Wednesday, May 28, 2008

Lies, Damned Lies, Statistics, and the CPI…

If statistics are the highest order of lies in this phrase about the three types of lies commonly attributed to 19th Century British Prime Minister Benjamin Disraeli, then the US government’s Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (Minicrap for the Orwell aficionados), is the celestial be-all and end-all of lies. Your Genteel Moderator begs your indulgence as he addresses what to some may be an arcane matter of economics. But the continued use by the government of a CPI based on the price of treacle and fairy dust demands our attention.

But why, you may ask? Because, unless you happen to live in Never-Never Land, you may have noticed that treacle and fairy dust do not make up a substantial portion of your monthly expenditures. Off the top of your head, estimate the top 10 costliest expenditures by month that you and your family incur. Would fuel be one of them, perhaps? Do you then imagine that an index compiled to measure the relative increase in the cost of living and from which the inflation rate is essentially derived should reflect that relative weighting? Many people would share your views, but apparently not the Bureau of Labor Statistics. Because they believe that fuel (gasoline and diesel for motor vehicle use) accounts for just under 5.5% of your monthly expenditures. In fact, according to today’s CPI formulation, energy costs account for less than 10% of your total monthly expenditures. That may be so for the Hollywood glamoratti and the Greenwich Hedge Fund Manager, but for rather more ordinary people, not so much.

The easiest way to calculate annual inflation is by using the CPI in the same months from two consecutive years, subtracting the base year from the second year, dividing the result by the base year and multiplying by 100. For example, the CPI for April 2007 was 206.686 and for April 2008 was 214.823. Therefore, CPI derived inflation year-on-year to April was 3.93%. Of course that’s based on a CPI weighting that puts gasoline costs at less than 5.5% of your expenditures and total energy costs at less than 10% of total expenditures. Let’s look at the price of gasoline for the same period. According to the US Energy Information Agency the average price of regular gasoline across the country has increased by just under 73 Cents in the past year (as of May 26). Using the same method of calculation as CPI derived inflation, then average US price for regular gasoline has increased by 22.68% in the past year (although I would like the Energy Information Agency to show me where I can get gas for $ 3.93 a gallon!). We could run through home heating oil as well but suffice it to say that that too has increased, if not as dramatically. For diesel fuel, a significant distribution cost driving food and other price increases, the increase is much more dramatic at 67.66%. That means at least a two thirds increase in the cost of getting goods to market (unless you distribute by sailboat of course). The point is that with gasoline prices having risen by nearly 23% (and diesel by nearly 68%), the CPI derived inflation rate of 3.93% is nonsense.

There have been and continue to be numerous criticisms of the CPI based on everything from sound economic theory to politically based tinkering. A quick review of internet based resources alone will give you more information on the subject than you could possibly want. But it is difficult to argue with the fact that a year on year inflation rate of 3.93% seems absurdly low in view of sky-rocketing energy costs. Add to this picture the falling value of the USD (which by some measures has fallen by more than 30% since 2000) driving up the cost of imports (i.e. virtually every manufactured good that you buy these days) and what we have is the portrait of an economy in real crisis. Add to this the substantial decline in relative liquidity, i.e. the widely touted “credit crunch”, and we have a potential Perfect Storm brewing, and certainly a rather sticky conundrum for monetary policy.

In any event, not only are gasoline prices painful and inconvenient, they are also having a multiplier effect on the much discussed recession that the government is vastly understating through a highly distorted CPI. The Bloated Plutocrat had this to say. “If you are relying on government statistics to understand the economy old boy, you are going to lose your shirt. Run for the Swiss Franc and Gold Bullion. The equity market is a total bear and the bond market is going to be flooded with punters and prats! Nothing’s going to change in the near term and neither one of the esteemed Senators likely to be elected in November have the intellectual capacity or political power to do a damned thing about it. Aside from the global shift in economic power away from the US in general, we are looking at conditions that bear some resemblance to the late 1970s, but without a Ronald Reagan to convince us that everything is going to be just fine.” The Bleeding Heart was somewhat less enlightening. “I suppose that the fuel / energy cost weighting in the CPI should be substantially increased, especially as those costs are disproportionately impactful on lower income groups. I know that fuel costs are definitely driving up the cost of tickets on the Martha’s Vineyard Ferry this summer!”

A CPI that weights total energy costs at less than 10% of one’s total monthly expenditure is at best inaccurate and, at worst, fraudulent. Were these costs more appropriately accounted for, adjusted inflation would likely be upwards of 5%, a level that is extremely disconcerting when looking at interest rates. Nevertheless, don’t expect a change in the CPI basket any time soon, the BLS think it works just fine…

Wednesday, May 14, 2008

Starbucks – Pretty Good After All…

Whether you love them, or love to hate them, the caffeinated equivalent of the fictional Fox Books (You’ve Got Mail) coming to destroy your neighborhood, or provide good coffee where the thrice-boiled muck beaker has reigned supreme, commands an opinion. Whether that opinion is entirely positive or of the more negative nature, the fact is that the company is firmly entrenched in pop culture and has transformed the ritual of morning coffee for millions around the world. The sin of over-expansion has moved from the realm of pundit commentary to a Wall Street factoid and has management pursuing a new strategy of closing down some outlets in oversaturated markets. Despite the slowed openings and some closings, the company has managed to stand by its commitments to the coffee growing community that while not exactly earth-shaking, are tangible.

Your Genteel Moderator is no fan of corporate social responsibility reporting. While occupying armies of people and consuming vast resources and time within a company, they have little to no impact on critics, and the rest of the world would rather make incisions in their own eyeballs with dull and rusty razor blades than read through the politically correct drudgery of such reports. Having attended, and even spoken at, a number of conferences dedicated to the topic of corporate social responsibility, it is my humble opinion that this is a field of activity so self-indulgent, self-congratulatory, and self-fulfilling as to rank right up there with the great Y2K consulting hoax. Nevertheless, serious companies that are willing to endure the horrors of the process, and the reasonable questions from their shareholders about the expense involved, and have their reports reviewed and verified by credible third parties, as Starbucks have done, do deserve some recognition for their efforts. It is reasonably certain that such recognition will not translate directly into share price increases, but they may have some positive impact on consumer off-take, and the congratulatory tone of some obscure blog will undoubtedly assuage any queries from the Board about the expense…

The Bloated Plutocrat was derisive. “I don’t know which so called ‘management consulting' firm invented this corporate social responsibility lark, but I’d like to buy their shares. They may have more fluff to sell. On the other hand, I better not hear about any companies in which I have a Board voice spending money on this nonsense. If people want to know whether companies are socially responsible or not (and why this should matter is beyond me – it should be profitability that they focus on), they should read the newspapers. Those bone-idle twits that call themselves journalists are forever harping on about the evil done by companies, except of course when they’re falling over themselves to print the bumpf fed to them by the PR agencies of the same companies!”

The Bleeding Heart was typically conflicted. “I do love a venti machiatto in the morning. But Starbucks is so ubiquitous and we certainly don’t want them running the little bakeries and coffee shops in Fairfield County into the ground. I suppose that as long as they are paying top dollar to coffee growers they are acting responsibly, but I wish they would keep the Pumpkin Latte on the menu year round…”

The fact is that any company that relies on CSR reporting to shore-up an image damaged by irresponsible business practices will have wasted time and money for either little result or a substantial backfire. If one is going to trumpet one’s own responsibility, it had better be reflected in the company’s core business practices. Regardless of the pundit opinions about Starbucks’ community impact, its pricing, whether it promotes homosexuality, is for or against Israel, or whether its logo is crypto-sexual, (people really have too much time on their hands) the biggest issues at the core of Starbucks business (besides sustained profitability) are its treatment of employees and the ethics of its coffee bean purchases.

The fact of the matter is that on both these issues the company does well enough to merit an above expectations conclusion. With the cost of healthcare benefits for its employees exceeding its total green coffee purchases, and a majority of those purchases being Fair Trade Certified (and, on average, some $0.20/pound higher than the Fair Trade mandated minimum), Starbucks has some empirically verifiable data to make the case that they are indeed acting responsibly in the daily conduct of their business. So, the next time you’re in a Starbucks, have paid your $7.50 for a bizarrely named mix of coffee and milk savagely beaten into a froth that occupies nearly half of your grande, and decided not to plump for a wireless connection, take a moment to read the treacle-sweet summary of their annual CSR Report. If you are able to stay-awake and/or quash the feelings of suicidal rage that it will produce in most people, perhaps you should consider a well-paid career in social reporting. If that doesn’t sound interesting to you, then simply note that while it is easy to take pot-shots at Starbucks, it turns out that they are pretty responsible when it comes to the things that really matter.

Thursday, May 8, 2008

Colgate-Palmolive Won’t Wash Hands of Sharpton Award

The well known maker of cleaning, health/beauty products, and toothpaste holds its annual shareholders’ meeting in New York City today, a city that the Rev. Al Sharpton, activist and President of the National Action Network (NAN), a national civil rights organization, has vowed to shut down with protests over the not guilty verdict in the Sean Bell shooting case. The National Legal and Policy Center (NLPC) is an ostensibly non-partisan, but decidedly conservative, NGO promoting ethics in the public and corporate sectors. This morning it denounced a response from Colgate-Palmolive Chairman, Reuben Mark, to its April 14 letter urging the company to “repudiate” a National Action Network Corporate Excellence Award for “fostering diversity in the workplace”. The response was a very politely worded “thanks for sharing”.

NLPC, which has a history of campaigning against Al Sharpton and Jesse Jackson, another well-known and sometimes controversial civil rights activist, wrote to the Colgate-Palmolive Chairman on April 14 demanding that he repudiate the award from NAN because, according to NLPC President Peter Flaherty, “Receiving a ‘corporate excellence’ award from Sharpton is a dubious honor indeed. His organization, the National Action Network, has been beset by legal and accounting problems for years, prompting a number of investigations. Moreover, recent media reports indicate that Sharpton may soon be indicted by a grand jury. Colgate-Palmolive received the award for fostering an ‘inclusive workplace.’ But who is Sharpton to be handing out such an award in light of his involvement in hoaxes such as the Tawana Brawley episode and the Duke rape case? Sharpton is not a legitimate civil rights leader.”

“Strong words and a tough stance by NLPC, but if being ‘beset by legal and accounting problems for years’ and ‘pending grand jury indictments’ were to become barriers to corporate engagement with politicians, it would mean the end of corporate lobbying on Capitol Hill.”, said the Bloated Plutocrat. “Colgate-Palmolive are shrugging off their extortion payments to NAN. This should come as no surprise to anyone. But with every pressure group out there, including the loony enviro-thugs, doing the same thing, the cost of doing business is being driven up sharply and tax write-off corporate philanthropy that would have gone to the arts or other good causes are being diverted to fill the coffers of every activist/stuntsman with enough media-savvy to carry off a ‘donate or pay’ scheme” he added. The Bleeding Heart was beside himself over the NLPC. “These right-wing hit-men hide behind the veil of ‘ethics’ when all they really are is another wet-work character assassination unit for the vast right-wing conspiracy that stole the White House for George Bush and dragged us into war. I’ll bet that Flaherty and his minions are out there digging away trying to fabricate some story about Sen. Obama at this very minute.”, remarked the Bleeding Heart.

While there is no question that NLPC has unearthed real issues of concern with regard to transparency and accounting rules in Sharpton’s dealings, this effort to force a “repudiation” of the NAN award that Colgate-Palmolive received looks a lot like the very type of NGO extortion to which the Bloated Plutocrat refers. The fact that NLPC chose to wait two and half weeks after receiving Mark’s response for the day of the Colgate-Palmolive shareholder meeting to comment on the letter is a transparent act of PR stuntsmanship lacking in both subtlety and good sense. Sharpton’s arrest yesterday during the protests he arranged to “shut down the City” will certainly generate more news coverage than NLPC’s press release and additional NAN organized protests blocking traffic today will cause more inconvenience and annoyance to the company than NLPC criticism. Colgate-Palmolive were recognized by a leading, if controversial, civil rights organization for doing a good job of fostering diversity in the workplace. Why should they repudiate that?

On the other hand, as Flaherty notes, they don’t seem that proud of it either. Perhaps it’s just a case of poor website management, but the NAN “Corporate Excellence Award” is not listed alongside the many other awards for promoting diversity in the workplace given place of honor under the rubric “Awards” on the company’s site.