Adviser's Blog

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Dear Clients,
The following is my Performance Update and Outlook for April. All prices and returns are as of 4/30/08.

PART I: INTRODUCTION

The last two months have not been kind to my model portfolios but we are still well ahead of all the equity and bond market averages for the year. Even though the recent activity in your account might be discouraging, I am growing increasingly confident in my long-term strategy and the opportunities for your portfolio. While the current trends could last a little while longer, by Q3 I should be generating returns similar to those we realized in the first part of the year.

The fundamental case for my strategy is stronger than ever. I can’t find any evidence that the economy is improving or that inflation is cooling which are the trends I’m seeking to capitalize on. Stagflation, a unique economic condition that only occurs every several decades, will prevail as long as the Fed can keep the credit markets from crashing – a scenario far worse than what I’m expecting. We are currently experiencing a bear market rally in stocks and a bull market correction in commodities (except energy) but these trends should reverse themselves within the next couple of months. I think we are far closer to the end of the countertrend than the beginning.

The following essentially describes the action in your accounts over the past 15 months. Last year, every asset class (bonds, equities and commodities) was highly correlated which is not the historical norm. I’ve mentioned on numerous occasions over the past year that the historical correlations would be reestablished and now it is finally taking place. Furthermore, I have stated that the normal correlations between these assets classes must be reestablished for my strategy to truly provide significant returns.

Since every asset class was correlated for the first 10-11 months of last year, my long/short strategy was not very volatile as my long and short positions worked against each other. If my long positions appreciated, then my shorts fell and visa-versa. We made money on the margin but that was about it.

Starting in Q4 of last year, the commodity markets, specifically the Precious Metals (PMs), began decoupling from equities. While this decoupling took place, my long/short strategy became far more volatile as my long and short positions started moving in lockstep with one another. From December ’07 through February ’08, everything in the portfolio made money as equity prices fell. Conversely, equity prices started rising in mid-March and all of my positions started to fall in unison. The net result is still a fairly nice gain YTD but far from where we were at a couple of months ago.

I went through a similar rough patch in Q2 of last year but I stuck to the fundamentals and we outperformed the market handsomely in the second half of the year. I believe that the second half this year will be even better as we’ll make money both in falling equities and rising commodities rather than just on the margin as we did in ’07.

PART II: ACCOUNT PERFORMANCE

Here is how my performance measured up to the averages for the first four months of 2008:

PORTFOLIO	2007 YTD	2008 YTD
The MAC’s Core Portfolio	12.5%	6.9%
The MAC’s Focus Portfolio	11.0%	7.7%
S&P 500 (VFINX)	5.4%	(5.0%)
NASDAQ 100 (QQQQ)	19.0%	(7.8%)
Benchmark	8.5%	(1.0%)

As I said in the Introduction, everything went our way in January and February and practically everything went against my strategy in March and April. I did foresee the countertrend emerging so I liquidated some of our positions which served to partially mute the impact of the current countertrend. Unfortunately, I didn’t think the reversal would be so severe nor did I think the decoupling between the PMs and equities would be so significant. In addition to these errors in judgment, I added some equity exposure to uranium stocks that have historically rallied with other equities but failed to so this time around.
Read the rest of this entry »

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Dear Clients,

I am preparing my Quarterly Update along with your performance reports and fee statements. I’m aiming to mail them out by Friday, but there are some analyst reports coming out at the end of the week that I’m waiting for so I might not get them out until Monday. In the interim, I wanted to report on your account performance so far this year:

Here is how my performance measured up to the averages on a YTD basis:

PORTFOLIO	2007 Return	Q1/YTD Return
Core Portfolio	12.5%	15.0%
Focus Portfolio	11.0%	16.8%
S&P 500 (VFINX)	5.4%	(9.5%)
NASDAQ 100 (QQQQ)	19.0%	(14.6%)
Benchmark	8.5%	(2.1%)

The quarter provided a lot of excitement in the market that resulted in losses in most portfolios. The S&P 500 had its worst quarter since Q3 of ’02 – near the bottom of the worst bear market in 70 years. Given that Q1 is typically a strong quarter for equities coupled with the monumental easing by the Fed, this is not a positive omen for the market.

The market has seemed to grab some traction as the government has provided a backstop to the financial sector on March 16th compliments of the US taxpayer. Since all the fun began last August, the fed has pledged over $1,300 for every man, woman and child in America. Fortunately, while our government has been increasing the liability side of your personal balance sheet, I’ve been increasing the asset side.

My performance for the last quarter has been pretty remarkable even though I gave a nice chunk back in March. I explained it to one client that “we went in at half with a 30 point lead but only won by 20”. (He appreciated the sports analogy which McCracken’s are famous for.) So far this year, my Core and Focused Strategy have beaten the S&P 500 by over 24%. In a $1M account, that equates to a $240,000 advantage.

Equities were severely oversold and commodities were equally overbought so a move back to the mean was expected (not necessarily welcome, but expected). The good news is that the long-term fundamental outlook for my strategy improved significantly this past quarter. But the technical short-term outlook is less favorable and I expect that many of our best performing positions might continue to correct. For that reason, I’ve reallocated a fairly significant percentage of your account to lock in profits while trying to find some risk-friendly returns over the next few months. I’ll cover all of this in detail in my report.

As always, please do not hesitate to call me if you have any questions or concerns regarding your account.

All the best,

Matt

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Dear Clients,
The following is my Performance Update and Outlook for February. All prices and returns are as of 2/29/08.

PART I: INTRODUCTION

The Stagflation theme has finally caught on with the investing public. On February 21st, both the Wall Street Journal and Larry Kudlow’s show Kudlow and Company dealt with the prospect of Stagflation. I just got an e-mail from an analyst in Dallas by the name of John Mauldin and his article is titled Stagflation and the Fed. (I think these guys are bit late to the party as I’ve been preaching about Stagflation for some time. Last April I wrote a post titled Goldilocks or Stagflation which concluded that Stagflation was the more probable outcome.)

Stagflation is simply persistent price inflation coexisting with a cyclical slowdown in the economy. It’s not the end of the world, but it can do nasty things to a portfolio invested in equities and bonds.

Inflation pressures are undeniable. I wrote in my Annual Update that we are experiencing unprecedented long-term inflation. The 5 year appreciation in commodities as measured by the CRB Index is running at it fastest clip since the index’s inception. The CRB index is up almost 200% since the beginning of 2002. And this month it got worse as the CRB Index increased by 12.4%. Since the “omniscient” Fed started their rate cutting campaign in August, the CRB Index is up 36.8% - the second largest 6 month increase since the index’s inception. The biggest increase was in 1973, not exactly the best time to be invested in equities as they fell 49% in 18 months. (Are you growing tired of me quoting that stat in every single update? If so, my apologies, but I feel the need to include it for non-clients who might be visiting this site for the first time. Feel free to skip over such redundancies in the future.)

Another certainly is the reality of a slowing economy. For reassurances about the slowing economy you can check out my Stagflation Alert or just read any of the latest Fed minutes, speeches or Congressional testimonies. (Federal Reserve Website link)

But this introduction has run on long enough; let’s get to the good stuff.

PART II: ACCOUNT PERFORMANCE

Here is how my performance measured up to the averages for the first two months of 2008:

PORTFOLIO	2007	2008 YTD
The MAC’s Core Portfolio	12.5%	22.0%
The MAC’s Focus Portfolio	11.0%	25.3%
S&P 500 (VFINX)	5.4%	(9.1%)
NASDAQ 100 (QQQQ)	19.0%	(16.13%)
Benchmark	8.5%	(1.9%)

We had another stellar month in February. On a YTD basis, My Core Portfolio has beat the S&P 500 (VFINX) by over 30% and Scott Burn’s Couch Potato Portfolio by nearly 24%. In a $1M account, my strategy would have yielded nearly $240,000 more than the Couch Potato Portfolio. Not bad considering that 75% of financial advisors are supposedly incapable of beating his benchmark. Read the rest of this entry »

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Dear Clients,
The following is my Performance Update for January. All prices and returns are as of 1/31/08.

PART I: INTRODUCTION

As January goes, so goes the year!
- Popular Wall Street Adage -

If this old adage has any validity, than equity investors are in for one hell of a time in 2008; conversely, we could see spectacular appreciation in your accounts this year. Over the past several months, my strategy has gained considerable momentum and your accounts have profited substantially.

While the large-cap indexes (S&P 500 and DJI) have not technically reached bear market territory, it is essentially a foregone conclusion that they will in the near future. For the first time ever, equities fell over 10% in January. The market volatility has been “gut-wrenching”. After falling nearly 11% in the first 14 days of the year, the S&P 500 rallied 5.2% in the last seven days of the month, but only after the Fed took drastic actions in cutting the Fed Funds rate 1.25%. The average intraday movement in the S&P 500 for the month of January was just over 2.4%! Read the rest of this entry »

³ They began saying to each other, “Let’s make bricks and harden them with fire.” (In this region bricks were used instead of stone, and tar was used for mortar.) ⁴ Then they said, “Come, let’s build a great city for ourselves with a tower that reaches into the sky. This will make us famous and keep us from being scattered all over the world.
- Genesis 11: 3-4 -
New Living Translation

On September 13th, 2007, the Associated Press reported…

The world’s tallest building, still under construction in the booming Gulf emirate of Dubai, has become the world’s tallest free-standing structure, its developers said on Thursday…The developer announced in July that Burj Dubai, Arabic for “Dubai Tower”, had exceeded Taiwan’s Taipei 101 which is 508 metres tall, to become the tallest building in the world.

When I read about the Burj Dubai, an unsettling feeling came over me. I don’t remember when or where, but at some point in my life I recall being told that economic calamity soon followed the construction of a new “world’s tallest tower”.

I was anxious to determine if there was truly a relationship between the construction of “towers” and market peaks, so I pulled up the ever-so-handy Wikipedia to do a little homework. Wikipedia was enormously helpful because with every building on the list it also listed the buildings that it surpassed and was proceeded by in height. Here is the link to the Empire State Building page. (I figured you could start in the middle and work your way in either direction.)

Let’s take a look at how the stock market performed after the construction of a new “world’s tallest tower”. (I didn’t include communications towers or tourist structures such as the Eiffel Tower, the Tokyo Tower or the CN Tower. Also, I didn’t include the Petronas Twin Towers in Malaysia because only the Antenna was taller than the Sears Tower – not the roof.)

Building	Years Built	Height	Stock Bear Mrkt	Stock Mrkt Returns*
Metlife	1893 - 1909	50 Floors	N/A	N/A
Woolworth	1910 - 1913	55 Floors	1911 – 1913	- 15%
40 Wall Street	1929 – 1930	282.5m	1929 - 1932	- 82%
Chrysler Building	1928 - 1930	282m/274m	1929 - 1932	- 82%
Empire State Building	1929 - 1931	381m	1929 - 1932	- 82%
World Trade Center	1966 - 1973	417m/413m	1966 - 1974	- 44%
Sears Tower	1970 - 1974	442m/412m	1972 - 1974	- 41%
Taipai 101	1999 - 2004	449.2m/439.2m	2000 - 2003	- 48%
Burj Dubai	2004 - 2009	555m	’07 - TBD	TBD

* Annual Returns provided by Crestmont Research, specifically from the Crestmont Stock Market Matrix . Returns are calculated as “Individual Investor Real Returns” which are adjusted for inflation, reinvested dividends, transaction costs and taxes paid.

What I found remarkable was just how well the “Tower” indicator predicted secular bear markets in stocks. I was surprised to discover that not a single building taller than the Empire State Building was built during the nearly 40 years between the two secular bull market peaks in the 20th century. Furthermore, construction on a single “tower” was not initiated for the 31 years between the two most recent secular bull market peaks (1968 and 1999).

But what I found even more astounding was the number of “Towers” built at secular bull market peaks. After 37 years of no “towers” being constructed (1929 – 1966), two “towers”, the World Trade Center Towers and The Sears Tower, were started within a couple years of one another and finished at essentially the same time. After an 18 year span with no “tower” construction, three “towers” were built right at the end of the Roaring 20’s just as the US was entering the Great Depression. Ironic!

Just for kicks, I thought I’d check out if this indicator worked in foreign markets as well. I was curious to know when the tallest tower was built in Japan and what sort of time proximity it had to the Nikkei crash in ’89. Sure enough, the two events coincided. From 1988 – 1991, the Tokyo Metropolitan Government Building (also known as “Tax Tower”) was built in downtown Tokyo and was the tallest structure in Japan until 2006. From 1990 - 1993, the Nikkei lost 60% of its value as Japan fell into a decade and half deflationary accident. Today, the Nikkei is still 60% below its peak of 18 years ago! (The Midtown Tower became Tokyo’s tallest structure in 2006 and consequently, the Nikkei was the only major stock market to depreciate in 2007!)

Whether you accept the Jewish/Christian Bible as Truth or not, it’s hard to ignore the seemingly strong relationship between market peaks and “tower” construction. I haven’t studied the world’s other religions as much as I’d like or should, but I believe that the theme of “pride before a fall” is interwoven throughout all religious texts such as it is in the Christian Bible. Regardless of your religious beliefs (or lack there of), it might be wise to take an objective look at your investment strategy and search for ways to insulate yourself from the possibility that equity prices may fall substantially.

I think I’ve provided a fairly objective view of our capital markets in my Market Outlook. I explain why a lot of financial advisors fail to find ways to protect their clients in secular bear markets which you can read by clicking this link.. For additional ideas on Wealth Management in the current market environment, I might suggest taking a look at my Stagflation Alert. Both have been fairly “spot on” in explaining why the market is behaving as it is.

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Dear Clients,

Happy New Year!

I am busily preparing my Year End Update along with your performance reports and fee statements. I’ll try to get them out by Friday so you should receive them by early next week. In the interim, I wanted to report on your account performance on a YTD and Quarterly basis:

Here is how my performance measured up to the averages on a YTD and QTD basis:

PORTFOLIO	Q4 Return :	YTD Return
Core Portfolio	8.0%	12.5%
Focus Portfolio	11.3%	11.0%
S&P 500 (VFINX)	(3.4%)	5.4%
NASDAQ 100 (QQQQ)	(0.4)%	19.0%
Benchmark	0.9%	8.5%

The second half of the year has been good for your accounts. While the market has been sideways to down, you’ve enjoyed considerable appreciation in your accounts.
I think we are in the early innings of a protracted correction and if the trends in volatility and inflation continue coupled with a slowing economy, my strategy should continue to provide some nice gains.

There are numerous indicators that are suggesting that ’08 will be unkind to equities, which I’ll cover in-depth in my Update. My goal for the year is to generate some significant returns in your account while protecting you from losses in equities and other vulnerable spaces in the capital markets.

As always, please do not hesitate to call me if you have any questions or concerns regarding your account.

All the best,

Matt

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Part I: Introduction
Historically, a significant increase in market volatility accompanies a market inflection point. Using history as our guide, it certainly feels like we are at inflection point. While we are entering a seasonally strong period for equities, the winter months do not guarantee positive gains. In fact, the two bear markets that I’ve consistently compared the next bear market to, 1937 and 1973, both started during this seasonally strong period for equities. The ‘37 Bear started in early March while the ’73 Bear started in January.

In the Market Outlook portion of this update, I’m going to briefly cover two very disturbing developments in the capital markets that merit our full attention. But first, I need to get the administrative part of my update out of the way, so here is my account performance on a YTD basis. Read the rest of this entry »

Several significant events happened today which I think are worth noting.

Oil Prices Hit New Record High
Oil hit a new high of $98.62 before closing at $96.70. USO, the Crude Oil ETF, is up over 45% for the year.

While this development is bothersome, it was to be expected as there has been an unprecedented draw in inventories over the last 13 months. Since the beginning of October ’06, energy inventories are down 7.5%.

In June, I made my first post suggesting that oil prices would continue to climb in light of the draws in inventory. Since then, the rate of inventory draws has accelerated. Initially, the climb in oil prices was a subtle confirmation for me but now it just flat out scares me. I’m very concerned about oil prices and where they might go.

It is currently estimated that the world is consuming around 88M barrels a day and only producing 85M. Production is going to continue to decline as the 40 year-old “elephant fields” lose production capacity. There hasn’t been a major oil discovery in over 4 decades and even if there is one tomorrow, it will take years for it to begin producing. If there are any supply disruptions in the form of weather or geo-political instability, the ensuing rise in energy prices could be detrimental to the entire global economy.

With that said, prices should pull back at some point. But that was my sentiment in October and I was wrong then so I could be wrong again. Prices may continue to climb until prices choke off demand.

The US$ down over 10% YTD!
As of today, the US$ trade-weighted index is down over 10% YTD. This means that most of the stuff we buy from overseas is now 10% more expensive than it was 10 months ago and everything we make here is 10% cheaper to foreigners. Wall Street will tell you that this is good for “multinationals” like MMM, CAT, BUD, ect. The government will tell you that this development will benefit our trade deficit. There is much debate whether either of these are true. What I do know is true, is that these trends have resulted in hardships for my 89 and 92 year-old grandmothers who are struggling to pay their utility bills and nursing home dues.

A falling US$ will lead to more inflation, higher interest rates and quite possibly a significant sell-off in US equities.

Gold reaches new cyclical high
Given the prior two trends, it’s certainly not shocking that Gold closed at another cyclical high today, not far from its all time high of 870 – a level which should get taken out soon, but possibly after a pullback. The two primary Gold ETFs, GLD and IAU, are up 30% YTD.

While Gold is near its all-time highs when priced in US$’s, it is still very cheap when priced in oil and other commodities and still well below its cyclical highs when priced in Euros and other established foreign currencies.

GM Takes $39B Write-down
Of all of today’s developments, the GM story is the most intriguing to me. Today, they announced a $39B write-down. According to an article by the Associated Press, the primary driver behind this write-down is “a $38.6B non-cash charge related to accumulated deferred tax credits in the U.S., Canada and Germany.”

But the article went on to say:

But the markets aren’t buying it, sending GM stock into a mild decline. That’s because there’s plenty of other bad news. Just a few years ago, General Motors Acceptance Corp., the financing arm that’s 49 percent owned by GM, was the company’s life preserver, with robust profits from loans relating to the housing boom. Now it’s an albatross, contributing a $757 million loss in the third quarter–virtually all of it attributable to mortgage write-offs.

On CBSmarketwatch, the following was said…

GM said that confidence has been shaken by sluggish earnings growth in its core North American automotive market and setbacks at GMAC Financial Services, its lending business.

GM said there was a “significant” decline in net income at GMAC and increased corporate expenses. GMAC, of which General Motors holds 49%, lost $1.6 billion. It was caught up in the subprime turmoil that has rocked mortgage and credit markets.

What makes this intriguing for me is not that GM’s stock got hammered today because of this news. I am neither long nor short GM (Although I do drive a GMC Envoy). It’s intriguing because it is representative of how much our nation’s earnings are tied to the financial space. While “financial” stocks only make up 22% of the S&P 500’s capitalization, there are a lot of non-financial companies that derive a substantial part of their income from “financial activities”. Therefore, earnings from “financial activities” accounts for even more earnings in the S&P than earnings from “financial stocks” alone.

And why is this important? I have long argued that the earnings in the financial space are a sham, which it is finally becoming apparent that I was correct. (It didn’t take a genius to figure this out, banks have always “cooked their books” and when they issued blow-out earnings in Q1 despite the troubles in housing, it was pretty evident that something was amiss.) Since earnings in this space were questionable at best, I have also argued that we should discard their earnings when trying to value the S&P 500. As of Q2, the average P/E for the S&P, including the financials, was in the neighborhood of 18, higher than its historical average of 14.5 but not grossly so. But if you take out the financial stocks, whose P/E was under 10, you have an average P/E in the 20+ range, significantly higher than the historical average. But what if financing activities actually account for 30+% of S&P earnings? Now we’re north of the 21-22 neighborhood and approaching extreme valuations particularly given the inflation picture.

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Part I: Introduction

What if, on New Year’s Eve of last year, you knew the following would take place by the end of October…
- New Home Starts would be down by over 30%…
- New Home Sales would be down by over 34%…
- Existing Home Sales down by nearly 20%…
- We’d have the first significant decline in home sales prices since 1930…
- Oil would be over $94/barrel…
- YOY gasoline prices up would be up 31%…
- Commodity inflation would be in excess of 15%…
- Food prices would be up over 17%…
- The US$ would be down over 9%…
- Earnings growth for the S&P 500 would be flat to down in Q3…
- And Consumer Confidence and Sentiment would be down 14 & 12 points, respectively…
What would you have predicted for equity prices?

But wait, there’s more…
What if you knew that a hand full of prominent hedge funds would implode by mid-year?
And that our nation’s biggest banks would have created these neat little entities called SIVs (Structured Investment Vehicles) for the purpose of taking advantage of mark-to-market accounting for pricing assets of questionable value - just the way Enron did a half a decade ago. And as an additional bonus, these SIVs allowed banks to move undesirable assets off their balance sheets to help improve financial ratios to meet reserve requirements – and when news of this broke, the equity markets saw it as a good thing and financial stocks rallied!

If you knew all of this at the beginning of the year, would you have predicted that by October, the Dow and S&P 500 would be trading at historical highs and the NASDAQ 100 would be up nearly 30% YTD. I certainly know I would not – which is why I’ve felt compelled to be out of the equity markets - which is a strategy this is finally paying off.

Part II: Account Performance

Here is how my performance measured up to the averages on a YTD basis through October:

PORTFOLIO	YTD RETURN
The MAC’s Core Portfolio	7.2%
The MAC’s Focus Portfolio	3.4%
S&P 500 (VFINX)	10.8%
NASDAQ 100 (QQQQ)	27.9%
Benchmark	9.3%

When I first sat down to write this update on Thursday, I wrote the following: “The last few months have been profitable for your portfolios as the market begins to price in inflation and credit risks but we still have a little catching up to do before I reach parity with my benchmark. But as I sat down to finish my market outlook over the weekend, I downloaded updated account information to find that we have finally caught up to our benchmark after a strong showing in the first couple of days in November. As of the close of business on Friday, my “Core Portfolio” was up 8.7%, just a 1/10th of a percent below my benchmark which is up 8.8%.

While I’m certainly not satisfied with my performance on a YTD basis, the returns in your account for the second half of the year are fairly impressive thus far. I appreciate your patience with my investment strategy and I’m glad that you are finally enjoying some appreciable gains.
Read the rest of this entry »

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

The purpose of this webpage is to provide a dynamic source of time-sensitive research that supports our macro Market Outlook.

For some time, I have theorized that our economy would gradually enter a state of stagflation. My core investment strategy is based on profiting from stagflation – which didn’t work all that well for the first half of 2007 but earned impressive returns in the second half of the year. In my Market Outlook, I explain in detail the rationality for my theory and why most wealth management firms have their clients woefully ill-prepared to profit from such a set of circumstances.

I originally posted an article on April 17th, 2007 regarding the probability of a Goldilocks scenario versus Stagflation.

I’ll attempt to update the following table the day after the government’s release of the CPI figures each month.

INFLATION DATA	2007	2008 YTD	Hot/Cold
CPI (2)	4.3%	N/A	Hot
Core CPI (2)	2.4%	N/A	Warming Up
PPI (2)	6.7%	N/A	Hot
CRB Energy Sub-Index (2)	39.5%	N/A	Texas Asphalt in August
CRB Foodstuffs Index (2)	21.7%	N/A	Texas Asphalt in July
CRB Index (2)	20.6%	N/A	Smokin’
Wage Inflation (1)	5.0%	N/A	Hot
Unemployment (2)	5%	N/A	Moderating

ECONOMIC DATA	2007	2008 YTD	HOT/COLD
ISM Index(2)	(3.7%)	N/A	Cooling
Construction Spending(1)	1.7%	N/A	Cool
Consumer Spending(1)	5.8%	N/A	Hot
New Home Sales(1)	(36.1%)	N/A	Frozen
Existing Home Sales(1)	(20.1%)	N/A	Ice Cold
Durable Goods Orders(1)	(2.8%)	N/A	Cold
Consumer Confidence (2)	(21.7)	N/A	Cold
Consumer Sentiment (2)	(18.3)	N/A	Cold

1. Data through November
2. Data through December
Sources:
CPI, Core CPI & PPI: Data obtained from the Bureau of Labor Statistics.
Energy & Food Prices & CRB Index: Data obtained from the Commodity Research Bureau.
All Economic Data obtained from Bloomberg.com

I feel a little silly continuing to track this data as it seems fairly obvious where we are headed. If there were any doubt, the Fed has successfully removed it over the past 6 months with their aggressive easing with apparently no regard for inflation pressures. Unfortunately, loose money always leads to inflation but it doesn’t always lead to economic recovery – see the popping of the Tech bubble in 2000. The Fed has all but promised to keep the liquidity pump primed but the housing and credit markets aren’t reciprocating in guaranteeing an economic recovery.

Some bullish wealth managers continue to make the case for contained inflation by pointing to government figures such as the CPI and PCE. Personally, I believe government data understates, perhaps grossly so, the real inflation picture. The following is a table of various inflation gauges so that you can make your own decision on this matter.

Inflation Gauge	Increase from 1/1/02 – 12/31/2007
CRB Index	149.8%
PPI – Intermediate Goods	41.4%
PPI - Finished	25.5%
CPI	18.9%
Core CPI	13.1%

As you can see, there is a remarkable disparity between real commodity price inflation and government reported inflation in Consumer Prices. Personally, I have a very difficult time believing that an explosive 150% increase in the price of commodities has only led to a meager 13.1% increase in Core inflation as the government reports. Since we know that the CRB Index doesn’t lie, then we can be certain that actual inflation in consumer prices has been understated. In my 2007 Annual Report to my clients, I included the following tidbits regarding the unprecedented commodity inflation in our economy:

• Currently, we are experiencing the highest rate of commodity inflation over any five year period – including the 1970’s. In 1973, the five year rate of inflation hit 99%. As of 12/31/08, it is at 103%.
• The last five years have been the only five consecutive years of positive commodity inflation since the CRB index was created in 1957 (Four was the previous record from ’71 – ’74).
• In three of the last six years, commodity prices have increased over 20%.
• In five of the last six years, commodity prices have increased over 10%.

In the 70’s, commodity inflation was like being kicked in the gut. Conversely, today’s commodity inflation is like a series of body blows from a heavyweight fighter. Once the global markets comes to realize just how substantial inflation really is, equity and bond markets will start to feel the pain that the consumers worldwide have been feeling for some time.

If you would like more information on how to protect your portfolio during a period of stagflation, please feel free to contact us.

The MAC is an Independent Firm that provides Wealth Management services to individuals, primarily those in or near retirement, on a fee-only basis. Our goal is to provide our clients positive absolute returns regardless of market movements. We believe that the majority of Wealth Managers focus on wealth creation regardless of risk while we prefer to focus on wealth preservation with an emphasis on risk-adjusted returns.