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Someday, something will happen.
But not yesterday. Stocks went up. Bonds went up. The dollar went down. Gold rose $2.50.
Investors are still trying to decide what Greenspan meant the day before...and what it foretold for the day after.
We doubt that it matters what the Fed chief said. First, because he doesn't know anything more than anyone else. And second, because even if he did know, he probably wouldn't say.
"Rates to rise eventually, Greenspan won't say when," summarized a newspaper headline, helpfully.
Even if rates were to rise tomorrow, it is not certain how investors would react. Yes, higher rates would add a dangerous new straw to a nation of humpbacked debtors. Already, judging from the statistical evidence, America's borrowers are schlepping along with the heaviest debt loads in history. Debt service payments, as a percentage of wage income, is the highest it has ever been.
Of course, the self-same Fed chairman who has investors wondering about the next rate increase is the same economist who claims that this outsized consumer debt burden is nothing to worry about. Consumers may owe more money to more people than ever before, he says, but the prices of their houses and stocks are rising.
Their stocks rose yesterday. Whether they will rise today or not, we don't know. And neither does the Fed chairman. Stocks go down as well as up. And today's stocks could go down 50% and still not be exceptionally cheap.
Likewise, houses have gone up in price. We understand how this makes it possible for a homeowner to borrow more. What we have been unable to figure out is why Alan Greenspan believes the extra debt poses no problem. Yes, he could sell his house and pay it off. But where would he live? All houses rose in price...not just his.
Alan Greenspan has also given his approval to homeowners who speculate on interest rates, choosing adjustable rates over a fixed one. Surely, rising rates will weigh heavily on the man's reputation; people who followed his advice will have to make higher monthly payments. Already, their expenses often exceed their incomes...what will they do when their expenses rise, and borrowing is more expensive?
We don't know. We will find out, sooner or later. Eventually, the consumer's hump will bust. But a small increase in the fed funds rate might be just another straw...not the final one.
Investors might take it well...or badly. They might be reassured that Greenspan is exercising his authority to guide the economy in a responsible, measured way. They might bid up stocks...anticipating that things will get better and better, forever and ever. They might sell their euros and buy dollars, too, confident that the dollar will stay the world's money for eternity. They might go and refinance their houses...taking advantage of an opportunity to 'take out equity' before rates rise further...and while there's still equity left to take out.
Then again, they might have already done all that. We will see...
Here's more news...
Addison Wiggin, reporting from 'Charm City'...
- The headlights of the assembled cars illuminate the cliff top. Far below, huge breakers smash the rocks, the white froth exploding in all directions. But the gathered teenagers aren't watching the sea...their eyes are focused on the dark track leading away from the summit. They know something big is about to occur, but they know not what...
- From around the corner come the two speeding cars, their engines roaring, and their headlights piercing the gloom. As they hurtle down the track toward the precipice, the crowd steps back, holding its breath, transfixed. Our daredevil hero, Sir Alan Greenspan, is racing against inflation; the last man to bail from his car is the winner. This is a game of chicken, and the future prosperity of America hinges on the result.
- Greenspan has the pedal to the metal. He is pushing the economy as hard and fast as he can, trying desperately to squeeze an extra ounce of power from the engine. He needs growth and he needs jobs - and until he gets them, he cannot jump, and he cannot brake.
- "As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging. As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building. But the Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome," cooed the valiant gladiator in his testimony.
- Meanwhile, inflation is catching up. And not only is it catching up; it's accelerating, too. Should inflation come out on top, Greenspan will have to bail prematurely, dashing the hopes of his supporters. Yesterday, a government report showed March producer prices rose by 0.5% or 6% annualized.
- "Go, Alan, go!" shouts the commissioner who, the night before last, following the testimony, pleaded with Greenspan not to raise rates - her state is still suffering from acute unemployment, she reasoned. But the commissioner is not alone. George Bush echoes the commissioner's support, as do all the leaders of America's businesses.
- And the stock market cheers, too...yesterday, it had its best day in nearly a month. The Dow racked up a triple- figure gain, closing at 10,461, up 1.4% or 144 points on the day. Likewise, the S&P and the Nasdaq both showed their encouragement, gaining 16 and 37 points respectively to close at 1,140 and 2,033.
- But cheering loudest of all are the homeowners of America. They whoop and they sing and they dance...thanks to Greenspan, they are rich. "Quite frankly," cautions Steve Sjuggerud, "everybody where I live believes that real estate prices can only rise. There is nobody here that believes that real estate prices can fall...which is exactly my cause for concern..." [What should you do about it? See Steve's article on the DR website...
- Paradoxically, it is the same inflation the lumpen profess to deplore that is making them rich. But instead of guarding the additional value bestowed on them, homeowners refinance their houses with adjustable rates and spend the proceeds...on SUVs and stocks. Now they, too, depend on Greenspan and his low rates.
- "You won't believe what the two-bedroom row home next door sold for," challenged one of our new Baltimore-based colleagues this morning, "...$345,000! In January 2002, it sold for $110,000, and then in October 2003, it was sold again for $252,000. Now look!"
- "The average sale price of homes in the Baltimore area jumped almost 20% last month, the highest year-over-year price increase in the last five years and another jolt to the region's torrid housing market," proclaims the Baltimore Sun.
- And worse still: "To buy a home in New York, you practically have to be a millionaire," reports the Daily News. "Prices of homes in all five boroughs have risen through the roof, with average selling prices going up as much as $220,000 from a year ago. Manhattan leads the way: The average sales price of an apartment in first quarter of 2004 rose 28.2% since a year ago to nearly $1 million..."
- Fortunately, everyone is a millionaire these days, and if you aren't, well, don't worry, there is bound to be someone nearby willing to lend it to you (in return for the deed to your house, of course).
- All we can do is hope that this episode follows the right script: Inflation's black leather coat catches the door handle as he tries to eject himself from the speeding car, and he plunges to his death. Meanwhile, his opponent smoothly tumbles out of his car at the last moment, and is left staring through the dust at the smoldering wreckage below. But remember, our hero is no James Dean; he's Alan Greenspan - rebel without a clue.
Bill Bonner, back in Venice...
*** 'Layoff events' declined in the most recent reporting period.
*** Producer prices rose 0.5% last month. But don't worry, dear reader. Alan 'Bubbles' Greenspan has both inflation and deflation under control.
*** As Addison notes above, colleague Steve Sjuggerud is concerned that an international housing bubble may have formed. But down in Argentina, he sends word that real estate prices go down as well as up:
"Citibank had spent $65 million fixing up what some consider to be the nicest hotel in South America...the Llao Llao Hotel in Patagonia. Not long after, [my friend] Eduardo was able to acquire the hotel from Citibank...for the equivalent of $13 million dollars.
"This type of story is repeated over and over...including a big steal...buying up the equivalent of New York's Central Park in Buenos Aires for next to nothing from a bankrupt soccer team (Boca Junior). This jewel could earn...hundreds of millions in revenues when they decide to develop it (in the next few years).
"Eduardo has cash when nobody else does. Simple as that. When the economy goes bust, and everyone is up to their eyeballs in debt, Eduardo is able to swoop in and buy assets on the cheap. It is brilliant. He sits and waits, ready with cash, knowing which assets he interested in, and he buys when they're desperate to sell. He may wait many years. But Argentina has had many crises, and he has built quite a portfolio.
"Said another way, Eduardo has no debt when everyone else has debt.
"Shares of Argentine stocks lost over 90% of their value in dollar terms. And companies that had big debts are now stuck, having to give away everything to rid themselves of the debt they took on.
"Argentines took on debt just like Americans are taking it on now. Now the U.S. looks more dangerous than Argentina in a way...as Argentines have no mortgage debt, while Americans are up to their eyeballs.
"Eduardo is a great model of how to survive and prosper when a debt bubble bursts...Here's what you do:
1) Have a ton of cash when nobody else does. Your cash will go a long way when people are desperate for it.
2) Have no debt when everyone else has debt. After the debt bubble burst in Argentina, credit has been impossible to come by. When everyone else is upside down, you're in a healthy position..."
*** [Editor's note: Technical gremlins have stolen your editor's promised essay for today, on the colorful history of Venice and its very own 'clash of civilizations.' But fear not...below, you will find his epistle from Rome instead, another Italian city with imperial pretensions...]
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The Daily Reckoning PRESENTS: A history of the rise and fall of Rome, Bonner-style. This DR Classique was first aired on April 18, 2003, almost exactly one year ago.
EMPIRE OF DIRT
by Bill Bonner
You could have it all My empire of dirt I will let you down I will make you hurt
- Hurt, by Trent Reznor of Nine Inch Nails "What I don't understand," Elizabeth began a conversation on our last day in Rome, "is why the barbarians - the Huns, the Goths, the Vandals and so forth, wanted to destroy the empire? They could see that people lived better inside the empire than outside...I mean, they had central heating, warm baths, art...and just look at all those beautiful buildings. Wouldn't it have made more sense for them to join it, rather than tear it down?"
We had no answer, save resignation.
"Yes, well, you might as well ask why the Romans went to all the trouble to build up their empire in the first place? Wouldn't it have been much more reasonable to enjoy life here in Rome...?"
And here we offer readers a history of the rise and fall of the world's greatest empire, as brief as the latest Italian underpants.
In the 8th century B.C., Rome was nothing more than a collection of villages along the Tiber, inhabited by a collection of tribes, principally Latin, Sabine, and Etruscan. Gradually, these 'Romans' grew in number and power - and went to war with almost everyone. In a celebrated early incident, perhaps only legendary, they invited their neighbors, the Sabines, to a feast...and then stole their women. The Sabine men did not celebrate; instead, they took offense and nursed a grudge.
But there was hardly a tribe, kingdom or empire in Europe, North Africa or the Middle East with whom the Romans did not pick a fight. After the Sabine war, there were wars against the Albii, the Etruscans, the Volcii, Carthaginians, Etruscans again, the Latin league - and this is only a partial list - the Volsquii, the Equii, the Veieii, the Gauls, Samnites, more Gauls, Epirians, Carthaginians again, and more Gauls, Macedonians, Syrians, Macedonians again, slaves in Sicily, Parthians...and even Romans in the civil wars...and we have not even arrived at Caesar's wars against the Gauls in 58-51 B.C. Roman history has another 500 years of wars to go!
The civil wars in the 1st century B.C. put an end to the Republic...then, Caesar crossed the Rubicon. It was a new era in Rome, an era of Empire. It was as if Tommy Franks decided to move his army to Washington and make a regime change of his own. Some people would object, of course...the liberal papers would howl...but most people wouldn't care.
In ancient Rome, as in modern Washington, people chose their ideas like they chose their clothes - they wanted something that not only did the job, but also something that was fashionable. And at the time, it was à la mode for emperors and individuals alike to pretend that they lived in a free republic, which honored citizens' rights, but in practice...the government, and its leader, could do what they liked. And what they seemed to like doing was going out and making war against everyone they thought they could beat.
Back then, of course, war was a paying proposition. When emperor Trajan took Ctesiphon (near modern Baghdad) he captured 100,000 people who were sold into slavery. When Augustus took Egypt, he used the Nile's wheat harvest to feed the growing population of rabble in Rome.
But while some people came out ahead, in the aggregate, wars then - as now - were negative-gain enterprises. And as the empire grew, the costs mounted, too, to the point where both became grotesque and insupportable.
"Until the rule of Augustus (who was installed as the first ruler of the Roman Empire in 27 B.C.)," writes Marc Faber, "the Romans only used pure gold and silver coins. In order to finance his vast infrastructure expenditures, Augustus ordered that government-owned mines in Spain and France should be exploited 24 hours a day, a measure which increased the money supply significantly and also led to rising prices. (It is estimated that between 27 B.C. and 6 B.C., prices in Rome doubled.) In the second half of his reign (6 B.C. to 14 A.D.), Augustus reduced coinage drastically, as he recognized that the expanded money supply had led to the rise in prices."
But Rome wasn't built in a day...nor was its money destroyed overnight. In 64 A.D., in Nero's reign, the aureus was reduced by 10% of its weight. Thereafter, whenever the Romans needed more money to finance their wars, their public improvements, their social welfare services and circuses, and their trade deficit, they reduced the metal content of the coins. By time Odoacer deposed the last emperor in 476, the denarius contained only 0.02% silver.
Still, the impulse to build up an empire seems to be as strong as the impulse to tear one down. To the question, when does a country aim for empire, comes the answer: whenever it can.
Every country in Europe has at one time or another reached for the imperial purple. Portugal and Spain discovered and conquered vast jungles, swamps and pampas...and built empires of them. For Spain, the conquests were extremely profitable - after they found huge quantities of gold and silver. But nothing ruins a nation faster than easy money. The money supply grew larger with every ship's return from the New World. People felt rich, but prices soon soared. Worse, the easy money from the new territories undermined honest industry. In the bubble economy of the early 16th century, Spain developed a trade deficit similar to that of the U.S. today. People took their money and bought goods from abroad. By the time the New World mines petered out, the Spanish were bankrupt. The Spanish government defaulted on its loans in 1557, 1575, 1607, 1627, and 1647. The damage was not only severe, it was long lasting. The Iberian Peninsula became the 'sick man of Europe' and remained on bed-rest until the 1980s.
France and England built their own empires in the 18th and 19th centuries. Napoleon's conquests took less than a dozen years to complete...but the empire collapsed even faster. By the end of the 19th century, all that was left of the French empire were a few islands no one could find on a map and some godforsaken colonies in Africa that the French would soon regret ever having laid eyes upon. Almost all were lost, forgotten or surrendered by the 1960s - with nothing much to show for them except what you find in the Louvre...and a population of African immigrants who now weigh heavily on France's social welfare budget.
England's empire was much grander, stretched further, and left more debris when it collapsed. But the end result was about the same: the pound had been degraded and the British were nearly bankrupt, while the crime rate in central London rose to surpass that in New York...thanks largely to immigration from the former colonies.
Germany lost its overseas colonies after WWI. It then created another empire - by conquest - in the late '30s and early '40s. The enterprise ran into Russia's empire in the East - resulting in history's largest and bloodiest land battles. In the end, thanks partly to American intervention on the side of the Russians, the German empire was destroyed. The Russians' empire collapsed under its own weight 44 years later.
Empires, like bubble markets, end up where they began. Rome began as a town on the Tiber, with sheep grazing on the hills. A bull market in Roman property lasted about 1000 years - from 700 B.C. to about 300 A.D., when temples, monuments and villas crowded the Palatine. Then, a bear market began...which also lasted at least 1000 years.
As late as the 18th century, Rome was once again a city on the Tiber...with sheep grazing on the hillsides, amid broken marble columns and immense brick walls. They had been built for a reason...but no one could recall why.
Bill Bonner
The Daily Reckoning
Editor's note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the international bestseller: Financial Reckoning Day: Surviving The Soft Depression of The 21st Century (John Wiley & Sons).
See: 'The Best Investment Book I Ever Read...'
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Analysis and Implications of Hilltop Algorithm
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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 ]
- 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
--- Mogambo Sez: I get the feeling that things are building to a head, sort of like a great big pimple. And, again like a great big pimple, when it bursts it ain't a-gonna be a pretty thing.
Editor's note: Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the editor of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it.
The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications. If you're inclined to read more, you'll find the whole Mogambo here:
Two scoops and a sprinkle of inflation
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