Robert Kientz's  Instablog

The economic news keeps coming for Japan and Britain, and not a lot of it is good. It has been interesting to see the strengthening of the Yen against the pound since April. 

Post Fukushima, it has been a fairly orderly direction the pair has taken to the Yen side, no doubt on fears of sovereign and banking collapse in Europe and Britain. While Japan is deep in the red on public debt, they are a nation of savers and many analysts feel as though the risk of economic collapse before the Tsunami and Nuclear disaster were somewhat remote. While the hit to Japan's economy was substantial and will continue to affect the country, the current reality is that Japan is holding steady and seeing some modest improvements in their economic indicators.

I graphed a Fibonacci retracement on the pair since the Tsunami and you can see that weakening of GBP to the Yen has steadily moved past lowest support. What had been support at 122.207 has now become short term resistance to the upside.



Sept 15's morning trading has been to the upside. The question is, will the pound continue to rally to the upside confirming long-term support at 122.207, or will the trend continue to the downside upon fears of sovereign and banking contagion?

Economic Indicators

Economic indicators this week have been clearly on the side of the Yen. Japanese industrial and manufacturing reports have been supportive of expectations, while British visible trade balance and retail price indexes have been misses. Jobless claims in Britain were favorable, however.

Next week is a big news week for the pair. Bank of England minutes, public sector borrowing, YoY housing prices, and loans for house purchases are on the docket for the Pound. The Yen will see the JPY leading index, merchandise trade balance, and all industry activity index news.

In two weeks, Japan will release data on retail sales, housing starts, jobless rate, household spending, and consumer price index news while Britain will announce consumer confidence, mortgage approvals, consumer credit, and nationwide house prices.

September is an important pivot month for the pair as economic indicators and the playout of banking sector troubles in Britain will put pressure on the currency pair. Continuing supportive numbers in the Japanese indicators along with deteriorating data in Britain could continue to push the pair to the downside, and that is what many analysts are expecting.

Technical Indicators

Stochastics show the shorts have moved into oversold territory with a possible breakout to the upside possible. Any value below 20 is potentially bullish to the upside.



The MACD is continuing bearish and continues momentum below the signal line.



Both are rear looking indicators and may not point the direction forward, however.

Trader sentiment with my forex broker reached a ratio of 16:1 long buyers to short, but has since decreased to 11:1, correlating with this morning's move to the upside as traders expect reversal above 122.207 support. However, trader sentiment is typically a contrarian indicator at levels above 3:1. Therefore, sentiment indicator also indicates a move to the downside could be coming.

With calls for double dip recession deepening in much of the West, and the worst of the bad Japanese news in the rear view mirror, my hunch is that the pair will continue to trade lower but within a reasonable range below 122.207. If banking fears are assuaged in Europe and Britain and Greece somehow avoids meltdown sending Europe into a tailspin, the pair could reverse to the upside. But my hunch is the economic data continues to get worse for Western nations while the recent bad news out of Japan gets relatively better than before.  

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I decided last year to write down a list of typical items that I would purchased from the grocery store on a weekly basis. I wanted to get an idea of what I spent on items and where I spent the money. In addition, it occurred to me, that with all of the inflation talk, it would be interesting to track prices on a basket of goods that I might buy from one year to the next. So I collected 46 items sizes and prices and wrote them down on a sheet of paper in January of 2010. This week, almost exactly one year later, I went back to the Walmart Neighborhood Store near my house in which I had purchased those 46 items, and checked up on their prices. What I found is the focus of this article.

If you want to download my excel spreadsheet to follow along with the analysis, click here.

Overall, 17 items deflated in price after one year, 18 inflated, and 11 stayed the same. I saw 12 significant declines greater than 5%. Those items were concentrated in the household sector, cereals, and flour. The price of Cheerios declined 20%, Hidden Valley Ranch dressing by 17.5%, and Tide detergent by 15%.



There were 16 significant increases greater than 5%, and the increases had higher volatility as a group than the declines. This may suggest that inflation is affecting different products (and their supply chains) differently, which is consistent with Austrian theory on inflation.

The biggest overall moves were in fruits and veggies, with an overall inflation of 21%. Green bell peppers were up 309% (no kidding) and navel oranges were up 227% (no kidding). While these items were not on sale last year when I selected them, it is possible that seasonal factors such as weather have heavily influenced prices in this segment. Given recent weather abnormalities, I feel we would have to follow this for at least 2 years before we can tell how much of a running impact inflation is making on this part of the food budget. Yellow onions and broccoli fell significantly in this category.

The second biggest increases were in meats. Hot dogs and bologna were up 50% from last year. Chicken breasts were up 10%, ribs up 13%, and bacon up 13%. Ground chuck was down about 1%.



Soaps and lotions were mixed. Those up ranged from 5-21%, while those down 8-15%. Overall, this category experienced a slight deflation of 1.94%.

Dairy saw modest deflation for all items but butter, which had 8% inflation, bringing the segment to net 0.5% higher than last year.  The one coffee item I had was up 18%, which is modest considering reported 30% in supply costs reported by producers in late 2010. It would seem that the consumer price in coffee has not quite caught up to producer cost.

Basic cooking items consisted of flour, sugar, and cooking oil. This segment saw 3.94% inflation. Flour was very cheap compared to last year, but sugar and oil were very much higher.

Snacks saw a modest increase of 0.49% increase from last year. Not much if you like the junk food.

One observation from the data that is while we saw larger price moves in the inflationary items, two of the highest price items saw large deflations which affected the overall basket price significantly. If I did not purchase diapers, for instance, then my overall basket inflation would move up by about a percentage point. If I was single and bought less laundry detergent, I could reasonably expect a basket increase of about 1.8% overall. Or stated another way, diapers are holding down inflation in other baby care items, and laundry detergent was holding down observable inflation in other soaps and lotions.

A very interesting observation occurs when products are separated out into either discount/generic/store brand versus name brand products. Excluding fruits and vegetables (for which I did not note whether they had a brand name sticker on them), the name brand items had relatively no inflation (0.09 percent!), whereas the generic items had much higher 3.24% inflation.



Since generic products are typically already discounted items, the ability of their producers to absorb inflation losses is much more limited than the same ability of brand name items which typically sell with higher margins overall. Because my basket of goods was weighted heavier towards name brand items, both because they are more readily available and because people have been shown through research to highly value name brands, my overall observed level of inflation was muted compared to the actual increase in commodity components of the products purchased.

Stated another way, inflation is more 'visible' in generic items with less ability to mask inflation, and less visible in name brand items with more ability to mask inflation to the end consumer. I believe this is a very valuable piece of information, especially for those poorer families that are already foregoing name brand items to make ends meet. Year over year, they have already taken their discounts and will be more vulnerable to inflation manifesting in cheaper items, at least in the near term. As name brand producers are forced to raise prices and pass inflation on to their consumers, eventually we will see inflation in more and more name products, if we consider that inflation is more likely to increase in the future given existing economic conditions.

There were 4 items that changed sizes from one year to the next. For those, I divided the price by unit of measure for both this year and last, and compared the price per unit of measure. Of the four that changed sizes, the Oreos cookies showed a per unit inflation of 4.9%, the Tombstone pizza showed a deflation of 13%, Enfamil baby formula inflated by2.8%, and the Lysol All Purpose cleaner deflated about 8%.

Lastly, due to consumer choice, the higher price items are typically purchased in moderation compared to processed food stuffs that didn't rise as much in price. This reflects my conscious decision to choose cheaper quality items that would fit in my budget. Different consumers with different incomes and lifestyles will choose differently, reinforcing the view that government inflation statistics, modified as they are by the ‘substitution’ method, do not adequately reflect the choices each person makes on a daily basis and cannot therefore adequately predict how grocery inflation will affect each family. Those who purchase more fresh vegetables and meats to cook at home will have significantly higher grocery bills than those who choose to budget for items in which do not rise in price, and therefore they can afford.

Substitution modifications made by government will only adequately reflect choices that SOME consumers make in their budgets, typically those on the poor end of the scale. Government inflation measures, modified as they are by substitution, do not measure overall inflation observed in the economy for grocery store items. The conscious decisions of families to REDUCE their standard of living, and the government anticipation of such choices reflected in substitution modifications, is in itself a measure of hidden inflation covered up by declining standard of living by the type of products purchased.

The BLS had food costs up by 1.5% in 2010. This number differs significantly from my personal value of 2.26% overall. They also estimated meat, poultry, and fish were up highest in their index, followed by dairy. Their observation on meat inflation was similar to my experience, but my fruits and veggies and dairy estimates differed significantly from theirs. Further, the absolute value of the increases in meat and fruits/veggies were significantly higher in my case study than as represented in BLS calculations. This could be partially due to regional or other differences.

In addition, I would like to point out that my store of choice, Walmart, would more easily be able to absorb losses caused by supply chain inflation costs than would a smaller retail chain or local grocery provider. This must be taken into consideration for your individual inflation number, dependent upon your choice of grocery provider.

Part 2 of this series will look at possible investment positions that will take advantage of grocery price inflation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclosure: I am long STZYF.PK, UPWRF.PK, GWMGF.PK, RJZ, IEO, DBA.