Two Stories of "Falling Short": CPI Shortfall As a Measure of Inflation vs. Great Bandol Wines Unjustly Falling Short of Worldwide Admiration.

Today, we will focus on two distinctly unrelated phenomena, both of which are falling short of their intended targets. One of them is CPI, which is often being viewed as a proxy for inflation. The other is the Bandol wine from Provence, which is were we will begin our journey today. Yet, as George W Bush often said: Make no mistake - we will return to the world of macro Econ... it is just so much more enticing after a glass or two of great Bandol!

And the key to Bandol wine is high quality Mourvedre mixed with just the right amount of Grenache. What you get is a true liquid magic, and yet, it too falls short of the international recognition and admiration if rightfully deserves, with Chateau Pradeaux being the ultimate example of this gap between the unbelievable quality of these wines, and less than overwhelming wave of international popularity.

2019 Chateau Pradeaux, Bandol Rouge

Provence, France 2019

Blend: 95% Mourvèdre, 5% Grenache Noir

Chateau Pradeaux: A Legacy of Power, Tradition, and Mourvèdre Mastery

Few estates in France carry the weight of history and tradition like Chateau Pradeaux. Nestled in the heart of Bandol, this family-run estate has long been a cornerstone of Mourvèdre excellence. Its wines, renowned for their raw power, minerality, and astonishing aging potential, are a testament to both the indomitable spirit of the Portalis family and the rugged terroir of Provence.

The roots of Chateau Pradeaux date back to 1752, when Jean-Marie-étienne Portalis inherited the property from his grandmother. Jean-Marie-étienne, later known as a co-author of the Napoleonic Code and a negotiator of the Concordat under Napoleon I, marked the first chapter in this remarkable story. But the estate’s journey was far from smooth. It was ravaged during the French Revolution in 1789, further devastated by the phylloxera outbreak in the 19th century, and occupied during World War II.

The estate’s revival began during the war years, thanks to Suzanne and Arlette Portalis, who, with the support of Baron Leroy (the founder of the INAO), championed the Bandol appellation and the Mourvèdre grape. Arlette’s passion and dedication laid the foundation for what Chateau Pradeaux would become.

In 1985, Cyrille Portalis, the sole descendant of Arlette, took the reins (needless to say that he has a beautiful first name, since Cyrille is just another way to spell the name of yours truly). Under his stewardship, Chateau Pradeaux became a bastion of traditional winemaking. Today, Cyrille’s sons, étienne and édouard, have joined him, ensuring that the family legacy endures. The Portalis family remains resolutely committed to crafting wines that honor the estate’s storied past while embracing the potential of its future.

The Power and Patience of Mourvèdre

Chateau Pradeaux’s Bandol Rouge is more than a wine—it is a living testament to Provence’s unique terroir and an ode to the Mourvèdre grape. This thick-skinned, late-ripening varietal thrives on the rugged limestone hillsides overlooking the Mediterranean. At Pradeaux, only vines over 25 years old are used for their reds, while younger vines contribute to their celebrated rosé.

The estate’s commitment to tradition is unwavering. Grapes are harvested by hand and fermented whole-cluster using native yeasts. Aging takes place in enormous, neutral oak foudres for an extraordinary four years—double the minimum requirement for the appellation. The result is a wine of staggering complexity and structure, one that rewards both patience and respect.

A Glimpse Into Bandol’s Evolution

Over the years, Bandol’s winemaking has shifted dramatically. Once considered the Proven?al counterpart to Barolo or Bordeaux, Bandol’s reds were defined by their brooding power and long aging potential. In contrast, many modern producers now favor softer, more approachable styles, often incorporating Grenache and employing new oak barrels.

Chateau Pradeaux stands proudly apart from these trends. Its wines remain fiercely traditional, with 95-100% Mourvèdre, extended aging, and no concessions to modern shortcuts. This steadfast approach has earned Pradeaux a reputation as a torchbearer for the classic Bandol style.

A Wine That Commands Time and Attention

The Bandol Rouge of Chateau Pradeaux is an experience unto itself. Its youthful ferocity is built on layers of cassis, violet, black rock, and wild herbs. With time, these elements transform, revealing an intricate tapestry of flavors and textures. Whether enjoyed now with a lengthy decant or laid down for decades, this wine never fails to leave a lasting impression.

Decanting is essential for unlocking its depth. Serve it in large Bordeaux stems, and let it pair with hearty dishes like lamb shanks or wild game. The reward is a sensory journey through Bandol’s rugged beauty and Pradeaux’s enduring mastery.

A Legacy That Endures

The Portalis family’s dedication extends beyond winemaking. Their stewardship of Chateau Pradeaux ensures that every bottle carries the weight of history, the strength of tradition, and the promise of the future. From the chaos of revolution and war to the challenges of modern viticulture, Chateau Pradeaux stands as a symbol of resilience, excellence, and the unparalleled allure of Bandol’s terroir.

Chateau Pradeaux is not just a wine; it is a story, a memory, and a legacy waiting to be discovered.

And now, as promised we are switching gears towards our discussion regarding some shortcomings of CPI as a measure of inflation.

* Recently, I have outlined our main points regarding the geopolitical situation, advancing an argument of continuing upward pressure on interest rates across the globe, which is likely to be punctuated by the bursts of flight-to-quality retracements. Today, we consider the argument that inflation data may not be fully reflecting the "true story", thus understating the actual inflationary pressure, and the resulting upward momentum in interest rates.

* Needless to say that for us, MBS investors, inflation enters into our mental calculus in many different forms. Aside from the obvious driver of rates, inflation (especially, a "silent" or unrecognized one) is likely to "eat into" the disposable incomes without an offsetting effect of rising wages. Thus, the already stressed DTI surface of mortgage borrowers will be tested once again, with a growing number of homeowners unable to refinance, even when they have an "economic" incentive to do so due to the DTI restrictions. When OTM, this growing army of high DTI borrowers will prove to be more prone to credit problems, thus resulting in higher DLQs.

* Despite the recent relief in U.S. inflation data, the numbers often don’t align with what many of us "feel" via our wallets. Although the CPI showed just a 2.4% increase over the past year through September, some major expenses that don’t appear in this measure continue to weigh heavily on household budgets. With costs still high from the pandemic, many essential expenses like property taxes, loan interest, and tips remain uncounted for in official inflation gauges.

* A large part of the CPI’s disconnect from everyday spending lies in its scope. The CPI tracks changes in the cost of goods and services but excludes major costs like property taxes and interest on loans. For instance, although credit card debt across the U.S. totals over $628 billion monthly at interest rates near 24%, these interest payments don’t show up in the CPI. Thus, while the purchase of an item might be included, the growing interest isn’t, yet it can heavily impact consumers’ overall financial picture.

* Housing expenses (something I love to talk about) further highlight the CPI’s gaps. The index doesn’t consider housing as a routine cost, so it leaves out mortgage payments, property taxes, and even parts of home insurance. These omissions are especially relevant, as home-related expenses continue to strain many budgets. The CPI includes only the personal property portion of home insurance, leaving out the cost of insuring the structure itself, often the larger component of premiums.

* Other indexes, such as the Personal Consumption Expenditures (PCE) price index, also struggle to cover the nuances of consumer expenses like health care out-of-pocket costs. Adding to the mismatch, shifting consumer behaviors have introduced fees that take a while to be accounted for, or may be left out entirely. Airline baggage fees, restaurant service charges, and grocery bag fees have all become common but aren’t always promptly incorporated into CPI.

* There are also more obscure items that avoid detection by the "CPI radars" such as winnings (gambling, lottery, predictions of MBS basis), unregistered tipping, weed consumption, and my favorite speeding (as well as other) tickets. All of these "unaccounted" drivers lead to increasing divergence between the "reported" CPI and real inflation, thus fundamentally understating the risk of higher rates, which is an essential ingredient in most fixed income allocation algorithms.

Thank you so much for traveling, thinking, and drinking with me!

Happy Thanksgiving!

Sincerely Yours,

Kirill A. Krylov, CFA, PhD