Vigilant Investor

While everyone celebrates the choice of Ben Bernanke, Morgan Stanley’s Stephen Roach frames his challenges concisely. Greenspan is not handing him a healthy economy. Rather, it is one that has just endured life-saving stimulus of emergency proportions.

• U.S. Economy Grew at a 3.6% Rate in Third Quarter
• U.S. Economy: Producer Prices Increase By Most in 15 Years
• Housing bubble may be deflating just a bit, experts say
• Bernanke: There’s No Housing Bubble to Go Bust
• Mortgage Defaults on the Rise
• Snow sees no housing bubble
• Is the Fed overfed?
• Lennar Finding Florida Market Not So Sunny
• Short Interest Climbs to 2.3% to NASDAQ Record
• General Motors Gets Subpoenas From SEC Over Pension Accounting
• US presses China to revalue currency

Prices of anything dropping off may be the first sign that they have peaked. Home sales were still up — but as the NY Times reports — a more noteworthy fact is that the median sale price of new homes from August fell over 5%.

Here is a fine critique of the minimum wage from The Filter to add to some of our previous comments on the subject.

In Pennsylvania, the city of Pittsburgh and its Allegheny are always flirting with a “living wage”, as is PA Governor Rendell, who argues we must remain wage competitive with neighboring states. Meanwhile, Continue Reading »

This past summer, it was confirmed that American’s just don’t save. Already it was known that consumer debt was piling higher and higher, as well as federal and national deficits… But when the official savings rate dipped below 0%… well, that was a stunner, although for those monitoring what’s been happening in this country for the last few decades on this level, it wasn’t terribly surprising. Continue Reading »

On November 21, 2002, Fed Governor Bernanke uttered the following words in a quite remarkable speech entitled “Deflation: Making sure ‘It’ Doesn’t Happen Here”:

“Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

…U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a papermoney system, a determined government can always generate higher spending and hence positive inflation.

Wow.

The CPI correlation to the creation of The Fed is undeniable. While it claims to fight inflation, the Fed has done nothing but mostly create it. Prior to The Fed, it took a Civil War to rocket CPI upwards, but overall the gradual trend was towards disinflation regarding prices, thanks to economic growth and production expansion.

CPI Since 1800

Source: Federal Reserve Data

Indeed, pre 1911, the natural tendency was for a nation to generate wealth, and for consumers to feel the full benefits of a stable dollar that grew stronger as prices dropped with more supply. You may not have earned a lot of dollars, but not only was the dollar dramatically stronger, each year it gained purchasing power.

Today, the inflated money supply makes higher prices appear to be a natural state, while the dollar weakens and citizens who save, lose out — especially those who are retired or of little means.

Keep in mind, U.S. inflation has been held in check while we have been able to vent much of the more recent money supply creation to emerging markets. This has come back in the form of cheaper goods as those lower cost markets produce more and more. However, it has also been loaned back to us resulting in tremendous debt creation, and a consumer that is leaning towards being tapped out. As the most recent numbers indicate, that trend may be ending.

With all the worship Alan Greesnpan gets, its nice to have James Grant (of Grant’s Interest Rate Observer) weigh in on his legacy. To quote:

“By many visible measures the Greenspan Fed has excelled. In fact, over the past 18 years the measured inflation rate has subsided, and the business cycle has mellowed, with fewer manic ups and depressing downs. The jobless rate has fallen, the cost of borrowing has collapsed, and the paper dollar has survived at the top of the heap of world monetary brands. Financial disturbances have occurred, but none–neither the bond bear market of 1994 nor the post-2000 bear stock market–has yet broken the system. Continue Reading »

“Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation.”

– Ludwig von Mises, 1951

With all the recent news about inflation, we thought it was timely that the esteemed Frank Shostak should post up an article to clear up the misconceptions about what it is. Notes Shostack:

“Every few days, a senior Fed official expresses concern regarding the effect of high gasoline prices on inflation. These comments are always phrased in the way a meteorologist would report on the weather, as if the phenomenon in question is an act of nature. Even stranger, these statements imply that only the Fed can hope to save us from this natural disaster.”

Indeed, in a country where most citizens are largely illiterate of economics, even those with a fundamental education in economics seem to misunderstand truly why prices are going up, and moreover, the more deleterious effects the real inflationary cause has on an economy.
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“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

— Henry Ford

David Clogg at Investment News (IN) has a nice article on a subject that too often is ignored by the mainstream media, on a subject that we’ve covered for a while: The reckless U.S. Consumer. The U.S. economy has grown entirely dependent on consumption fueled not just from earnings, but through spending savings and by loading up on debt.

The latter has been exacerbated, as we’ve pointed out, on the unsustainable use of home equity as a sort of ATM. In 2004 alone, borrowing against the home added $600 billion into consumer purchases, a subject that bothered Alan Greenspan in a late September address. That is a finite resource in a rising mortgage rate environment where home prices appear to have topped. From where will the next $600 billion come at a time when consumers’ wages have stagnated?
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The Financial Times (via its Foreign Policy) had a poll of the top 100 public intellectuals, which worked in sync with Britain’s Prospect Magazine. Paul Krugman ended up as number 6.

We occasionally rail on Krugman, if only because he is so influential via his New York Times editorial post. But you will find us calling him by his true colors: He is for democratically elected collectivism, run by quasi authoritarians who, like himself, know what is best for everyone else. His prescriptions boarder on pseudo mercantilist / fascist economics (using the true definitions of those words).

Recently, we note in his October 17, 2005 editorial from the NYT, a few doozies, although at times he asks good questions, if not for the wrong reasons.
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“I feel totally safe playing polo on a field full of pros,.. But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don’t know when to hold back.”
–Tom Barrack, Real Estate Deal-maker and Billionaire

In other countries that have experience an easy credit induced real estate bubble, we’ve seen that, at about four to six quarters later, real estate slows and turns. Of course, there are no guarantees that the same would happen in the U.S. markets even if we’ve certainly seen some extraordinarily frothy markets in cities on both coasts where it would be nearly a shock not to see prices come down in some fashion or another after racing up over 150% in just a few short years.
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Declining sales due to not so attractive models & gas guzzling SUV’s; massive pension under funding: soaring health care costs; archaic relationships with unions; all true. Ford and GM are reeling — and the problems seem only to get worse. These issues — coupled with our long standing concern that over the past few years US Automakers have been borrowing economic activity from the future via desperately low financing rates — pose serious challenges for the “Big Two.” Left unsolved — the effect could be devastating for Ford, GM, and the economy in general. Check out this article in The Economist for more details.

• Retirement and Health Benefits Crippling American Firms
• College costs going nowhere but up
• Health care to gobble up most of this year’s raise
• Oil, Gasoline Fall to Lowest Since July as Wilma Threat Ebb
• Refco Finishes Collapse With Bankruptcy
• Long U.S. yields hold tight despite Fed, inflation
• Pensions insurer ‘nearing crisis’
• 30-year mortgage rates hit 15-month high