 per CPI. $288,000 according to my rule of thumb.
Gold cost $850/oz. near its peak in 1980. How much is that in today’s inflated dollars? Answer $2,271. $4,400 per my rule of thumb.
One last example, an investor puts $10,000 into a money market account after the dot.com crash in 2000. How much does he need in today’s debased dollars to have the same purchasing power as in 2000? Answer: $12,788 according to the BLS. I say 24,000 per my rule of thumb. My rule makes less sense the shorter the time interval due to less time to compound the price increases.
For more tips, go here:
http://www.myhighdividendstocks.com/category/tip-of-the-week
Rising food prices in the Arab world are much to blame for social unrest. And who’s actions cause prices to rise? Why, that would be the central bank of the world’s fiat reserve currency – the Federal Reserve, of course. And you thought they just tried to control interest rates.
Charts: Food Prices, Commodity Prices
Feb. 24, 2011
The United States Department of Agriculture has published this chart of commodity prices, including oil. Food prices have risen, especially after 2006, but not anywhere near as rapidly as general commodity prices and the price of oil.
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http://www1.eere.energy.gov/biomass/pdfs/global_agricultural_supply_and_demand.pdf
The move in oil began in 1999, during the boom phase of the economy. The recession of 2001 did not reverse the rise of prices.
Oil's price tumbled sharply in the second half of 2008: from $147 per barrel in July to $33 in December. Since then, it has risen. Food prices also fell sharply. Food prices have risen steadily since late 2008.
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http://www.fao.org/worldfoodsituation/foodpricesindex/en
by Bill Bonner
Daily Reckoning
Recently by Bill Bonner: Revolution in Egypt and Where to Be When Black Swans Appear
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Cereal Wars…and Zombie Wars…
Hey, how ’bout that Ben Bernanke… He’s a freedom fighter! Look what he’s done to North Africa!
Seems like every time we pick up the paper another dictator is toppling over. Where does it lead, we wonder? What would a world be like without dictators? Without them, who will the CIA and the State Department give our money to?
On the run this morning (but not quite given up) is Muammar Gaddafi of Libya.
Wait… Is this guy a friend or an enemy? We can’t remember. Wasn’t he a bad guy a few years ago? But recently we’ve heard that he is a good guy. He’s helped with the War on Terror. And he sells oil.
Friend or foe, we don’t know…but whatever he is, he’s beginning to look past tense. As of this morning, reports say he’s lost control of Libya’s second largest city. His troops are firing on protesters in the capital, where he and his loyal guards are holed up in a few government buildings.
His son vows to fight back. He says there will be “rivers of blood” before he gives up.
That “rivers of blood” image was used by Enoch Powell in Britain fifty years ago. It came from Virgil’s Aeneid, in which a character foresees “wars, terrible wars, and the Tiber foaming with much blood.”
Powell was referring to the effects of immigration into Britain from Africa and elsewhere. He thought he saw race wars and power struggles coming as a result.
But the younger Gaddafi uses the language as a threat, not a prophecy.
Still, it didn’t do Powell much good. Maybe Gaddafi will have better luck with it. Most likely, he’ll high-tail it out of the country before the blood is his own. That will bring to three the number of regime changes in the last few weeks. Which leads us to ask: what’s up?
The answer comes from our old friend, Jim Davidson. He pins the revolutions on Ben Bernanke. Behind the popular discontent is neither the desire for liberty nor the appeal of elections. It’s food. And behind soaring food prices is Ben Bernanke.
The Arab world is a model Malthusian disaster, says Davidson. Populations have ballooned. Food production has not. Which makes Arab countries the biggest importers of cereals in the world. And when the price of food goes up, the masses rise up too.
From Jim’s latest newsletter, Strategic Investment:
Food prices hit an all-time high in January. According to the UN’s Food and Agricultural Organization (FAO) “the FAO Food Price Index (FFPI) rose for the seventh consecutive month, averaging 231 points in January 2011, up 3.4 percent from December 2010 and the highest in both real and nominal terms” since records began. Note that prices have now exceeded the previously record levels of 2008 that sparked food riots in more than 30 countries. “Famine-style” prices for food and energy that prevailed early in 2008 may also have helped precipitate the credit crisis that Federal Reserve Chairman Ben Bernanke described in closed-door testimony “as the worst in financial history, even exceeding the Great Depression.”
This time around, the turmoil surrounding commodity inflation has taken center stage with more serious riots and even revolutions across the globe. Popular discontent is not just confined to “basket case” countries like Haiti and Bangladesh as in 2008. High food prices have roiled Arab kleptocracies with young populations and US backed dictators such as Tunisia, Egypt, Bahrain and Yemen. Even dynamic economies have been affected. Indeed, all of the BRIC countries, except Brazil, have witnessed food rioting.
Well, how do you like that, Dear Reader? All those billions of dollars spent propping up dictators – $70 billion was the cost of supporting Hosni Mubarak in Egypt alone – and then the Fed comes along and knocks them down.
The Fed lowers the cost of money so speculators can borrow below the rate of inflation. And then it prints up trillions more – just to top up the worlds’ money supply.
Is it any wonder food prices rise? Imagine you’re a farmer…or a speculator. You can sell food. Or you can hold it in storage. You know the food is valuable. You know the world has more and more mouths to feed every day. You know food production is limited. And you know Ben Bernanke can print up an unlimited number of dollars. What do you do?
Do you sell immediately? Or drag your feet…holding onto your valuable grain as the price hits new highs?
Davidson continues:
While Mr. Bernanke modestly declines the credit for de-stabilizing much of the world, close analysis confirms that he played an informing role. His QE2 program of counterfeiting trillions out of thin air has helped ignite a raging bull market in raw materials with food and commodities – up 28% in the past six months. The fact that the US dollar has heretofore been the world’s reserve currency means that almost all commodity prices are denominated in dollars. As a matter of simple math, when the dollar goes down, the prices of commodities tend to go up.
Today, Libya. Tomorrow…Yemen? Or Saudi Arabia.
In North Africa, Cereal Revolutions…
In North America, Zombie Wars…
Yes, the battle rages in the Dairy State. And yes, Nobel Prize winner Paul Krugman (Economics!) has no idea what is going on:
It’s “not about the budget. It’s about power.”
He thinks it is a battle between the rich and powerful, whom he calls the “oligarchy,” and the decent lumpenproletariat. Wisconsin’s governor is trying to bust the union, says Krugman, so that the elite can ride roughshod over poor government workers, cut their pay, and reduce their benefits (thereby downsizing the state’s budget deficit).
It’s not about money, says the New York Times columnist. He’s wrong, as usual. The Zombie Wars are always about money. There is less money available and more zombies who want it.
In the present case, rather than hire honest people to work at market rates…Krugman wants the state to be forced to deal with a privileged union. Union zombies should bargain with government zombies, he says. Together, in cooperation, not in conflict, they should figure out how to rip off the taxpayer.
Stay tuned…the Zombie Wars are just beginning.
Reprinted with permission from The Daily Reckoning.
February 24, 2011
Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.
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Don’t trust the government reported price inflation numbers otherwise known as the consumer price index (CPI). The government’s Bureau of Labor Statistics under-reports the true price increases that we all experience as we buy food, shelter, energy, healthcare, entertainment, and transportation. I wrote about this in greater detail in August of 2010:
You might be asking yourself why would the BLS change their methodology for computing the CPI? The reason is simple. The two largest federal welfare programs: Social Insecurity and Medicare would go broke dozen of years earlier without the rigging of the CPI. It is in every president’s and congress’ best personal best interest to delay the day of reckoning. Rigging the CPI helps to kick the can.
The Federal Reserve and the monetary base
There will be massive price inflation caused by all the money that the Federal Reserve has created out-of-thin-air since late 2008. The Wall Street Journal author does not understand the mechanics of money creation. The Federal Reserve creates the money and buys assets (usually US government debt like they are doing now with QE2). This expands the FED’s balance sheet and adds money to the monetary base. Prices don’t go up until the monetary base gets transformed into money that actually goes into people’s bank accounts.
The fractional-reserve banking process in a nutshell
The banks receive the freshly printed dollars or digital dollars in their accounts for the US government debts that they sold to the Federal Reserve. The banks can then lend almost all of the money they received from the FED – OR – they can choose to not lend it. They have chosen to lend very little of it. They call the money above the legal reserve requirement the “excess reserves”. The banks are holding over a trillion dollars as excess reserves. When banks lend they create new money. For example, if the legal reserve requirement was set at 10% (it is much lower than this), then Bank A that received a $1,000 deposit from a customer would be allowed to lend $900 and would have to keep $100 as reserve. The person who received the $900 loan from Bank A would deposit $900 into his checking account at Bank B until he was ready to spend the loan money. Bank B could loan $810 to someone else while keeping $90 (10%) as legal reserves. This is how money is created. A $1,000 increase in the monetary base multiplies many times through this process. The M1 money supply increases. Prices increase.
If the banks lent that money in a manner like they did in 2006, then prices would roughly double in a relatively short time. Keep this in mind as you read the WSJ article below.
A surprising number of people on Wall Street will tell you not to worry too much about inflation.
After all, they'll say, just look at the numbers. The inflation picture is incredibly benign. In the past 12 months the Consumer Price Index has risen just 1.5%—a remarkably low rate. And when you strip out volatile food and energy costs, they'll say, it's even lower—a meager 0.8%.
It doesn't stop there. Many economists will point out that wages are also rising by less than 2% a year. With so many people still out of work, goes the line, labor costs are going to stay low for a long time too. So what's the worry?
Clearly, a lot of investors agree. Inflation-protected government bonds, which people would buy to protect themselves if they were worried, have fallen in price in the past couple of months. Gold, another inflation hedge, is down. Ten-year Treasury bonds yield less—3.3%—than they did when President Eisenhower left office.
It's crazy. There is plenty to worry about. As you battle to manage your family's finances, be aware that there are three reasons why inflation needs to be on your radar screen.
• First, the official inflation numbers should be taken with a fistful of salt.
Over the past 30 years, the federal government has made a lot of changes to the way it calculates inflation. It's taken place under presidents of both parties. Each change in methodology has come with plausible-sounding justifications. But, as if by magic, each change has had the effect of flattering the numbers. Funny, that.
According to one rogue economist, John Williams at Shadow Government Statistics , if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when ... Jimmy Carter was president. According to Mr. Williams's calculations, if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%.
Mr. Williams is just one voice. But it makes sense to treat the government numbers with skepticism.
Under the official calculations, if steak prices boom, the government just assumes you buy cheaper hamburger instead. Presto—no inflation!
Or consider the case of Apple ( AAPL: 344.46*, +3.06, +0.89% ) computers. We all know Macs are expensive. And we know Apple doesn't discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?
Ha. Not according Uncle Sam. Using a piece of chicanery called "hedonics," Uncle Sam calls this a price cut. His reasoning? You're getting more for the money. Today's $999 Mac is lighter, fancier and faster than last year's $999 Mac. So the government calculates that the "real" price has actually fallen.
How's that work in the real world? Try it. Go into your local Apple store and ask for 50% off thanks to hedonics. (If you do, please, please video the exchange and put in YouTube. We could all use a good laugh.)
Instead, the government is worrying about deflation, partly because of all the "cheap" MacBooks out there.
• The second reason to treat the official inflation figures with some mistrust is that they look backward. They register what just happened, not what's about to happen next.
OK, so the prices of many things haven't risen. Yet. But if the laws of economics mean anything, they will have to. Why? Because costs are rising.
Economists need to stop focusing just on labor costs. The world has plenty of surplus labor. But look at raw materials. Around the world prices are skyrocketing, from copper to cocoa. The United Nations Food Price Index has just hit a new record high. Oil's back near $90 a gallon. Wheat prices have nearly doubled since last summer.
Soaring food prices helped spark the revolution in Tunisia. According to Alex Bos, commodities analyst at Macquarie Securities in London, other governments—especially in North Africa—have responded with panic buying of foodstuffs.
Algeria alone, he says, has bought about 1.5 million tons of wheat this month—maybe triple its usual amount. Saudi Arabia is rushing to build up grain supplies. Corn supplies are as tight as they were back in the inflationary 1970s.
Sooner or later this is going to show up in your supermarket, or at the mall, in higher prices.
Just ask McDonald's ( MCD: 75.40*, -0.08, -0.10% ) . Or paints and plastics giant DuPont ( DD: 50.36*, +1.32, +2.69% ) . Or Kleenex and Huggies maker Kimberly-Clark ( KMB: 65.21*, -0.40, -0.60% ) . Or 3M ( MMM: 89.18*, +0.68, +0.76% ) . Or Coach ( COH: 54.61*, +1.52, +2.86% ) . These companies, and many others, have warned in recent days that they're getting squeezed by rising costs. They'll either eat the costs, which will hit the stock, or pass them on. How is this not inflation?
• The third reason to be mistrustful of the inflation picture? Simple. Economics.
We are flooding the world with extra dollars. The Fed simply invents as many as it likes. In the past couple of years, to try to keep the economy out of a tailspin, it has more than doubled the size of the so-called monetary base.
A dollar bill has no intrinsic value. Dollars are only "worth" something because you can exchange them for a haircut, or a pair of shoes, or a book from Amazon.com ( AMZN: 175.63*, -1.07, -0.60% ) . So if you drastically increase the number of dollars without a commensurate increase in the number of goods and services, each dollar must, by definition, be worth less. That's another way of describing inflation.
So far, this inflation seems to have shown up in the unlikeliest of places. It's like Whac-A-Mole. The price of vintage wines has skyrocketed 57% in the past year, according to the Liv-ex Fine Wine 50 Index . Real estate prices across China are in a bubble. So long as the Chinese tie themselves to the U.S. dollar, they are importing our inflation. But, once again, one wonders how this can be called benign.
Is inflation certain? I'm wary of any predictions. Casey Stengel once said, "Never make predictions, especially about the future." Mr. Stengel would have lasted three days as a Wall Street analyst. But he won five World Series in a row, and he knew a thing or two.
Maybe inflation really will stay tame. But I'm not counting on it. I'm not buying the conventional wisdom, and neither should you.
Read more: ROI: Don't Trust the Inflation Numbers - SmartMoney.com http://www.smartmoney.com/investing/economy/roi-dont-trust-the-inflation-numbers-1296052731208/#ixzz1CAwwqdMx
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12/15/10 Baltimore, Maryland – Consumer prices rose 0.1% in November…and less than a percent over the past year. If you strip out food and energy – which government number crunchers do, because those prices are allegedly “volatile” – you still get a 0.1% increase.
That’s the “core” CPI, and that’s what the monetary mandarins at the Federal Reserve care about when drafting plans to buy Treasuries, control interest rates, goose employment numbers, order pizza, drink wine, play Xbox 360 or any of the myriad other things they do during their FOMC meetings.
As a group, they can’t be pleased with the number. Over the last year, despite trillions of dollars in government stimulus and quantitative easing, core CPI has risen a scant 0.8% – far below the Fed’s “sweet spot” of 1.6-2.0%.
But whom are we kidding? Even the “headline” figure, the one including food and energy, is suspect.
Our friends at Casey Research put out this chart a couple months ago. The column in the far right – CPI-U – is actually lower now than it was then, all those other columns notwithstanding:
How does the government pull this off? We ask constant readers to indulge our newer ones as we revisit three of the most common tools the statisticians use…
These changes started with the last round of Social Security “reform” under the auspices of Alan Greenspan in the early ’80s. The idea was that if CPI were lower, Uncle Sam could pay out less in Social Security benefits.
You can see the end result over time maintained by our friend John Williams of Shadow Government Statistics. Mr. Williams calculates economic numbers the way they did back in the Carter era. The “official” CPI number is in red. The shadow stat is in blue:
In the meantime, the Federal Reserve statement issued after yesterday’s meeting amounted to, “steady as she goes” on the ill-fated QE2. The Fed, looking at current “official” CPI numbers, sees “deflation”…
And so the plan to goose the system with $875 billion in Treasury purchases that started last month will continue to at least double the official rate from whence it sat while they were kibitzing over bagels before the meeting began yesterday morning.
Sooner or later, reality is going to catch up to the gamed statistics. Indeed, “an inflationary outbreak is very likely,” says Chris Mayer, editor of Mayer’s Special Situations.
History is on our side.
“The dollar has done nothing more reliably than lose its value over time,” Chris points out. “I think the future will be no different. People who worry about deflation – that, somehow, the dollars in our pocket will actually buy more in the years ahead, not less – will not only be wrong. They will be broke.
“Writer Jason Zweig points out that ‘Since 1960, 69% of the world’s market-oriented economies have suffered at least one year in which inflation ran at an annualized rate of 25% or more. On average, those inflationary periods destroyed 53% of an investor’s purchasing power.’
“That is why I believe that being prepared for inflation is the most important investment decision we have to face in the coming decade. If you aren’t prepared, then the consequence is a mean hit to your wealth.”
Addison Wiggin
for The Daily Reckoning
Read more: Why You Shouldn't Trust the Core CPI Numbers http://dailyreckoning.com/why-you-shouldnt-trust-the-core-cpi-numbers/#ixzz19LBybZFb
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