Well, “spring has sprung” (as they say) and at times it has almost felt more like summer over the past few weeks.  I hope this doesn’t portend a hotter than usual summer season for 2011.

This week started off with a bang with the screaming headlines and constant media coverage that the Standard & Poors bond rating division has threatened to downgrade the credit rating of U.S. Treasury bonds.  The U.S. markets dropped 1% almost immediately after the news broke and it took the rest of the day on Monday to recover from the lowest level but still closed down more than 1% for the day.  As usual, the correct details were not publicized very well and the reaction was overblown as this was not an actual downgrade.  It was more of a warning that our AAA status would probably be reduced if our federal budget deficit is not addressed within the next two years.  Hopefully, this will act as a wake up call to our politicians to begin addressing the real problems that are looming over our economy.

This deficit problem is, of course, a major part of the whole issue of controlling inflation and our cost of living.  Our government keeps telling us that inflation is low now and under control but they are not necessarily counting food and energy.  My experience at the gas station and grocery store tells me otherwise (you also??????????).  One of the analysts we work with had some comments about this and I thought you would find them interesting.

Tom McClellan wrote, “You could have bought a bushel of wheat in 2004 for around $3.  Now, you'll have to pay more than $7.  Who says that there is no food inflation?

Unlike computers, cars, housing, and a lot of the other goods and services that the BLS (Bureau of Labor Statistics) uses in the Consumer Price Index, there have not been any "heuristic" improvements in wheat.  Heuristic adjustments to the CPI calculation take into account factors such as technological improvements that make products more valuable.  Your computer today is faster and more capable than your PC 10 years ago.  Your car has airbags, and better pollution controls.

Wheat does not have those sorts of improvements, at least not for the consumer.  The wheat grown today may be somewhat more disease resistant than in years past, and farmers may be able to get a higher yield per acre, but for the consumer a bushel of wheat still offers just about the same number of calories, vitamins, and other benefits now that it did 200 years ago.  So the price of wheat is perhaps a good measure to use in gauging price inflation without those pesky heuristic adjustments.”

We continue to monitor the economic circumstances and their impact on the markets and your portfolio and, as always, we will make any necessary adjustment as the trends change.  If you have any questions please don’t hesitate to give me a call.