The new delayed hedonically inspired Producer Price Index, PPI, jumped up 0.5% in March. Core prices rose 0.2%, which excludes food and energy costs. Food prices rose 1.5% and crude goods’ prices 0.7%. Small truck and SUV prices rose 0.8%. In the first quarter, intermediate goods’ prices rose at a sharp 10.1 rate, compared with only a 3.9% climb last year.
Again Sir Alan Greenspan would have us believe that productivity growth will curtail inflation. They have little to do with each other. Over the last 3-1/2 years, job growth has been feeble, as we are 9.4 million jobs below the post-WWII norm of job growth for this point in a recovery. Income growth is dreadful. If that is vigorous we are terrified as to what his encore will be. If everything is fine, why are interest rates still at 1%? Our government lies about almost all their statistics but they also lie by omission. They forget to tell you GM’s tax rate fell from 31% to 21%. They also forgot to tell you 37% of Ford’s earnings were from financing.
Two former Duke Energy executives and a trader have been indicted on criminal charges. Two are charged with racketeering conspiracy, nine counts of wire fraud, three counts of mail fraud, one count of falsifying Duke’s books and four counts of money laundering. This sounds like something you would expect of Citibank, JP Morgan Chase or Goldman Sachs.
Thirty-year mortgage rates rose again last week from 5.89% to 5.95%. That is the fifth weekly rise in a row. The 15-year rose from 5.23% to 5.25%.
We believe that the FED has been in the process of losing control of market interest rates. The long end of the market is very hard to manipulate due to the cost and its size, although the FED has had Japan and China in the 10-year notes suppressing yields but their participation has been a holding action. Short-term rates have risen more dramatically then you would think possible considering the FED’s power at that end of the market. The FED simply cannot hold the short end down at these yield levels. This will put financial pressure on government, corporate and financial borrowers as their cost of money rises. This is starting to be reflected in the market irrespective of the actions of the “Plunge Protection Team.” As money costs rise profits fall. Artificially low rates have created the bubbles we see in bonds, the market and real estate. It has also allowed the carry trade that has gone long the market and short gold and silver. A good part of the leverage is going to disappear as rates rise. In fact, it has already begun. As interest rates rise the extension of debt will diminish and all market sectors will fall except gold and silver. The bubbles will begin to break and probably simultaneously. If the FED does not officially raise interest rates before the election 2005 will be a horrible mess. If they do raise rates in August, the long journey downward will begin. As rates climb, liquidity will tighten. That drives down prices. The FED can offset that by printing $2 trillion a year instead of $1 trillion, but it will be a holding action. If you stop and think about it the consumer has little liquidity, just lots of debt and leverage. We also hear, lets stay in dollars. Except for business purposes that is not any good either. If you must stay in Treasury paper make it euro paper, or Swiss franc paper. The deficits are destabilizing and they grow bigger every day. That is governmental, corporate and personal. These factors raise havoc with the dollar and that is why the best place to be is in gold related assets. Once interest rates rise people are not going to be able to service their debt and bankruptcies will follow. Once the FED has raised interest rates and given up on massive liquidity injections, the US and the world will see the worst depression in history. As a matter of act, a rise in interest rates is the first indication that deflation is not too far off. Once that happens the only thing that will hold its value is gold. In this kind of a durational or generational market we buy and hold. After 45 years we know we cannot and do not have to outsmart the market. If you trade you could miss out on the opportunity of a lifetime. In time there will not be enough liquidity created by the FED to paper over the disaster they have crated. That is when the big move to real money, gold, begins. That is in addition to the fact gold has appreciated 23% the past year, which is in reality a 23% devaluation of the dollar.
In Alan Greenspans’ latest speech he was quite taken with the productivity gains of non-financial corporations. The ratio of employee compensation to gross non-financial corporate income was very low by historical standards. The question is when is the worker and organized labor going to realize they are being screwed by big business? If the recovery were durable Sir Alan would be raising interest rates. Interest rates in the real economy, in the market, are up 80% in three weeks, but that is not because of the FED. It is because foreigners want sounder assets, not depreciating assets. Besides, our government admits to 5% inflation. Any foreign investor worth his salt knows it is double that, they also realize inflation driven profits are not realistic or sustainable. We will have mega inflation as long as the FED prints money and interest rates continue rising. If we do not get the drops in stocks, bonds and real estate this year, they will begin next year for sure and they will last longer and be much worse than necessary.
The economic experts were very wrong again. March durables’ orders rose 3.4% or five times the experts’ forecasts. Motor vehicles were up 3.6% and aircraft orders 11.7%. If the money is sustainable why aren’t interest rates rising? As personal bankruptcies and real estate prices soar new home inventory continues to build, which will eventually exert downward pressure on house prices. Starts, building permits and completions are up an average of 10% in March and up 16% for the year. Demand for mortgages over the past two months have fallen and have probably peaked. Homes planned but not yet started are up 50%. Those are some big dreams. This all reminds us of a pyramid club.
The two main reasons the FED will raise interest rates is inflation and higher returns to attract foreign investment. Some people are calling for a rate rise in June. They could be right but this is an election year and Bush senior blamed his defeat on Alan Greenspan’s monetary policies. Thus, we went for August. Not too early to affect the election and maybe not too late to slow the rampant speculation down. The carry trade was warned a month ago as the 10-year rose from 3.65% to 4.55%. Another three months is ample warning. In September, the 10-year should be 5-1/4 to 5-1/2% and 30-year mortgages 6-3/4 to 7-1/4%. The first move downward in the Dow will have begun to 9,000 and real estate prices will go down and more inflation will pressure most investments downward as we head into 2005, which will be a very difficult year. If the FED rate increase does not come until after the election we could see the beginning of a financial collapse in 2005.