Ding Dong the Witch isn't Dead

Peter Schiff
Apr 20, 2007

With this week's release of an apparently benign CPI report, Wall Street resembled Munchkin Land celebrating the death of the Wicked Witch of Inflation. Amidst the revelry few spared much concern that the Index actually registered a monthly gain of .6%. Since such a rise equates to an annualized inflation rate of 7.5%, how could the Wall Street Lollipop Guild be so euphoric? Simple; to pronounce the Witch sincerely dead, one needs only to consistently strip out marginally needed items such as food and energy. Without these "distractions" the core CPI increase can be shown to be only .1%: "way" below the .2% that had been forecast.

In the face of what was in reality a horrific March CPI report, Wall Street once again demonstrated its ability to spin economic straw into gold. The trick to making a 7.5% annualized inflation rate disappear is simply to misdirect attention towards meaningless monthly core numbers instead.

However, Wall Street's power to make high inflation disappear before our very eyes will not last forever. If a magician repeats the same trick over and over, his audience is bound to get wise. The idea that the "core CPI" should trump the actual "headline number" is an example of a lie being repeated often enough that it becomes the truth. Originally, the emphasis on the core was supposed to smooth out month-to-month volatility. But putting primary weight on "year-over-year core CPI" is another matter entirely. Year-over-year changes are not volatility, they are reality! Of course, your typical Wall Street strategist could have figured this out, if they only had a brain.

Making the illusion all the more brazen is the fact that on the same day the CPI was released the dollar broke down to a 26-year low against the British pound, an 18-year low against the Australian dollar, and a near record low against the Euro. Since dollar weakness will inevitably exert additional upward pressure on already rising consumer prices, the ability to celebrate victory over inflation is premature in the extreme. As an added twist, gold finished the week with an impressive gain, rising to a new eleven-month high. Yet this tried and true measure of inflation was barely noticed, no doubt dismissed as representing a sign of increased global affluence resulting in higher jewelry demand, particularly in India.

The next trick up Wall Street's sleeve will be an attempt to minimize, or eliminate, the pesky problem of rising rents, which account for close to 40% of the "core" CPI. Surely many will suggest, as some already have, that we strip out "rents" from the core, thus adding shelter to food and energy as unimportant expenditures. They will argue that since rents are rising abnormally, as a result of the deteriorating housing market, that they are no longer a valid component of true inflation (None of these arguments were put forward when rents were falling as a result of the housing boom). Hopefully when this self serving argument gets its wider rollout, more people will begin noticing the man behind the curtain.

April 20, 2007

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Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
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Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.

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