- The New Fed Paradigm / The Daily Reckoning - - Elli -, 26.04.2004, 23:13
- The Daily Reckoning/ Deutsch - Sorrento, 26.04.2004, 23:48
- Vielen Dank. Schoen, dass es das wieder gibt! - Pulpo, 27.04.2004, 00:49
- The Daily Reckoning/ Deutsch - Sorrento, 26.04.2004, 23:48
The New Fed Paradigm / The Daily Reckoning
-->The New Fed Paradigm / The Daily Reckoning
London, England
Monday, 26 April 2004
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*** We are still waiting for something to happen...
*** ECB won't bend... inflation breaches"ceiling"
*** Locusts in Nebraska... tax defaults soar... and more!
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We wait. We wait.
We're waiting for something to happen.
Stocks are, generally, too expensive. The dividend yield on
most stocks is less than 2%. Investors are merely gambling
that the stocks will go up. And yet, they are already near
the top of their historical price range.
Real estate, generally, is too expensive also. Where can
you get a decent return, after costs, on real estate? There
are probably some areas, but most buyers are not investing
for yield... they're speculating on higher prices, and
leveraging themselves heavily with mortgages, as it if were
a sure bet.
Bonds? Our guess is that bonds may surprise investors by
not collapsing. Now that Greenspan has officially denied
deflation, it seems a near-certainty. Deflation would mean
lower, not higher, yields... and, obviously, higher bond
prices.
But so what? We do not invest on our hunches. Bonds could
go down as well as up. And whatever gain is left in bonds
is small potatoes compared to the immense losses investors
will suffer when inflation finally returns.
So we count our gold coins and wait. Cash - in dollars,
euros, yen... or gold - is what you end up with when you're
waiting for something to happen.
Meanwhile, something very interesting is happening at the
meeting of the G7 get-together. Gary Duncan reports in
today's Times of London that both French and German
government officials are annoyed at Jean-Claude Trichet,
president of the European Central Bank.
Remarkably, Mr. Trichet seems to be taking his
responsibility to protect Europe's money seriously. German
and French politicians would like a cut in interest rates
to give their economies a little boost. But Mr. Trichet
reminds them that his job is not to help them get re-
elected; instead, he's supposed to control inflation.
Economic growth in Euroland is already as high as can be
expected, he points out. Besides,"Inflation in eurozone to
breach ceiling," says a Financial Times headline. This is
no time to cut rates, says Trichet.
How the huns and frogs must envy their American
counterparts. While the rigid Monsieur Trichet seems
unwilling to bend even a finger to help inflate the
European economy, America's own central banker, Mr. Alan
'Bubbles' Greenspan, is pure jello in comparison. His
masters in the White house seem able to pour him into any
shape they want - no matter how unnatural or perverse.
Federal deficits, bubbles in the stock and real estate
markets, consumer debt, adjustable rate mortgages - Mr.
Greenspan has never met a mold so awkward or uncomfortable
that he couldn't get into it when the occasion called for
it.
His"emergency" 1% lending rate will have to crack
sometime. We wait for it to happen... and save our cash for
the moment; we might need it.
While we're waiting, here's more news from Eric, our man-
on-the-scene in Manhattan:
------------
Eric Fry, writing from Wall Street...
- On three consecutive mornings last week, your New York
editor ambled into the glistening new Time Warner building
at Columbus Circle to be the guest host on CNNfn's"Market
Call." And on three consecutive mornings last week, a
procession of Wall Street pundits also appeared on the show
to gush about"surprisingly strong" earnings reports and
"surprisingly robust" economic growth.
-"It's a party!" one commentator declared.
-"If it's a party," your editor replied,"the bond market
is the designated driver... soberly looking on while the
stock market revels. The 10-year Treasury note will be the
key security to watch for the balance of 2004," your editor
continued."The bond market's trend will determine the
stock market's trend."
- The Nasdaq partied all week, gaining 2.7% to 2,050, while
the Dow added only 20 points to 10,472. But both the Dow
and the Nasdaq nosed back into the black for the year to
date. The U.S. dollar also whooped it up last week, jumping
more than 1% to $1.184 per euro. But the dollar's delight
was gold's grief, as the monetary metal slumped $5.90 to
$395.70.
- All week long, favorable economic reports flew across the
newswires like champagne corks. Technology companies from
Motorola to Microsoft dazzled investors with strong first-
quarter earnings, as did homebuilders, cable companies and
numerous other enterprises.
- Capital goods companies also delighted investors with
their quarterly reports. Apparently the economy has become
so strong that companies are once again buying the kinds of
things that rust in the rain - Caterpillar, Ingersoll-Rand
and Parker Hannifin all reported stellar results. Friday's
stunning durable goods report - up 3.4 percent in March -
suggests that capital spending is proceeding at a
blistering pace.
- So far this earnings season, nearly 90% of the S&P 500
companies to report earnings have met or exceeded the
consensus earnings expectations, according to Thomson First
Call. Earnings results are averaging a hefty 26% growth
from the 2003 period.
- But lest we get carried away by the glad tidings, we
should bear in mind that interest rates are rising even
faster than the collective glee over economic strength.
Last week, the 10-year benchmark Treasury note fell for the
fifth straight week, as its yield jumped from 4.34% to
4.46%. And as we noted last week,"Neither Wall Street nor
Main Street is well prepared for rising interest rates. The
shares of banks, mortgage lenders, brokerage firms and
other interest-rate sensitive stocks make up more than 25%
of the S&P 500. So if the financial stocks struggle, so
would the entire S&P 500."
- [Ed note: Back on the DR website, Dan Denning chimes in
on the subject of Wall and Main Street's unprepared-ness
for rising interest rates... concluding that the Fed finds
its hands tied:
Why The Fed Can't Raise Rates
http://www.dailyreckoning.com/body_headline.cfm?id=3891 ]
- The stock market's many"closet financials" might also
struggle in a rising rate environment. Caterpillar, General
Motors and Ford all leaned very heavily upon their in-house
finance operations to produce their surprisingly strong
earnings. Continuing what has almost become a tradition in
Dearborn MI, GM's finance operations contributed more to
the company's bottom line than its auto operations.
Tellingly, however, the profit from it sizeable mortgage
operations dropped more than 30%. If rates continue rising,
GM's non-auto profits will continue sliding.
- Which brings us back to the bond market. Alan Greenspan
promises that interest rates will rise"at some point." We
believe him. Indeed,"some point" seems to have arrived
already. The 10-year Treasury note yield has jumped from
3.77% to 4.46% in less than two months.
- Alan Greenspan hopes and believes that gradually rising
rates will slow the economy GRADUALLY - down to a
"sustainable" rate of growth. Unfortunately, Greenspan
wields even less power over effect than he does over cause,
rumors of the chairman's omnipotence notwithstanding.
Perhaps rising rates will brake the economy - and the stock
market - as gradually as hoped. On the other hand, rising
rates may brake the economy as abruptly as a stick through
the front spokes of bicycle.
- Already, mortgage demand is toppling end-over-end. The
Mortgage Bankers' Association's index of applications
dropped 22.1% in the week ended April 9 - the fourth
straight decline - while the index of applications to
refinance mortgages plunged 30.7%. Both declines were the
biggest in nearly nine months.
- Maybe the stock market will"learn" to cope with rising
interest rates, like a dog that learns to walk with three
legs... But don't expect it to set any speed records.
------------
Bill Bonner, back in London...
*** Durable orders surprised economists on Friday - rising
5 times as much as expected. Bonds fell in reaction.
Investors took the new orders as evidence of an economy
heating up. Higher interest rates, they believe, will
follow.
*** But here is the problem, dear reader. The average
consumer has leveraged himself to the margin at rates that
Greenspan set at artificially low levels. They have become
like a curious breed of over-domesticated animal that can
no longer survive in the wild. Rising rates will strike
them like a particularly cold winter.
***"Tax defaults soar as homeowners struggle," reports the
NY Post.
***"Grasshoppers Threaten Nebraska Crops," adds the
Associated Press.
*** Venice was an agreeable place to spend a week. The city
is full of renaissance art... voluptuous churches... and
elegant old buildings with the plaster falling off. When we
arrived, we were a little surprised and worried to find
that our apartment was not located in the heart of the
city, but on the island of Guidecca, across a wide canal
from the piazza de San Marco. But it was only a few minutes
ride by water taxi from the main part of Venice and the
water proved a blessing. The city has a museum-like quality
to it, with tourists - including our own family - wandering
through as though it were the Louvre. As in a museum, the
restaurants were over-priced and not very good. And, as in
a crowded museum, you find yourself bumping into other
tourists every time you turn around. Giudecca was a relief;
Italians lived there.
*** On this day, in 1889, just 6 days after the birth of
Adolph Hitler, one of the world's great philosophers was
born - Ludwig Wittgenstein. More about Wittgenstein later
in the week.
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---------------------
The Daily Reckoning PRESENTS: Inflation is not dead, the
BLS admits... which, in Mogambo-ese, means it must be wildly
flourishing beyond control. So why then does the Fed
maintain its 'emergency rate' of 1%?
THE NEW FED PARADIGM
by The Mogambo Guru
"For at least some investors," writes James Gipson of the
Clipper Fund,"the relevant lesson of history seems to be
that repeating the major mistake of the recent past is a
really great idea."
To paraphrase in Mogambo-ese:"For the morons in the
government and the Federal Reserve, the relevant lesson
seems to be ignoring the One Great Lesson Of History."
Namely, creating excess money and credit is a recipe that
does NOT result in a delicious chocolate cake, but rather
results in something else that is chocolate brown, alright,
but much stinkier and spread all over everything in the
economy after it hits the proverbial fan.
And the worst part is, this latter chocolate-colored
substance is starting to appear where it's least wanted.
Especially in prices, which are zooming skywards for
everyone but, apparently, Sir Alan and his merry men at the
Fed.
"Fed Officials Should Get Out and Shop," says Caroline Baum
in the title of her article on Bloomberg."In the rarified
atmosphere at 20th and C Streets, better known as the
Federal Reserve Board, there is no inflation. In the
parallel universe in which most of us live, prices are
going up."
Ms. Baum is doubtlessly referring to the Bureau of Labor
Statistics, whose latest fraudulent report revealed a 0.5
percent increase in the CPI, and a 0.4 percent increase in
the core index, which excludes food and energy.
But"The price hikes are pervasive and led by the service
sector, which is not energy dependent," says Bill
Dunkelberg, who is the chief economist of the National
Federation of Independent Business in Washington. So price
rises resulting from the rise in oil are not causing this
price inflation, he says.
Mr. Dunkelberg has also taken a look at recent prices
action in finance, insurance and real estate, and found
that nobody cut prices, while 43 percent of the companies
raised them. Similar results came from the March NFIB
survey, which noticed"the most aggressive price behavior
seen since early in 2000," with 19 percent of all firms who
have not had their phone service cut off and were
hightailing it out of town one step ahead of the collection
agencies, and who bothered to answer the phone, reported an
increase in average selling prices.
So where does the Greenspan Fed get the idiotic idea that
there is some deflationary crisis brewing? Where in the
hell are the damn prices that are falling that are
requiring interest rates to sit at their lowest level in
half a century? Nobody can see them except this Greenspan
twit and his little playmates at the Fed.
And this is very dangerous, because before you know it, the
inflation that this Greenspan character doesn't see could
turn into the hyperinflation he doesn't see. What happens
in a hyperinflation is that people start buying things,
anything, everything, desperately getting rid of their
money, spending all their cash to stock up on these things
that are going to cost more in the future because their
money is going to be worth less in the future. And then
prices rise like they were rocket-propelled in response to
this heightened demand. The result is that everybody who
has any money that they were not able to spend is gradually
bankrupted.
And sure enough, Census Bureau statisticians report that
"Some farmers have been pre-paying for their annual supply
of fertilizer, getting a discount up front and immunizing
themselves against price increases down the line. Some
fertilizers are up 25 percent in price in the past year."
Then all this panicky buying makes prices go up even more,
as a result of the old supply-demand dynamic, thus
reinforcing the hyperinflationary price rises. Which causes
more panicked buying. Which causes prices to rise even
more. Which causes more panicked buying. Which causes,
well, you probably get the idea.
But you wonder where the AARP is in all of this, as the
Social Security benefits that its members receive every
month are not going up nearly as fast as the rise in
prices. The main reason for this decline in purchasing
power of retirees is that the Cost of Living Allowance
(COLA), with which monthly Social Security benefits are
adjusted to for inflation, IS the fraudulent Consumer Price
Index! So the government has engineered a fraud for the
express purpose of robbing a lot of old people. Or as
Richard Benson said in the title of one of his recent
articles,"Using the Consumer Price Index to Rob Americans
Blind."
In a similar vein and in a separate report, Bloomberg
reports that in the"U.S. Economy: Consumer Prices Rise,
Trade Gap Narrows." And sure enough the Commerce Department
said that the trade deficit narrowed to $42.1 billion from
a record $42.5 billion. Whoopee. A measly $400 million
dollar change, or, in percentage terms, 1%, which is
probably statistically insignificant, according to court-
appointed psychiatrists who posit that 1% is the chance
that I will ever say anything that is not laughably stupid.
"So far this year," Bloomberg tells us,"consumer prices
are rising at a 5.1 percent annual rate." Perhaps this has
something to do with the fact that"the dollar has lost 11
percent of its value in the last two years against a basket
of currencies from the biggest trading partners."
Against all of this surging inflation, which you will
remember is what the Mogambo confidently predicted as the
lone voice squeaking in the wilderness like some brain-
damaged rodent, pitted against the mindless cacophony of
the multitudes of the other clueless jerks who bill
themselves as"economists" and who, almost to a man, all
took time out from filling in their Daffy Duck coloring
books to opine that there was no inflation, and that
inflation was dead, and how we will all spend the rest of
our lives living in a world with no inflation, and how the
Fed printing up all that money and creating all that credit
had no connection to inflation, and blah blah blah.
Jackasses.
Anyway, against all of this surging inflation, the Labor
Department has been working double shifts to massage every
bit of inflation from every price rise so that they could
issue one of their laughable reports on the Consumer Price
Index, so that they could show that inflation was non-
existent. But even those corrupt wonks have now been
overwhelmed by the sheer deadweight tonnage of evidence
that inflation is NOT dead, but that it is rising by, at
least, 5.1% a year. So you can take it to the bank that if
those corrupt weenies are now backed into a corner enough
to admit THAT, then the REAL inflation in America is
undoubtedly much, much worse.
Of course, there are the inevitable opinions that the Fed
will now be forced to raise interest rates to combat this
surging inflation. I say, hahahaha! Says who? Who's going
to make them? You? Hahaha! The Fed can sit on 1% rates
forever if they want to, as far as they are concerned. And
they probably will, as they have shown absolutely zero
intention of doing what they are supposed to be doing all
this time, which is to keep inflation from destroying the
USA and to keep the idiot banks from financing ruinous
bubbles, and I have serious doubts, make that VERY serious
doubts, that they are going to start now.
In fact, Dan Denning of Strategic Investment says that the
Fed CAN'T raise rates,"... until the final piece of the
inflation puzzle is in place: rising consumer incomes.
Until that happens, rising prices will simply make
consumers cut back on spending. Throw in rising interest
rates and energy prices and you have two more factors which
lead to slower consumer spending and economic growth.
Bottom line: the economy can't grow until the consumer can
spend more. And the consumer can't spend more when prices
and interest rates are rising."
Seems about right to me. So where does that leave us? Mr.
Denning says,"Here's a prediction for you - the Fed will
become so concerned with the market pricing in rising rates
(and pushing mortgage rates up) that it will cut rates by
25 basis points at its May 4th or June 30th meeting."
So the old aphorism about how the Fed is supposed to take
away the punch bowl after the party really gets started is
now proved false. The new Fed paradigm is something more
bizarre: the Fed is pouring pure grain alcohol down the
throats of partygoers who are passed out drunk on the
floor.
Regards,
The Mogambo Guru
for The Daily Reckoning
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