 Backfire On Corrupted Price
Index
by Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
May 24, 2006
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We are
fast entering the other side to statistical distortion, as an
unusual combination has revealed itself. If it were not so destructive,
it would be hilarious. The pendulum has begun to swing on the
housing sector component to the Corrupted Price Index (CPI).
For a few years housing rents had been tame (if not dropping),
as the housing boom inflated in full force. Buy the property,
bid its price up, while the rental properties go begging with
minimal attention. Now rising rents are the new phenomenon, as
the housing boom deflates. House properties are fast becoming
unaffordable. People flock to rental homes and apartments, thereby
pushing up rents requested and paid. Heck, who are we kidding?
There was no housing boom. It was a dangerous reckless bubble,
to salvage Greenspan's reputation, offer him yet another bubble
to inflate so as to rescue the previous busted bubble. What a
tragic end written in stone! Now Mr Magoo is off on speaking
engagements, warning of the perils which lie ahead, leaving Ben
Bernanke to assume the position of Pied Piper. The harsh spotlight
might expose Ben more as a mad professor who cannot keep the
wagon on the road, the wagon which had begun to careen off the
road when Greenspan jumped out from behind the wheel.
The down side of the corrupted
CPI game has begun to show itself in the latest month. Not only
have housing prices softened, but the balance of rent versus
housing price now damages the CPI as reported. A jump in the
rental component was enough to lift the April CPI by 0.6%, translated
into 7.2% annualized. The shelter cost accounted for half of
the increase in the core CPI increase. The financial markets
remain transfixed on the core, in defiance of the harsh reality
for the communities and corporations which must eat food and
consume energy. The financial sector does little work. It just
prints money, spins stories, urges more lubrication of the machinery,
and conducts arbitrage (of both people and market differentials).
One might suspect global warming comes from the hot air emanating
from both politicians in Washington DC and financial monkeys
in Wall Street. Over the first four months of 2006, the CPI is
running at a 5.1% annual rate, versus 3.4% for all of 2005. It
is hard to justify a 5.0% or 5.2% long-term Treasury yield in
the face of such a CPI. This statistic is no longer respected
by even the mainstream, no longer a reflection of the Untied
States Economy.
PREFACE ON CPI
It might be helpful
to review main messages from some past articles on the topic
of the CPI, its blatant distortion (pervasive in almost every
aspect), export of inflation (becomes their problem), and the
risk to policy from doctored statistics (bad data, bad decisions).
The entire saga of deception and setting up a biased system has
begun to come full circle. The irony and pathetic twisted humor
is inescapable to an informed observer. Have you ever seen an
evil bully set a trap, then break his nose as he falls unwittingly
into that same trap himself down the road at a later date? Have
you ever seen a social deviant place brown bags of dog manure
on the path of his rival buddies, only to step onto them himself,
dragging along a stench of his own making? This is such the story
of the USGovt cockeyed shameless embarrassing display of garbage
statistics, led by the total joke known as the CPI. Let it be
known as the Corrupted Price Index, its true description.
In "Inflation
Pushes Down the CPI" (Feb 1, 2005) arguments were laid
out to demonstrate how in American style, our brand of credit
largesse and reliance upon imports has actually pushed down the
CPI. One would figure that the explosion of new credit and abandonment
of domestic industry would cause a direct adverse effect on the
price inflation scheme. It did not in the past, but it is showing
signs of doing exactly that right now. The cited article explained
how the housing bubble smothered the rental market, and kept
rent costs down. How car sales encouraged by 0% and 1% deals
kept used car prices down, even with underwater loans assumed
and buried in the new car loan. How the flood of Asian imported
products, combined with foreign central bank collusion (called
intervention), conspired to keep down consumer prices. How the
rising cost structure, against a backdrop of global competition,
made price increases a desperate challenge to businesses, resulting
in inventory liquidations from real stress. However, the pendulum
swings with its sharp edge back toward the tied down victim,
much like in the horror films we often enjoy. Monetary inflation
has raged out of control for so long that the public and investment
community believe it is normal. A tame CPI had signaled a "green
light" to our hapless US Federal Reserve to continue the
astronomical credit growth. No more, no mas, non jamais.
In "Export
Inflation, Import Deflation" (March 16, 2005) the virtuous
circle was depicted whereby monetary inflation was exported to
Asia, and in reaction finished products poured onto our shores.
Asians exploit their own cheaper labor costs and we exploit their
desire to capture market share. Nowhere is the insanity of USGovt
economic policy making more evident than the abandonment of entire
US industries, devotion to foreign factories, and the massive
shift of wealth from the Untied States to an organized growing
Asia. We trade our credit supply and debt ownership for their
industrial development and factory output. As "old school"
economists preach, FOLLOW THE FIXED BUSINESS INVESTMENT. Believe
in investment based growth rather than inflation based growth,.
Asia has it, we do not. Their wealth grows from export trade.
Our debts mount as we spend money from home equity and credit
cards. Asia benefits from the productivity, we do not. Their
standard of living expands from job growth. Our standard of living
is slowly eroding as jobs are outsourced. Asian economies are
founded upon industrial plants and construction booms, ours is
not. The Untied States Economy is centered on retail malls and
housing construction, a direction leading toward disaster. When
the process turns into a vicious circle, the dynamics shift into
reverse. The process fails to operate as before. We begin to
witness and suffer more domestic price inflation, even as economic
growth stalls. Curiously, no longer does the queer twisted corrupted
CPI distort the price inflation measurement, as it is designed
to do.
In "Risks
From Doctored Statistics" (May 24, 2005) an attempt
was made to plead the case that the Untied States Economy has
been subjected to great risk in monetary policy from basic lies
on economic performance. The US GDP (economic growth) is exaggerated
by 4% to 5% easily and most assuredly. Designed to remove price
inflation from economic activity, the GDP Deflator is even lower
than the goofy CPI. As higher costs filter through the economy,
too little price inflation is removed. The result is that we
label "inflation" as "growth" and claim strength,
which is pure horse manure abuse of statistics, my chosen field.
My favorite quote from all last year in public scribbles is the
following:
Any lack of proper adjustment
in nominal GDP is falsely labeled as real economic growth. In
my view, most of it comes from inadequate adjustment of higher
energy & material costs, even food costs. Ironically,
we boast that the economy is strong enough to handle higher energy
costs, but evidence of that strength to handle more burden is
distorted growth from wrongful (favorable) adjustment of those
same energy costs!!! Most economic growth comes from
hedonics to information technology and improper removal of general
cost increases. The most glaring obvious higher cost born by
the public and business world is for energy costs... Our
GDP growth is mostly exaggerated technology spending and price
inflation!!!
The end result is that the
USFed continues to hike interest rates when the USEconomy has
entered a stall. One must wonder if Fed Governors are aware of
their hikes in the face of weakness, or whether they are too
stupid to see what they are doing. They might actually believe
the nonsense promulgated by USGovt agencies and their statistical
mumbo jumbo, which is better depicted as propaganda. The Untied
States Economy has grown tragically and utterly dependent upon
the financial inflation sector, from housing to bonds and stocks.
Such a strategy is destined to fail. It requires a painted billboard
on a constant basis proclaiming bold statements: that price inflation
is nil, that growth is strong, that productivity is robust, that
jobs are being produced, that we are moving forward as a nation.
It is a big lie, a grand lie, a colossal lie in all respects.
Rising interest rates expose the fat naked unsightly people scattered
in the shallow water on the beach. If only we could all obtain
the corner on the facial blind folder market, or stocks to such
firms.
THE NEXT SLAM TO THE CPI
Next on the path to
the Corrupted Price Index (CPI) is the rise in imported product
prices. After a few years of depending upon tame Asian currencys,
our consumer product providers have run amok with a gigantic
hoard of USTreasury Bonds. Our Asian suppliers have conducted
routine and regular interventions in order to keep their currencys
from rising. Now they are meeting with a dozen Asian regional
partners for the openly expressed purpose of preparing for a
currency downgrade for the USDollar. They set the stage for the
birth of a pan-Asian credit market. They are acting with surprising
unity. The historical disunity seen in Europe had been traditionally
eclipsed by a profound disunity in Asia. Europe did finally unite,
created a continental currency, and has acted in a constructive
fashion for a few years. Not without a rocky time, such as when
they rebelled against the grant of centralized power in Brussels,
the Europeans remain with the euro currency. At least for the
time being. Now Asia is acting in a more unified and constructive
fashion. The real leader is emerging in the process, China.
More nonsense comes from the
Untied States side, which must watch and listen to the Asians.
Our representatives have been shouted down, discredited, and
bored the heck out of the Asians with incessant tiresome talking
points. Our highly paid clowns actually believe, and state publicly,
that as Asian currencys rise in unison, the USEconomy will not
be affected on the price front. How reassuring! This seems why
they are paid and serve in office, to deceive and sing new choruses
in the propaganda concerto echoing from political and economic
bastions. These bastions have merged forces with corporate America
in a very unfortunate, inefficient, and harmful manifestation.
SIGNIFICANT TURNAROUND MONDAY
A telephone call awakened
me on Monday, a friend from Zurich of Irish descent, a bright,
well-informed, kind, and colorful man. He told of a gold and
currency drubbing, led by a tepid USDollar recovery of sorts.
By the end of that call, both gold and the opposing (non-US$)
currencys had staged the early makings of a recovery. After the
noon hour, the recovery and reversals were clear. One day does
not a trend make, but it sure was a day with significant notables.
The metals all three reversed and held their highs. The currencys
all finished on daily highs, enough to erase USDollar gains in
Europe.
Gold might have plumbed too
low when it descended below 640 intraday, too low to claim an
equilibrium of demand against supply. It reversed to close at
658.0, a full 21 bucks above its low, within a buck of its high,
and over 3 bucks above its open, for a nice reversal. Silver
overcame its 30-cent drop at the open, then extended for a 32-cent
plus day, another nice reversal. Copper climbed 10 cents off
its low to finish near even, a good recovery. Unclear is whether
the metals are leading the currencys, or vice versa. My personal
view is that gold leads. However, in the last couple weeks the
currencys lead and the metals follow. Only a meaningful USDollar
bounce will justify and sustain a continued gold selloff. The
entire world is engaged in a global rejection of the USDollar,
and a vote of no confidence in USGovt and USFed leadership.
The euro finished up 89 basis
points, a hefty 104 bpts off the low, closing at the day's high.
The yen finished up 26 basis points, a hefty 90 bpts off the
low, closing at the day's high. The swissy finished up 78 basis
points, having climbed all day to close at the day's high. The
Canadian dollar finished up 48 basis points, a hefty 90 bpts
off the low, closing at the day's high. Even crude oil, the cantilever
to the petro-dollar, finished up 70 cents, a hefty 1.68 off the
low, holding the majority of the day's gains. The USDollar is
bloated, corroded, and mismanaged. Gold cannot hold a much lower
price without confirmation by the currencys led by a bonafide
recovery in the USDollar.
The follow through on Tuesday
is underway. Gold has added 12 bucks. Silver has added 50 cents.
Crude oil has jumped 1.40 upward. The euro is even, but the yen
is up 30 basis points. We have early signs of a confirmation
that Monday saw indeed a turnaround event.
One must deem as irreconcilable
and inconsistent the long-term interest rates at work. Do long-term
rates rise to respond to a ground swell in the Corrupted Price
Index? Recall that the CPI runs now at an annualized 6% to 7%
rate. Do long-term interest rates fall in realization that the
Fed has already tightened too much, and broadly pinpricked the
housing bubble? The entire USEconomy has been dependent upon
the $12 trillion housing market, which used to be half that size
before Greenspan urged its inflated condition in 2001 and 2002.
Do long-term interest rates continue upward in order to attract
foreign credit suppliers? They are in a dangerous state of international
rebellion, and have begun their rejection of the USDollar as
world reserve currency.
SCREECHING SIRENS & ROTTEN MORSELS
DeutscheBank has warned
that the USEconomy has begun to decelerate rapidly. Goldman Sachs
has warned that the weakening housing market is certain to slow
the economy. High Frequency Economics actually unveiled a forecast
for a 2% slower GDP which would come in at 1.5% for the 2H2006.
And Fed Governor Poole warns that price inflation will not go
away even if the economy slows in a meaningful way. WHY CANT
THESE GUYS USE THE WORD "STAGFLATION" IN THEIR WORDS
??? Because it is more dreaded than the word RECESSION.
An insightful comment circulates,
that USFed Chairman Bernanke strives for increased transparency.
Well, we are seeing more transparency in their policy and their
perception of the climate for policy making. Sadly, we the investment
community are not seeing much wisdom in their inner chambers,
nor deep insight. Meanwhile, Bernanke, Treasury Secy Snow, and
SEC Chairman Cox speak before the Congress on financial illiteracy.
Is that to report on Congressional illiteracy or the public illiteracy?
Let it be known there is confusion at the USFed. It is worth
a stadium ticket price to observe (former major league baseball
pitcher - Philadelphia Phillies) Senator Bunning toss a fast
ball at Chairman Bernanke on his poor judgment to speak on monetary
policy to financial press reporters at an informal dinner, and
on his responsibility for triggering a stock market decline.
Big Ben managed only a weak ground out to the short stop, and
seemed not to run full speed to first base. At least he owned
up to his error, which is something you would never see the High
Priest Greespasm do.
A 340-page Fanny Mae report
has been released. It describes a cesspool as the foundation
for the mortgage finance industry. It describes an arrogant and
unethical culture which routinely catered to executive bonuses
and stock options by their decisions. It describes flawed investigations
to place new effluent layers over revealed impropriety. DO PEOPLE
REALLY EXPECT A SOFT LANDING FOR HOUSING, WHEN NOT A SINGLE SOFT
LANDING HAS BEEN WITNESSED IN ANY ARENA SINCE THE GREENSPAN ERA
DAWNED ???
Lastly, Transportation Normal
Mineta struggles to craft national policy for a nation whose
entire infrastructure is hopelessly dependent upon the car (including
inefficient SUVs) and trucks, with painfully little usage
of railways and magnetic levitation (MagLev) trains for public
commutes. The entire paradigm of the suburban residential model
is flawed, vulnerable to energy prices, inefficient in operation,
and destructive to national wealth potential. He believes automated
toll collection will relieve congestion in urban highway systems.
One must harken back to the $230 billion Transportation Bill
last year, whose pork barrels were loaded to the rim with wasteful
and self-serving useless projects. And yes, the Untied States
national energy policy is spelled IRAQ and SPR. We waste our
efforts in a referee role inside a denied civil war torn Iraq,
where oil production is actually lower than the Shock & Awe
annexation launch. We dither with a national strategic petroleum
reserve instead of making difficult tradeoffs of environmental
concerns versus needs for domestic energy production. We pay
lip service the entire next generation of fuel cells and hydrogen
systems, which will be dominated by Japan.
THE HAT TRICK LETTER
COMBINES MACRO ANALYSIS WITH INVESTMENTS.
May 23, 2006
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Jackass
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Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
about subscriptions, contact him at JimWillieCB@aol.com.
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