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Insanity on Wall Street

Insanity on Wall Street

Once again, Wall Street is surprised by yet another in a string of weak
employment numbers. Not only were the 21,000 jobs created far fewer than
the 175,000 that had been forecast, but the labor department actually revised
the numbers for the prior two months lower. Even the much talked about revival
in manufacturing employment failed to materialize, as that sector still managed
to lose jobs for the 43rd consecutive month.

I think the definition of insanity— repeating the same thing over
and over again while expecting a different result— describes this situation
perfectly. For those of you who still do not understand the dynamics behind
the U.S. bubble economy, let me try and clarify it once again: American companies
increase “productivity” by replacing high cost American labor with
better educated, higher skilled, low cost foreign labor. American consumers
replace their lost wages with home equity extractions, refi’s, and adjustable
rate mortgages, and spend the proceeds on imported goods. The Fed keeps it
going with artificially low interest rates, lenders cooperate by throwing
credit standards out the window, and Asian central banks come to the rescue
by intervening in the currency markets and buying treasuries. All the while,
America goes deeper and deeper into debt to its foreign creditors as the
industrial foundation of its economy crumbles.

Making the whole situation possible is the fact that while the Fed perpetuates
the most inflationary monetary policy in its undistinguished history, everyone
pretends that there is no inflation. This farce occurs because all eyes are
on the CPI, a government contrived and manipulated index which dramatically
understates inflation. So money supply soars, the dollar collapses, the CRB
index hits new 20 years highs, and crude oil trades above 37 dollars per
barrel, yet no one is concerned about inflation! It is analogous to driving
a car at one hundred miles per hour while the speedometer is stuck at thirty
five. A rational driver would believe his own eyes as he looks at the objects
rapidly disappearing in his rear view mirror, rather than stubbornly fixating
on an obviously broken speedometer. Those of you residing in the Washington,
D.C. area had better hope that the speedometer on Alan Greenspan’s car is
calibrated frequently.

As a perfect example of how the CPI distorts the true impact of inflation,
last year I rented a 2,500 square foot house with no yard and an appraised
value of 1.1 million dollars for $4,700 per month. I just renewed the lease
for another year at the same rent, although I believe that I could have negotiated
a lower rent if I were so disposed. However, the house is now “worth” 1.7
million. So the price of this house has risen by over 50% in one year, yet
the rent has stayed the same. (As an example of how ridiculously overpriced
the house I am renting is, if I were to buy it with 20% down payment and
a 30 year fixed rate mortgage at 5.5%, with property taxes and homeowner
dues my monthly payments would be over $10,000, and I would forgo over $2,000
per month in investment income that the down payment money would have otherwise
provided. Of course, If I bought the house with zero down, and finance it
with an interest only ARM… )

So while housing represents about 40% of the core CPI, in this case a 50%
increase in the price of a house actually reduces the CPI. The irony of the
situation is that the longer the Fed keeps interest rates low, the more downward
pressure these is on rents as more renters become buyers. Lower rents artificially
reduce the CPI, while rising home prices are not even factored into the index.
In other words, the more inflationary Fed policy is, the less “inflation” we
actually get as measured by the CPI. Rising food and energy costs are simply
dismissed as being “volatile” and are not even part of the “core” CPI.

As usual, Wall Street embraced the disappointing news. Bonds surged and
stocks went along for the ride. Now it’s time to hand the rally baton
to the Asian central banks. Stock and Bond market bulls had better hope they
are there to accept it— as long as they are, this ridiculous charade
can continue. However, the longer this unsustainable loop revolves, the less
likely it is that America’s creditors will continue to participate. The problem
for them is the longer they play, the more they lose. The problem for us
is that when they finally do stop playing, most Americans will lose everything.

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