Friday, January 25, 2013

Two Buck Chuck: The Canary in the Coal Mine

Coal Miners carried canaries underground into the mines. If a canary keeled over and passed out or died, then the miners rushed out of the mine because the gasses, such as carbon dioxide or methane, reached deadly levels in the mine.

Trader Joe’s most famous product is Charles Shaw,a brand name for wines, such as  cabernet sauvignon, chardonnay, merlot, pinot grigio, sauvignon blanc, shiraz, vaudieguie, and white zinfandel. Charles Shaw, produced by Bronco Wine Company, is best known as Two Buck Chuck. It sold for $1.99 in California for 11 years. Boone’s Farm, Thunderbird, and Bartles & James had their day in the sun, but only Two Buck Chuck is sold by Trader Joe’s - about 5 million cases last year. Trader Joe's out-Galloed Gallo.

Trader Joe’s raised the price of Two Buck Chuck 25% on January 16 to $2.49. That’s inflation. The new nicknames for Two Buck Chuck are Upchuck and Inflation Chuck.

A bottle of Inflation Chuck’s Cabernet Sauvignon quaffing Subway’s 11” footlong sub tells it all – food inflation.

Prices rise and sizes decrease throughout the food industry, but the 25% increase in Two Buck Chuck is the canary in the coal mine. It hits us with inflation.

We’re used to volatility in meats, fruits, and produce, but not the steady as a rock Two Buck Chuck. It’s a rude awakening.

The government tells us inflation is under control. The official rate of inflation from December 2011 to December 2012 is 1.7% with food rising 1.8%, down from 4.7% the preceding year. Fuel rose 1.7%.

Prices at the supermarket belie the government’s 1.8% figure. Prices shoot up while sizes drop. For example, 16 oz. is now 14.4oz, a ten percent cut.

Energy prices are rising, driving up costs throughout America.

Oil is rising again, for seemingly little discernible reason. Actually, the doubling of oil in recent years is the result of the fall of the dollar over the past decade. Oil is traded internationally in dollars. As the dollar falls, the sellers of oil want more dollars in exchange.

One sign of inflation is rising commodity prices, such as copper and oil.

Inflation is a major threat because the Fed has been printing money, about $85 billion monthly to buy back bonds and mortgages under “quantitative easing,” QE3. It has printed about two trillion dollars in 4 years.

A second major factor, in addition to the supply of money, is its velocity. Banks, for now, are sitting on the money from the Fed. When they start issuing it out, such as in loans, inflation will heat up. Money will flood the economy.

President Obama’s inauguration speech was not reassuring. He wants to raise taxes, but not curb spending in the three entitlement programs driving the trillion dollar deficits: Medicare, Medicaid, and Social Security. These programs are unsustainable in their current state.

Purchasers of the government’s debt will soon be demanding higher interest rates to offset the increased risks.

The risks are even greater for state and local governments with shaky finances.

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