The Cost of Green Eggs and Ham

Young readers know that March 4th is the birthday of Dr. Seuss. Many parents trip their tongues over Seuss stories like "Green Eggs and Ham". "Do you like green eggs and ham?/I do not like them, Sam-I-am./I do not like green eggs and ham".

Our son wields a wild spatula when making his April Fool's Day green eggs and ham. Sometimes his culinary skills warrant a cost per item analysis the same way the U.S. Department of Labor reports the Consumer Price Index (CPI).

CPI reports tell us what a "basket of goods and services" costs using a benchmark dating from 1982-1984 Importantly, the CPI becomes one of many components within inflation measurement models. The CPI "basket of goods" leaves out green eggs and ham, however, it includes breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks. CPI reports account for 7 or 8 categories of goods and services in the U.S. economy. If you recall Psychology 101, each category coincides with Abraham Maslow's basic or physiological "Hierarchy of Needs".

When the U.S. Bureau of Statistics announces the CPI (most countries have a similar index), Wall Street listens because price increases suggest inflation concerns. When prices inflate, wallets deflate making consumers shy about spending. As you may observe, consumer spending drives worldwide economic productivity; for example, our spending habits account for nearly two-thirds of all U.S. economic activity.

Although statistical patterns for Internet spending seem scant, the effect appears the same. Mall shoppers and Internet surfers open or close their wallets based on value and price. Inflated costs suggest decreasing value for products or services. Likewise, inflation pushes credit card interest rates higher, thereby adding another burden to the consumer.

Inflation decreases the value of the dollar also. Ask your grandparents what they could purchase with a dollar compared with what that same service or product costs them today. Their experience explains inflation with more colorful expression than the CPI.

Investors become unnerved by inflation as evidenced by Wall Street sell-offs when CPI numbers go up. When interest rates increase, the cost to borrow increases making it more difficult for corporations to borrow for expansion, earnings decrease and stock prices stagnate.

Inflation numbers since 1926 average about 3.1%. In 1980, inflation peaked at 14%. High interest rates attract investors to bank certificates of deposit. However, investors often overlook and misunderstand "real rates of return". If a bank certificate of deposit earns 5% annually and the inflation index reads 2.5%, then your "real rate of return" becomes 2.5% (5%-2.5%). When bank certificate of deposits paid 16% in 1980, the real rate of return provided a measly 2% (16% - 14%), and then U.S. investors paid tax on that 2%. If you choose bonds or certificates of deposit as investments, consider laddering your maturities (e.g. with $100,000 to invest have $10,000 come due every year for ten years).

Stock or equity securities out perform bonds and certificates of deposit with returns exceeding inflation numbers. However, when inflation increases, stocks go down in value initially. Stock investing seeks long term returns which average about 11% since 1926. Since inflation averages about 3.0% during the same time period, stocks provide an 8% real and reasonable rate of return. Stocks, including stock mutual funds, confront investors with greater short term risk while offering higher real rates of return over long term time periods. This risk reward trade off allows you to purchase your green eggs and ham during any economic cycle.

"I learned there are troubles of more than one kind./Some come from ahead and some from behind." - Dr. Seuss

About The Author

Ray Randall serves clients as a registered investment advisor with his firm, Ethos Advisory Services, Essex, Massachusetts http://www.ethosadvisory.com, and coordinates the developments at Echievements http://www.echievements.com.

---

Every Baby Deserves a Moses Basket from SAHM Baby Baskets! (Wholesale Welcome)

---

Work From Home?
Learn to Earn Online?
Click Here Now!

Better Investing Made Easy

If there were one piece of advice that an investor... Read More

Retirement is Never Urgent Until

If you're like many people, your retirement savings have not... Read More

The Benefits of Laddering Your CD Investments

If you've decided to stock some money away in a... Read More

Making Your Investment Dollars Work for You

Investments are scary for some people, especially those who have... Read More

How Do I Start Investing Online and What Are Some Basic Tips?

If you are new to investing online, don't put your... Read More

Investing for Retirement - Not an All or Nothing Play

In 1519, Hernando Cortes, beached on the shores of unexplored... Read More

Copy Cat or How to Use a Successful Trading System

How many books have you read about successful traders? How... Read More

Focus Your Investments on the Long Term

"All human power is a compound of time and patience!"... Read More

Sitcom Investing

A fickle stock market encourages good-humored mockery.Recently, as I watched... Read More

Investing and the Fear of Regret and Greed

People tend to feel sorrow and grief after having made... Read More

How to Buy to Let

Find out everything you need to know about buy to... Read More

Poll Names Coin Laundries Best Investment For 2005

According to Morton Pollack, CEO of PWS, The Laundry Company... Read More

An Investment Real Estate Strategy Unknown To Most Is A Negative Amortization Loan

If you want to make the most of your personal... Read More

Wit and Wisdom on Money, Wall Street and Success - Part #4

Can you concisely summarize your investment philosophy in a few... Read More

Investing in Car Dealerships: Doing Your Homework

This article attempts to help give the investor a broader... Read More

Raising Capital in Today?s ?New Economy?

We've helped a number of clients develop business plans and... Read More

Investing In or Owning Drug Lab Properties

Clean Up (includes the insides and the outside of a... Read More

Before You Invest You Must Read This

It is important to answer the following questions before you... Read More

Franchise Investing, Franchise Opportunities and Franchising Renewals

Have you considered buying a franchise instead of trying to... Read More

Buying Florida Investment Properties and Where Its Hot

Relaxing in Style: Florida Investment PropertiesIn Florida, relaxing in the... Read More

How to Use Annual Report

There are many steps in calculating the fair value of... Read More

In a Time of Need

As I take my leisurely walk with my dog through... Read More

Getting Started Investing is Often the Hardest Part

There are several reasons people give for not investing their... Read More

Forex Trading Best Practices

FOREX, the term for the FOReign EXchange market, is an... Read More

Bankers in Denial

Denial is a ubiquitous psychological defense mechanism. It involves the... Read More