Over the weekend, your managing editor Mike Merson had a bone to pick with the government…I think his exact words were “inflation numbers are complete bunk.”

And as he pointed out, new car prices prove it:

A brand-new Ford Model T cost $319 in 1922. Adjusting for “official inflation numbers” should make that price roughly $4,600 today (a 1,342% increase).

Do you see any brand-new trucks selling for $4,600 in 2022? I sure don’t.

The lowest end of the Ford truck lineup, the 2022 Ranger, starts at $25,715 (a 7,961% increase from the 1922 Ford Model T).

As Mike said, economists like to attribute this to “hedonistic adjustments.” Supposedly the luxuries offered in today’s cars justify the increased costs.That’s not to say there are no arguments for these adjustments. Cars are a lot safer than they were in 1922, for one thing. And a lot faster.Some might argue this justifies the adjustments. Though, I still don’t buy it.I think inflation data should reflect prices paid. If a car costs me 10% more than it did a year ago, that’s what we should measure.And if that’s not enough, there’s another way to dispel the myth of “hedonistic adjustments” once and for all…

Double-Digit Inflation Is More Like It

Economists can talk all they want about digital dashboards and heated seats in new cars…But let’s take a look at a market where the latest innovations shouldn’t apply — used car sales.There are two sources of data we can compare. One is maintained by Manheim Consulting. It tracks actual sales of over 5 million used vehicles a year, and is the blue line in the chart below.The orange line is the “official” data from the Bureau of Labor Statistics. You can see the inconsistency in the chart:

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I set both lines to 100 in January 2008, to see how much each has changed since.You can see that CPI data is a lot smoother than data pulled from the actual market. That’s not a coincidence. Economists deliberately eliminate sharp changes, because they believe it more accurately reflects the economy.As a result, CPI’s decline in 2008 lasted longer than the data from Manheim. It also grew less rapidly in 2020. But that doesn’t entirely account for the gap on the chart we see today…Manheim data is all the way up at 205 today, reflecting a 105% increase from 2008. Meanwhile, according to the government, used car inflation is significantly lower at 145 — a 45% increase.How? You might want to sit down for this…The Bureau of Labor Statistics applies the same quality adjustments to a used car as they would if it were brand-new. They then depreciate the value of the changes, just like the value of the car.So you may be buying a car that’s 10 years old, but the government is valuing it as if it’s never been used.

Over time, this adds up. Just look at the market data in 2020 versus the government data at the start of the recession.Per the market data from Manheim, used car buyers were paying 31% more in January 2020 than they were in 2008…Yet according to the government, prices were unchanged over those 12 years.(You’ve probably bought a car in the last few years. Which number feels more right to you? Write us at TrueOptions@BanyanHill.com.) And the gap has only grown larger since.

Market-based data is currently up 78% from the pandemic low at the start of 2020. That compares to a measly 48% gain in the official data.

This alone shows inflation is drastically understated.

Let’s be generous and call the difference between market and government data for used cars a “tracking error.” That error would be about 66%.

Used car inflation is a more extreme category. But even if tracking error for full inflation data was only one-third as much, CPI would still be 10.5% instead of 8.5%.

I’m not sure about you, but double-digit inflation is closer to what I experience in my daily life. Government economists can use all the tricks up their sleeve to make us feel better — but we know the truth.

And there’s a trade to play it. ProShares Inflation Expectations ETF (RINF) moves higher as consumers become more frustrated with inflation. It’s a small fund with less than $45 million in assets, so there are no options available. But it’s an ideal inflation hedge that belongs in every portfolio right now.

Regards,Michael Carr signatureMichael Carr, CMT, CFTeEditor, One Trade

Chart of the Day:The Second-Best Time to Short XLE

By Mike Merson, Managing Editor, True Options Masters

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Energy stocks are looking wicked vulnerable here…The SPDR Select Sector Energy ETF (XLE) just broke down out of a rising wedge pattern, with a thunderous 4% down move in a single day.This comes as momentum wanes on both the RSI and MACD momentum indicators… Lower highs on both as XLE made higher highs all through March and April. Not a good sign.The last nearby support is the 20-day EMA, which XLE just managed to scrape back to before the close of trading yesterday. But as we open this morning, it’s set to open below it.If you’re looking to play a bounce on this, you’re either brave, foolish, or somewhere in between. I think energy stocks are set to fall a lot further, probably set to test the 50-day MA.Of course, the best time to short XLE was at the highs yesterday. But the second-best time is this morning. Play some short-dated at-the-money put options, and be ready to take profits quickly.


Mike MersonManaging Editor, True Options Masters