Inflation Is Killing The American Dream

  
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To investors,

I have been talking to a lot of friends about inflation lately. The great debate in finance and investing is whether we will see high levels of inflation after the trillions of dollars in quantitative easing over the last 12 months or so.

Those who believe we won’t see inflation have relied on two separate, yet related, arguments. First, they will point to the official Consumer Price Index (CPI) inflation numbers.

As you can see in this chart from the US Bureau of Labor Statistics, CPI has been relatively rangebound between 2.5% and 0% since 2008-2009. The belief is that despite the monetary interventionism conducted by the Federal Reserve and our elected officials, inflation has not been prevalent in the daily lives of Americans over the last decade.

You can extrapolate this historical argument to then say that there will be low levels of inflation moving forward, regardless of what the Fed does. This leads to the second argument.

The second argument is that the world is moving towards a more technology-enabled world, which should create a deflationary tailwind. Technology forces the cost of labor down. Technology forces the cost of production down. And technology could potentially create a constantly decreasing impact of inflation in the eyes of those who support this argument.

So according to these folks, whether the Fed chooses to print trillions or they choose to sit on their hands, inflation will remain relatively low. It isn’t a big worry. While I acknowledge there are some important points to each argument, I disagree with the conclusion.

We can start with how inflation impacts a population — there is no single inflation number for the various socioeconomic groups. For example, the top 20% of the socioeconomic ladder experience lower levels of inflation than the bottom 20% of a population. Some of that is due to the percent of investable assets each group has and some of it is due to the types of goods and services that they each consume.

The second thing is that people in different geographic locations experience different levels of inflation. Someone in New York City is unlikely to have the same experience as someone who lives in Lincoln, Nebraska.

So how can we understand what is happening with inflation?

The best indicator of true inflation I have found is the Chapwood Index. The creator, Ed Butowsky, set out to more accurately measure inflation because he was tired of seeing a large percentage of Americans falling further and further behind in their financial lives. His initial assumption was that Americans were living their lives with the goal of beating 2% inflation, but that inflation was actually higher, therefore creating a scenario where people could never get ahead.

This summary from the Chapwood website is crucial to understanding the issue:

“It exposes why middle-class Americans — salaried workers who are given routine pay hikes and retirees who depend on annual increases in their corporate pension and Social Security payments — can’t maintain their standard of living. Plainly and simply, the Index shows that their income can’t keep up with their expenses, and it explains why they increasingly have to turn to the government for entitlements to bail them out.

It’s because salary and benefit increases are pegged to the Consumer Price Index (CPI), which for more than a century has purported to reflect the fluctuation in prices for a typical “basket of goods” in American cities — but which actually hasn’t done that for more than 30 years.

The middle class has seen its purchasing power decline dramatically in the last three decades, forcing more and more people to seek entitlements when their savings are gone. And as long as pay raises and benefit increases are tied to a false CPI, this trend will continue.

The myth that the CPI represents the increase in our cost of living is why the Chapwood Index was created. What differentiates it from the CPI is simple, but critically important. The Chapwood Index:

  • Reports the actual price increase of the 500 items on which most Americans spend their after-tax money. No gimmicks, no alterations, no seasonal adjustments; just real prices.

  • Shines a spotlight on the inaccuracy of the CPI, which is destroying the economic and emotional fiber of our country.

  • Shows how our dependence on the CPI is killing our middle class and why citizens increasingly are depending upon government entitlement programs to bail them out.

  • Claims to persuade Americans to become better-educated consumers and to take control of their spending habits and personal finances.

The inaccuracy of the CPI began in 1983, during a time of rampant inflation, when the U.S. Bureau of Labor Statistics began to cook the books on its calculation in order to curb the increase in Social Security and federal pension payments.

But the change affected more than entitlements. Because increases in corporate salaries and retirement benefits have traditionally been tied to the CPI, the change affected everything. And now, 30 years later, everyone knows the long-term results. Ask anyone who relies on a salary or Social Security or a pension and he’ll tell you his annual increase in income doesn’t come close to his increase in expenses. What comes in is less than what goes out — a situation that spells disaster for average Americans.”

Now that we understand the issue with CPI numbers, what exactly are the true inflation numbers in major American cities?

Yikes! The Chapwood Index shows that the average inflation over the last 5 years is between 8.1% and 12.9% in the top 10 cities. That is a big difference between the 2% inflation assumptions that people make.

One way to think about this is if you are simply generating 8% a year in stock market returns on average, your investment returns are not keeping up with the real rate of inflation in these cities. That is a major problem for the top 50% of Americans who have investable assets, let alone a death sentence for the financial health of the bottom 50% of Americans who hold no investable assets.

I bring up this idea of true inflation vs the CPI numbers because it is the single most important thing that is impacting the finances of tens of millions of Americans. The continued devaluation of our currency is enriching those who hold investable assets, but punishing those who simply save their wealth in cash. The system is working as designed. It is a feature, not a bug.

Savers are punished and investors are rewarded. This is the number one reason why I am bullish on something like Bitcoin. It is the single greatest protector of wealth in the world. There is extreme volatility in the short term, but over a long period of time, Bitcoin shines. It does a great job of preserving purchasing power and avoiding the perils of fiat currency devaluation.

As more people become aware of this structural advantage, I believe we will see a cascade of capital flows into the asset. What looks like a speculative asset to some today is actually the parachute that they desperately need. It is just a matter of time until the mainstream citizen is educated on this topic. Those who understand it early, and have the courage/conviction to act, will be in a better position than others.

It is nuts to think about 10% inflation levels happening in the United States. We don’t need a hyperinflationary event to drive Bitcoin adoption. We simply need the status quo to continue.

Have a great start to your week. I’ll talk to everyone tomorrow.

-Pomp


This installment of The Pomp Letter is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 100,000 other investors today.


THE RUNDOWN:

Bitcoin Falls Over 10% as Record-Breaking Rally Loses Steam: Bitcoin is pulling back from its record highs. The cryptocurrency briefly dipped below $30,000 Monday, just two days after breaching that level for the first time. The price of bitcoin rallied to a fresh all-time high over the weekend, topping the $34,000 mark. That move was followed by a surge in smaller cryptocurrencies such as ether, which passed the $1,000 mark for the first time since February 2018. Read more.

Bitcoin Could Quadruple in 2021, Fundstrat's Tom Lee Says: Following a strong 2020 that saw bitcoin march to all time highs for a gain of around 300%, 2021 could be even stronger. That's according to Fundstrat's Tom Lee, who said in an interview with CNBC on Wednesday that he sees bitcoin surging another 300% next year. Read more.

NFT Art Sales Reached All-Time High of $8.2M in December: The total trading volume of non-fungible token artwork hit an all-time high of $8.2 million in December 2020, according to cryptocurrency art analytics platform CryptoArt.io. With the lights turned off in museums and galleries due to the coronavirus pandemic, sales of physical art plunged in 2020, but sales of NFT-based art have taken off, reaching an all-time high in December, according to CryptoArt.io data. Read more.

DeVere Group CEO Sold Half of Bitcoin Holdings at Christmas Highs: Nigel Green, CEO of U.K.-based financial advisory firm deVere Group, has said he sold 50% of his bitcoin holdings over Christmas as the cryptocurrency’s price surged to new highs. In a blog post late last week, Green said that as bitcoin neared $25,000 per coin, he made the decision to sell half his holdings, explaining, "it's better to sell high and re-buy in the dips." Read more.

Bitcoin Worth $1B Leaves Coinbase as Institutions ‘FOMO’ Buy: On-chain data shows big money continues to chase bitcoin amid the frantic bull run. That’s a sign of institutions catching the “FOMO” bug, according to one analyst. Institution-focused Coinbase Pro exchange registered an outflow of over 35,000 bitcoin worth more than $1 billion early Saturday, according to data source CryptoQuant. Read more.


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