California Leavin'

California, with its fantastic climate, gorgeous geography and huge size, has been a mecca for millions ever since the Gold Rush. Perhaps life here has been too easy for many, and too rich for liberal politicians eager to redistribute the wealth. Democrats especially have found life to be easy, with the party having a virtual lock on state and local power centers. 

Government has become increasingly lazy and disfunctional; the roads are a mess, traffic is the bane of everyday existence, taxes and regulations are oppressive, and modest cottages start at $1 million. Famously, Los Angeles can't even keep the fire hydrants and reservoirs full. Not surprisingly, there is an ongoing exodus of state residents and many of its major corporations. The state has spent tens of billions of dollars on an absurd "bullet train" without managing to lay even one foot of track. Thank goodness Trump has put this project out of its misery. The scattered bridges and columns that have been completed should be left standing for future generations, as monuments to the stupidity and corruption of our politicians. 

As a 5th generation Californian, with ancestors dating back to the Gold Rush, it pains me to post these facts: Grok reports that "Between 2020 and 2025, approximately 500 companies have moved their headquarters out of California or shifted significant operations elsewhere, with a notable spike in relocations since 2019. From 2018 to 2021 alone, the Hoover Institution reported 352 companies relocating their headquarters out of the state."

Nuni Cademartori, my good friend and great artist, penned the above cartoon which I featured in a post almost five years ago. Back then it seemed like there was little hope for any change on the horizon.  

Sadly, things have just continued to get worse. The only thing that has changed are the names of the companies opting to move out of California, as this second cartoon illustrates. 

I especially like the signpost on the right: "Gavin Newsom Memorial Highway." Yes, Gavin Newsom deserves full credit for the deterioration of this great state. May this be a warning to the rest of the country. In case you haven't already noticed, our Guv thinks he would be an ideal choice to run the country after Trump. Heaven help us if he gets the chance!

Over the long haul, S&P 500 returns have been impressive

Today the S&P 500 set yet another all-time high of 6,359. 

As the chart below shows, since 1950 the S&P 500 index has increased by slightly more than 8% per year, from 16.79 to 6359. Add reinvested dividends to this and you get a total return of 11.6% per year, according to Bloomberg. If this price performance continues, and given that the current dividend yield on this index is only 1.2% a year, one could expect an investment in the S&P 500 to produce an annualized total return of almost 9.5% per year going forward. Subject, of course, to violent swings along the way, as the chart makes clear.

 

Since 1950, the Consumer Price Index has increased by about 3.5% annualized. This means that the total, inflation-adjusted return of the S&P 500 has been 7.8% annualized over the past 75+ years.

Food for thought!

Inflation remains low

June CPI and PPI figures were released this week, and the buzz centers around whether Trump's tariffs have boosted inflation. There is some evidence in the numbers of tariffs boosting the prices of some goods, but it would be premature—and unwise—to declare that yes, tariffs are causing a rise in inflation. 

Tariffs arbitrarily increase the price of some goods, but that is not the same as monetary stimulus, which is the only thing that can boost the overall level of prices. Absent an increase in the supply of money, higher prices for some goods will almost certainly result in lower prices for other goods. A household on a fixed budget that is faced with higher prices for food will have to cut spending on some other things.

In any event, it's difficult if not impossible to find evidence in the numbers that inflation is rising. Here are some charts to prove it:

Chart #1

Chart #2

Charts #1 and #2 both focus on the CPI and the CPI without its shelter component. The first chart shows the change in these indices on a 6-month annualized basis, whereas Chart #2 shows the year over year change. I fail to see where the latest numbers have changed the overall picture. By any of these measures, inflation currently is somewhere in the neighborhood of 2-2.7%.

Moreover, according to Chart #2, the ex-shelter measure of inflation has been 2% or less for the past two years, as I've been pointing out repeatedly over the past year or so. The reason? The method the BLS uses to determine shelter costs is flawed, as illustrated in Chart #3.

Chart #3

Chart #3 is designed to show that Owner's Equivalent Rent (OER), which makes up about one-third of the CPI index, is driven by the year over year change in housing prices 18 months ago. Talk about lags! The rise in housing prices has slowed significantly over the past few years, and the most recent surveys show that housing prices are actually flat to down a bit over the past year. Yet OER purports to tell us that housing costs have increased by about 4% in the past year. Using a more contemporaneous measure of housing costs would thus yield a much lower overall rate of inflation.

Chart #4

Today the June figures for Producer Prices were released. They show inflation running at 2 to 2.5% over the past year. But as Chart #4 shows, producer prices overall have only increased 0.7% in the past three years, for a 0.2% annualized rate!

Chart #5

Chart #5 shows an index of non-energy commodity prices. Since overall inflation peaked in mid-2022, these prices are essentially unchanged. 

Chart #6

Chart #6 shows the price of crude oil, which is a key determinant of energy prices and which has been extremely volatile over the past 60 years. Since mid-2022, when most measures of inflation peaked, energy prices have been falling.

Chart #7

Chart #7 shows an index of five industrial metals prices, one of which is copper, which jumped 10% 10 days ago, thanks to a new Trump tariff. Still, metals prices overall are unchanged over the past three years. 

Inflation isn't determined by individual prices; you have to look at broad measures of prices over time. Focusing on one month's numbers is a fool's game, since monthly data are notoriously volatile.

Commodity prices have been generally stable for the past three years. This is a solid base for the conclusion that the Fed is doing a good job of keeping inflation low.