Don't Get Excited About CPI and Housing Data

Peter Schiff
Oct 20, 2006

This week it was announced that both producer and consumer prices dropped by 1.3% and .5% respectively, while housing starts unexpectedly increased by 5.9%. Not surprisingly, Wall Street celebrated the apparent good news, sending the Dow Industrials into uncharted territory. As has been its recent tendency, the market is unconcerned with recent bad news, instead championing it as confirming the highly touted "soft-landing." September's much weaker than expected non-farm payroll data and the Philadelphia Fed survey that showed an unexpected deterioration in manufacturing, are two recent examples. However, a closer look at the supposed good news reveals just how unwarranted the hype really is.

The inflation data was largely a function of the sharp decline in gasoline prices. In the first place, this decline will likely prove to be temporary, as it merely reflects a correction in an ongoing bull market. The confluence of events behind the correction will soon fade, and gasoline prices will resume their upward march.

More importantly, while oil price declines have claimed center stage, few have noticed other commodities price rallies that are surging in the wings. For example, during the past month industrial metal prices have surged, led by zinc and nickel prices which have both increased by more than 20%. Even more impressive has been the rise in agricultural commodities, led by skyrocketing wheat and corn prices that have risen by 33%. Given that food prices are conveniently absent from the "core" measures of inflation, I would expect that these agricultural price gains will receive scant attention from government economists and financial pundits. And although many of these theoreticians would prefer otherwise, we all have to eat. Unfortunately, doing so is about to get a lot more expensive.

So as the temporary relief at the gas pump will soon end, pain at supermarket checkout counter will soon begin. These higher costs, combined with rising mortgage payments created by upwardly resetting rates on adjustable home mortgages, will result in severe strains on the consumer's ability to spend on discretionary items. Of course, if the consumer stops spending, there goes the ball game for an American economy whose GDP is 70% consumer spending.

I would also not take great comfort in the recently announced up-tick in housing starts. By adding additional inventory to an already over-built market, homebuilders are simply helping to make a bad situation worse. Either home builders do not appreciate the gravity of the supply and demand imbalances, or they are simply building in order to convince stockholders that the future earnings picture looks bright. Company insiders can only continue selling their shares if they convince investors to keep buying. A sharp reduction in starts would confirm just how dire the housing situation really is, and jeopardize many executives exit strategies. As a result, they keep building homes that they can't sell profitably, so they can keep selling shares that will collapse in price as soon as Wall Street wises up.

This confluence of seemingly good news has just about everyone embracing the soft landing scenario. This is more wishful thinking than true forecasting, as those calling for it the loudest have the most to gain from its occurrence. In fact, this rosy, pollyanna view is now so ingrained in Wall Street's psyche that any evidence to the contrary is summarily dismissed. However, now that most remaining skeptics are finally on board, the stage is finally set for the crash-landing scenario to catch everyone by surprise.

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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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