The Gluttony of Hedonic Adjustments

The Daily Reckoning PRESENTS: Just in case you are new to the Rants And Raves Of The Mighty Mogambo (RAROTMM), here is a little background: inflation is the worst thing that can happen to your economy. This week, the angriest guy in economics expounds a bit more on the horrors of inflation through the mystery of ‘hedonic adjustments.’ Read on…


From, we read, “The Conference Board’s index of leading economic indicators increased 0.1 percent in March.” If this is the economic forecast for six to nine months down the chronological road, then the road sure looks pretty rocky!

Next we learn that their coincident indicator “rose 0.1 percent in March after a 0.2 percent increase in February”, which means that business conditions right now ain’t so hot, either.

Lastly, we come to the lagging indicator, which is a measure of burdens and inflation, which also “rose 0.1 percent following a 0.2 percent increase.”

And speaking of inflation (not to mention yelling about inflation and screaming bloody murder about inflation until my throat is raw and sore), we turn – for a change of pace – to Monty Guild, writing at He reports that inflation has hit the mining industry, too, as, “All mining stocks I follow are experiencing rapidly increasing costs. This is due to higher raw materials, energy, labor and other costs of production.”

If your heart suddenly seized up, then congratulations! You are dead; but you went out with the satisfaction of achieving total consciousness concerning the terrifying phrase, “rapidly increasing costs.” let’s us hear something scary about inflation, when they say, “inflation is roughly at least 3% higher than what is being reported”, which is due to the government implementing the foul and dishonest tricks of the Boskin Commission Report.

These slimy adjustments nowadays being made to inflation calculations have come to be called “hedonic adjustments” stemming from the word “hedonics”. Now, I admit that the word “hedonics” does not come up very often in my personal everyday conversation with my hoodlum friends, which is usually limited to (in the B’s) beer, burgers, bacon-burgers, bacon-and-mushroom cheeseburgers, big pizzas, bathrooms, babes with big bazooms, barking at buttheads who say and do stupid things, and back-talking to my wife who wants me to do something (like take out the trash), and where I wittily reply “Why don’t you just shut up, instead?” Which (in case you were wondering) never makes her shut up, having quite the opposite effect, in fact. And loud, too!

So everyone is asking “Huh? Hedonics? What in the hell is that?” Thus indicating that a) we don’t know, b) we want to know and c) we are rude. They graciously reply, “Literally it means relating to pleasure”, which is a concept that certainly needs no explanation for The Mogambo, whose whole worthless life (according to his wife and children, all of whom are liars) has been one long, disgusting display of selfish, conceited, hedonistic self-indulgence, where not once did he ever think of anything, or anyone, except satisfying his own greedy, grubby gluttony.

Well, as flattering as that is, I hasten to add that they always leave out the part about “raving, gun-nut, gold-bug, patriot and a real peach of a guy”, which they always “forget to do” on purpose because they hate me; and then I hate them back in revenge; and then they walk around wondering, “Why does he hate us so much? Whine, whine, whine!” obviously does not want to “go there”, and immediately gets back to the point about hedonics, as “in an economic sense in U.S. statistics, it involves adding or subtracting values to important government statistics like CPI or GDP that cause them to be false or incorrect.”

This must be a new Bill Clinton distinction along the lines of his famous, “It all depends on what the definition of ‘is’ is”! Hey! This is great stuff! It all comes down to how you define ‘is’, and how you distinguish between making something ‘false’ versus making something merely ‘incorrect’! I’m going to use this concept the next time I am hauled into court!

Well, apparently nobody at is interested in my brilliant new legal defense strategy. Instead, they firstly demonstrate the actual use of hedonics in adjusting inflation statistics with the classic and ever surprising, “One general example is in the computer area. If you bought a $2000 computer 3 years ago, and then replaced it with another $2000 computer today that is twice as fast, it can be counted as roughly a $4000 computer in the GDP since it’s twice as fast.” What a scam, huh?

The reason I bring this up is that they brought up another part of hedonic adjustments that the butthead Boskin Commission did not address, namely that, “Another issue with hedonically adjusting for better or faster products is that the reverse is not done. In other words, if the quality of something drops over the years, no adjustment is made for it. One example would be solid wood furniture versus using a thin veneer.”

Or how about using “high fructose corn syrup and artificial sweeteners” instead of sugar in my drink, and “agglutinated vertebrate protein globules” to fill my soggy taco! It’s worse, and it costs me more! How come that does not affect the Consumer Price Index?

I leap to my feet, and cheer! “Hooray!” Unfortunately, my enthusiasm is quickly muted when I accidentally knock the plate of nachos out of my lap when I stand up, and some of the hot cheese lands on my socks, which (in case you are interested) must have a very low R-factor because they provide surprisingly little insulation against searing globs of molten, melted cheese, which immediately burns the hell out of my ankle.

But, being professionals, they ignore the man screaming loud obscenities in agonizing pain and throwing bottled water on his own ankle, and they get back to the point by saying, “Longer term CPI accuracy is also far from accurate. From mid 1955 to mid 2005, CPI has risen slightly over 7 times”, which seems oddly incongruous with the facts that, “During that same period, houses have gone up over 18 times and even Disneyland admission has risen over 15 times.”

A reference to John William’s is all it takes to know how the Consumer Price Index looks these days when actually computed the way it used to be computed in the old, pre-Boskin Commission days: Inflation is just about 10% on the nose!! Yikes! 10% inflation! This is horrendous!

Until next week,

The Mogambo Guru
for The Daily Reckoning
April 30, 2007

**** Mogambo sez: It’s all getting to be almost too much to bear, but made much more bearable by the utter simplicity of the appropriate course of action one must take at this point. Namely, there are only three things to do; buy gold, buy silver, and buy shares of companies involved with oil.

Ahhh! I feel better already! Try it! You will, too!

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

“Let Rome in Tiber melt, and the wide arch
Of the ranged empire fall! Here is my space.
Kingdoms are clay…”

– William Shakespeare

So said Marc Antony as he drew the Queen of the Nile into his embrace.

Rome did eventually melt into the broad Tiber; its kingdom of clay broke into a hundred pieces.

But what a run! What a show! What a story!

We were reading up on Rome over the weekend…preparing for a speech we just delivered this morning. “What can we learn from Roman history?” was the question. “A lot,” was our answer.

We will tell you more about it today, but let us first attend to the news. The big thing that happened last week was that the Dow drew closer to what must be its all-time high. And the dollar? It began to sink.

Of course, this could be nothing but a theory – and an empty theory at that. We have become suspicious of theories. Give us a theory – and we’ll give it right back to you.

But you have to have a theory. Otherwise the facts are dumb; they do not speak. Nor do they even point you in the right direction.

Our theory is that there is not much left in the Dow. Stocks are high. They’ve been high for many years – following a brief pullback from ’02-’03. Earnings are at record levels – and probably coming down. And now the dollar is coming down too. Sooner or later, the Dow has to find its top. It has to reach the point where it no longer makes sense to buy stocks, where people will have better uses for their money – if only, perhaps, just to pay down debt.

Of course, a lower dollar could make U.S. firms more competitive on world markets.

“But wait,” said old friend Mark Skousen, who had listened patiently to our little talk on Rome. “I’ve just spent a couple of days in Paris. Things are already expensive in Paris. On a purchasing power parity basis the dollar ought to be going up, not down.”

Mark is right. It has always bothered us that the dollar is so cheap. It confronts us with two mutually exclusive theories about the way the dollar should be priced. On the one hand, Mark’s point is that there is no inherent reason why a steak dinner should cost $30 in Dallas and $60 in London. The market for beef is worldwide.

“And not just food, practically everything you buy,” Mark continued. “I was looking at prices of computers…printers…and that sort of thing. They are twice as expensive here as they are in the United States. It makes no sense, because they’re all made in Asia and traded on global markets.”

According to price parity theory, big price differences will be resolved by entrepreneurs and traders. They’ll buy in the cheap country and sell in the expensive one – until the gap almost disappears. The effect: the cheap currency will rise; the expensive currency will fall.

But that doesn’t seem to happen.

Meanwhile, the balance of trade theory holds that if one country runs a big deficit and another a big surplus, the currency of the former will fall while the currency of the latter will rise. In fact, for many years the United States has run the biggest trade deficits in history…and for much of that time the, U.S. currency actually went up!

Well, go figure.

By one theory the dollar should go down. By the other it should go up. Take your pick.

Our guess: the trade deficit will trump purchasing power parity. The dollar will fall. As a result, global prices, denominated in dollars, will rise. This will have the effect of increasing prices in the United States, but not abroad. Result: a lower dollar, but higher prices in the homeland.

More news:


Addison Wiggin with some interesting news from our own Jonathan Kolber…

Have you heard the rumor that the nation’s honeybees are disappearing? Well…it’s definitely true. Or may be, anyway.

Our tech investing expert, Jonathan Kolber, reports that a rare phenomenon called Colony Collapse Disorder may have wiped out over 60% of America’s commercial bee populace. And “experts” in the government and the telecom industry believe they know why: cell phones.

For the rest of the story read today’s issue of The 5 Min. Forecast


And more thoughts…

*** There seems to be some disconnect in the energy markets…

While the price of crude oil had been on the rise on fears surrounding an antiterrorist sweep in Saudi Arabia and uncertainty of the supply coming out of Nigeria, today it fell back around $66 a barrel as these concerns eased up a bit. However, the price of gasoline continues to go up as more declines in motor-gas inventories are reported.

From MarketWatch: “[Gasoline] futures prices are lower in the distant delivery months than in the nearest delivery months. ‘Add to the mix the seasonality of the market to rally through mid-August and gasoline could move to historic price levels this summer,’ said Darin Newsom, an analyst at DTN of Omaha.”

Gas inventories have fallen for 11 weeks in a row, as continuing refinery problems – not to mention the geopolitical concerns and high demand – add to the concern over gas supplies.

Not great news heading into peak driving season…and could you imagine if we threw a hurricane into the mix? Less people would be packing up and heading to Aunt Gertrude’s house for a visit this summer, that’s for sure…especially since the alternatives to the gas-fueled car aren’t looking too compelling.

“I went to buy a new car this past weekend,” a friend recently confided, “and I really wanted to get a hybrid – but I had no idea how expensive they are! I guess the smaller ones are a bit cheaper…but with a six-month old, I really need more room, and just could not justify paying close to double on a hybrid than I would on a regular car.”

More and more problems are coming to the surface with these hybrid cars that were thought to be Americas salvation from high gas prices…and ethanol certainly isn’t all it’s cracked up to be (more on that tomorrow).

So, what’s the winner in the race for car of the future? You might be surprised.

*** It is a strange world; one in which the people who are closest to something are less able to appreciate its value than are strangers. But sometimes you can understand the big picture by examining the little picture in detail.

We were recently reminded of a deal in a business we think we understand. An old friend sold his company – for tens of millions of dollars, more money than anyone in the business would have paid for it. How is it possible that a business could be worth more to novices than to the people who are most likely to know how to extract its value?

Well, that’s the story of business in 2007. All over the country – and perhaps the world – businesses are being bought by investors, not by businessmen. And these investors then have an agenda that permits them to make a fortune – without ever learning the business or operating it.

Hedge funds, private equity, venture capitalists and investment bankers are buying businesses at a record pace. They then work their magic. Typically, they borrow a fortune against the business assets – and use the money to pay themselves millions of dollars in fees.

For a time, everyone makes money. The owners pocket millions more than they would have gotten otherwise; and the big investment pros, too, make a lot of money – in fees, commissions, special dividends and the like.

And then, the business is repackaged and sold to small investors through an IPO – with even more fees and commissions to the Wall Street professionals.

A real investor, like Warren Buffett for example, probably wouldn’t touch any of it; he wouldn’t want to get stuck with all those financial charges and wouldn’t want a company that is deep in debt because of them.

But the lumpeninvestoriat doesn’t know any better. Small investors just pretend to be real investors. They buy stocks at the wrong times for the wrong reasons. They recognize the company name. They’ve heard the industry is doing well. A broker recommends it to them. And as long as liquidity bubble keeps getting larger and the market keeps going up, who complains?

But on the banks of the Hudson…like on the banks of the Tiber…everything eventually melts. A company with a lot of debt on its books is not as healthy as one with no debt. When trouble comes, the debt-burdened companies are less able to maneuver. A whole market of such companies is fundamentally weak and vulnerable.

*** Our thoughts wander from the Tiber eastward…

“The credit of the…money market is intimately bound up with the prosperity of Asia.”

That sentence quoted in our speech perfectly describes the economic situation of the United States of America in the 21st century. The Asians make; America takes. The Asians save; Americans spend. The Asians lend; Americans borrow. Were there no Asians, the economic situation would be far less appealing in America today, since those nice people in Asia actually make it possible for Americans to spend far more than they earn year in and year out. Asians sell valuable goods and services to Americans. Americans pay for them in dollars of no particular value at all.

But that quote about Asia did not come to us from last week’s Financial Times or Wall Street Journal. It came to us from Cicero, writing two thousand years ago.

Then, as now, the Empire of the West depended on the economy of the East. And when the expansion of the empire ceased under the reign of Trajan, so did the big flow of slaves and booty. And then, it became hard to squeeze enough tribute out of the captured territories to pay the centurions.

But, by then the old Republican families had disappeared. Many of the farmers and tradesmen were disappearing too – how could they compete with the grain shipped in from Egypt or North African…how could they compete with the new, abundant slave labor?

In their place was a new class of upstarts – who made their money from the slave trade…or by lending money…or by finagling government contracts. And the simple folk who had made their living as honest farmers and hard-working tradesmen…these ‘plebes’ were no longer the supporters of the army and the government; now, they expected to be supported by the government.

More to come…


The Daily Reckoning