equivalent to levels that previously led to economic slowdowns in the US. This development prompted our exit from [an overweight position in the Energy] sector.
In a compelling study, Ned Davis Research examined the real price of gasoline, adjusted for the inflation rate, and its economic impacts. The inflation-adjusted price of gasoline today has reached levels that have historically throttled growth. Furthermore, the Ned Davis study finds that a higher price for gasoline would be the equivalent of a major shock. The research suggests that under either circumstance – current gas prices or prices that surge even higher – the weight on the economy from that adjustment is onerous.
And I just can’t close without this brief, ironic comment. Readers may know that I have neighbors who question my Texas ancestry (which goes back to the Republic, thank you) because I don’t own any guns. I am perfectly content for my friends to have lots of them and feel gun ownership is one of those sacred rights, but I have just never been motivated to build a bunker with an arms locker, or even possess a small pistol. For whatever reason, I feel perfectly safe without one.
With that admission (which some will applaud and others see as a glaring lapse of character), I note that over the 4th of July weekend, there were 82 people shot, 14 fatally, in Chicago.
I read elsewhere that Houston had six shot and two dead over that same period. Chicago, the third-largest city in the US, has no places where you can legally buy a gun. Houston, the fourth-largest US city, has over 500 (including Walmarts, etc., which are not listed as gun stores per se but have rather extensive offerings). Not sure what that means, but you have to wonder.
Have a great week. And enjoy your summer! I know most farmers are, as the weather is perfect for growing all sorts of crops, which look to produce record yields in the US this year.
Your going to be reading about GDP this week analyst,
John Mauldin, Editor
Outside the Box
Poverty Matters for Capitalists
By Charles Gave
GaveKal Dragonomics
July 8, 2014
Inflation is a much misunderstood phenomenon. Most people assume that a CPI rate of 10% means that most prices are rising by a similar amount. In reality, some prices may be falling even while others soar. This matters because price variations affect socio-economic groups in very different ways. The rich tend not to be impacted unduly by price hikes for “necessities” such as food, rent and fuel, while the impact on the poor is to slash that portion of their income left over for discretionary spending.
A sharp rise in the price of staples imposes an effective tax on low earners, resulting in recession conditions for firms that sell to them. The broad picture in the US may be of low interest rates and rising real average incomes, but the poor have seen their real incomes slashed since 2008 and with scant subsequent improvement. The poor also own few assets. Aside from the inequity of such a situation, the macro concern is that the erosion of real incomes creeps up the earning scale so that middle earners eventually see an erosion of living standards. At some point, the decline in activity created by a fall in average incomes will lead to a recession.
I have tested this postulate by building a US inflation index comprised of price variations for oil, food and rent. This can be seen in the chart below where rent is weighted at 50%, food at 30% and energy at 20%. I term this price measure the Walmart Index since it is where most low earners tend to shop. The chart shows the relationship since 1934 between the US CPI and my adapted measure of the price index most relevant to the lives of the least well-off in America.
