CPI: The Charade Continues

Maybe some day someone will draw attention to the many ways CPI data is falsified.  We’ve written about this extensively, most recently in December [see: Again with the CPI Games?] when gasoline prices, which had risen 20.3% YoY for November, were reported by the EIA as a 17.5% increase.

Of course, by the time the BLS was finished massaging the data, gas prices had increased by only 16.5% and the “energy index” increased a measly 9.4%.  Combined with the ludicrous methodology in calculating shelter costs, the BLS was able to report headline CPI had increased only 2.2%.

Equity buyers were thrilled.  SPX gapped higher on Dec 18th (the day CPI was released) and never looked back.  Bond buyers weren’t as sanguine.  The 10-yr, which had traded at 2.35 the day before, was up to 2.49 two days later.

This morning, we get more of the same.  The EIA reported an 8% YoY increase in gas prices for January. (2.467 vs 2.285.)  It was reported by the BLS as an 8.5% increase.  There’s nothing, in particular, wrong with these figures….except that they’re a lie.

Here are the closing prices for RBOB (gasoline futures) in Jan 2018 compared with Jan 2017.  The average close in Jan 2017 was 1.5772, compared to 1.8583 in Jan 2018.  That’s a 17.8% increase.

The extent of the increase is immediately obvious from the RBOB chart below. The Jan 2017 range is shown in 2018 for comparison purposes.  There was zero overlap.EIA reported an average of 2.467 for Jan 2018.  Even a casual glance at the chart below shows that gas might have touched 2.467 only around the first of the month, spending most of its time much higher.My own data, taken from AAA’s daily gas price report, showed that gasoline was as low as 2.467 on exactly one day: Jan 1.

Why the charade?

I’ve been listening to the financial news this morning.  Pretty much every single commentator has opined that, while the 0.5% monthly CPI increase is “concerning,” the 2.1% annual increase means inflation is definitely not out of control (how bad might things have been without the manipulation?)

S&P futures, which just dropped 48 points, beg to differ.  For once, even bulls are openly wondering whether the Fed has, indeed, lost control.  A dismal retail sales figure (the biggest decline in 11 months) hasn’t helped.

Fortunately for them, VIX manipulation is alive and well.  Pay no attention to the momentary pop in the “fear index.”  It’ll be down to our targets soon enough.And, isn’t it great to see the mainstream financial media start to report on this?  MarketWatch, CNBC, Bloomberg, et al have stories out this morning on the whistleblower lawsuit alleging that someone has been manipulating VIX.  Gosh, really?

I and many others have only been writing about this for, oh, 5 or 6 years, so it’s nice to see ace reporters jump right in — even if it is to point out how ludicrous the allegations are.  Bloomberg’s article appears to have been penned by the CBOE, which derives 25% of its profits from VIX trading and is quoted extensively throughout:

The claim sounds dubious: the VIX, that index at the center of the stock market’s wild gyrations over the past week, is somehow being manipulated.  That allegation, made to federal authorities by an anonymous whistle-blower, captivated Wall Street on Tuesday, prompting both quick dismissals and more than a few raised eyebrows.

I imagine most of the eyebrow-raising is related to who is doing to manipulation rather than how they’re doing it.  Ask yourself: who might have an interest in aggressively shorting VIX smack dab in the middle of a 4.5% futures flash crash?  Who would have the money, the mandate and the cajones?

It’s the equivalent of writing thousands of homeowners’ insurance policies as the tornado sirens are spooling up.  Yet, this is exactly what happened on election night in Nov 2016 [see: The Fallout and Why the “Trump Rally” is a Fraud.]

My conclusion all along has been that it was the Fed itself, shorting VIX then and at all the right moments since then to ensure that market volatility was limited to rallies, never declines.

Yet, an explicit admission by then-Governor and now-Fed Chairman Jerome Powell in the Oct, 2012 FOMC transcripts has gone completely unreported in the media [see: The Fed’s Short Volatility Position.]  You’d think one of the intrepid “journalists” covering the current story might have found it relevant.

Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.

While I’ve been ranting “someone” has been hard at work…shorting VIX.  It has fallen from its initial 25.72 highs to 20.21 (-21%) and has further to go.ES has recovered 34 of its 48-pt loss and is off a manageable 10 points.  If VIX continues dropping as I expect it to, the algos will soon turn the indices sharply positive.

I’m certainly not complaining.  This is all perfectly in keeping with our analog from Feb 6 [see: Analog Watch] which has already produced nice gains in VIX, SPX, RB, CL and gold.  The currencies are just getting started.

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