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Inflation News

Posted On: 2006-12-08Length: 22:24

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Alright everybody this Johannes Ernharth, you're listening to Vigilant Investor daily. It's 4:15 on Friday, wow made through another whole week here and for our first full week of actually doing our broadcast on a daily basis, of course you can always catch Vigilant Investor live on a hourly basis, an hour long show every Wednesday night 9PM Eastern. But our daily show is usually going to be on every day but not always and again yesterday was one of those days. So we always encourage folks to subscribe to our Podcast as well, and that way you can be assured that if you just can't make it to tune in, or if we do a show maybe a little bit earlier, or a little bit later which sometimes might be the case other than 4:15 you'll be sure to get it. But nonetheless as the announcement always goes at the front of our Talk Shoe show, the show is live and interactive and if you happen to tune in on one of our 4:15 shows, a lot of the times people are chatting after the show when we wrap up with our actual recording. So, feel free to do that as well, and of course every Wednesday evening, we're starting to migrate more to an open discussion type of a format for everybody to be involved and have some fun. But, on to bigger, better, more important things. The markets today for example, let's get into the Dow Jones was up about 29 points, it is still 101 points down from its high, but it's climbing back up toward that direction. And you know after the big drop right after Thanksgiving, the Monday after Thanksgiving, things are starting to pick up a little bit there. The S&P 500 is about 2.5 points, now that's not even two tenths of a percent, and it's still, it's just down a touch from its high early in the year about 8 points down. So, we're all getting very close here, same with the Nasdaq, only 31 points down from its high earlier in the year, but it was up 9.6 percent, or excuse me, 9.6 points today trading at about 2,437, the S&P at 1,409 and the Dow at 12,307. And one of the other things we like to take a look at is of course the VIX, that's the CBOE volatility index dropped about 4.5 percent today, and it's trading at 12 dollars and 10, and that's you know down a little bit, it had a big run up mid week here and has since come back, come off just a little bit, but we take a look at its low this year, again 981, it's up 23.5 percent. So, volatility though still off 50 percent off of its high. And if you want an explanation of what the volatility index is, tune in at another time we'll get a little more in depth in that, but let is suffice to say that when it's down low we get around 10's, 11's and 12's well below its typical area where it tends to be on average. You have an environment that could conceivably be just complacency, where traders aren't necessarily as worried about risk as we think they ought to be especially when we talk about all the things we do every day, day in and day out on Vigilant Investor, our web site, our daily journal site and as well as our weekly show and so forth. But, moving on we'll take a look at gold is trading down a little bit, it's come down from some highs it had at about 630 dollars, it was earlier, now we're down about 620. And silver is around 1364 and you know still have come up from the lows earlier this year, still up 26 percent for the year, 27 percent is gold and silver is up still about 40 percent from the early part of the year, which taking those two precious metals, we like to talk about those and we should probably also talk about oil which is trading down just a little bit, it was up around 65 and I know that it was down 63 earlier. But, let me see, 65 earlier the past week and a half or so. Taking a look at the dollar is an important thing, we always talk about the dollar trade, what's going to be happening with the dollar going forward. And the dollar is gaining a little bit of strength from its big slide it had just post the Thanksgiving holiday. That Friday it dropped about 3.5 percent relative to the Euro, took it on the chin relative to some other currencies, the British pound and so forth. But we noticed that, compared it to these other things as well, you just cannot measure the dollar's strength relative purely to other currencies. We always talk about how other currencies are getting printed as well today. China was saying that it's not going to expand it's, the yuan's currency trading bandwidth and that it's not going to be floating any more than it currently is. And that's of course a big grip as the dollar strikes relative to the Chinese currency and the trade deficit and so forth. But, with the dollar showing weakness or strength relative to other currency only tells you part of the story. What you need to look at is what's happening in terms of other commodities, things that cannot be printed out of thin air. Currencies in this day and age in 2006 modern world are literally printed fiat currency. They don't have anything to back them up, there's no real restraints on central banks other than the threat of rampant inflation to keep them from printing more and more of the currencies but gradually over time they very much managed to deteriorate the purchasing power and the wealth which for example the dollar has held. But we take a look at what's been happening with gold and silver or oil since say 2000 when we saw the Dow Jones Industrial drop, we know that gold and oil for example have retained a lot of purchasing power that the dollar has given up. You look at the, everybody thinks of the Dow hitting new highs, we'll you adjust it for inflation, you still haven't hit new highs, real new highs, but especially when you adjust them for gold, oil, silver and so forth the Dow is still down about half. And take a look at other things through that lens, you take a look at the housing bubble, compare the house going up in price relative to inflation always tells one of the story. You compare housing prices to things like gold and silver and oil and it's a completely different story, you're not looking at it as much as an inflation as you think, or I should say an appreciation as you think, a lot of people look at their house as having this big bonanza of a huge new found wealth, and true that is the case, but the prices are really more out of whack because there's so many dollars circulating out there whereas you compare that to things that again cannot be printed out of thin air, your hard assets, your commodities and so forth. And you'll see that prices really are, you know when you adjust them in those terms a lot different. So just again, it's a perspective thing to take a look and I'm always reminding everybody that we talk to on Vigilant Investor when you see the price of something go up, the reality of it is it's the price of the dollar, that's the purchasing power of the dollar declining. So if gold is up, really what's happening is the dollar is losing its purchasing power. So don't ever forget that. I see my co-host Stephan Ernharth is on as well. Stephan, how are you doing today?

Stephan: Doing well, doing well. And I think Johannes, another thing to point out are the employment figures, which came out today. You had, we had an increase of 132 thousand jobs this past month, but what's really important to point out, the department of labor is telling us that hiring accelerated at retailers, restaurants and health care firms while manufacturers and homebuilders shed jobs. I think it's really important, I mean retailers and restaurateurs, what types of jobs are those in compared to manufacturing jobs? And that is a trend, you know restaurant jobs, retail jobs, swapping those jobs for manufacturing jobs which are leaving the country or homebuilding jobs which are drying up to a great degree, that to try to get positive news out of that, which is what we're trying to see, you hear comments like this is just what the Fed wants to see, or the economy is in a sweet spot, give me a break. I mean, you ask any person on the street, do we want, what is most important in this country, alright? So, this is a really, as we have mentioned, you know after this election all bets are off, and the data that is coming out here is very intriguing in relation to what type of jobs are being created?

We take a look also at the average, I think it was the hourly earnings was up about two tenths of a percent, which is fairly slow, now of course that's going to be used as an indicator, a lot of talk today was that you know inflation obviously is under control, the fed has less to worry about, the belief is that that's why the, you look at the bond markets, why aren't the bond markets reacting, typically the bond markets will react if you're dealing with some serious problems. Some people will say, well there's recessionary problems potentially ahead, but then again you look at the stock market and the stock market is saying hey there's no recession coming, the stock market keeps climbing higher. So, which is it, either the market has it or it doesn't. Usually bond investors are going to be the more conservative, but nonetheless, the markets should be an indicator and they're clearly disconnected there. But getting back to the inflation being under control or not, it's sort of the guiding principle under which everybody operates these days and the trust in the Fed to being able to handle that. We need to of course remind everybody that CPI is very, very, very manipulated number and its reliability is just, I mean a lot of people don't even consider CPI to be legitimate when they're doing their calculations anymore. It's happening more and more where you're looking at some of the bigger firms out there, they say yes, CPI is there, we all know it's there but you know today's CPI is not the CPI of thirty years ago but moreover, we take a look at what's going on with money flowing around. CPI is an even number. We look at CPI, 4 percent for example, we think of inflation being at 4 percent but that is, inflation never operates that way. When central banks are creating a tremendous amount of new currency, it gets sloshing around in the economy, if you ever hear people use the term of all the money sloshing around out there, but few talk about where it's coming from. It's coming through the credit system, it's coming through the central banks it's just keeps cranking open that money supply, and it's got to find a home and it does not find a home evenly as CPI finds a home, you know if you will, and 4 percent evenly across all assets. You see the housing bubble created where the housing prices have just gone parabolic over the past couple of years, you see things like the stock bubble that happened in the late 90's. And what ends up happening is that in inflations, the pricing mechanism starts getting dislocated from reality, and that gets a little more on the economic side of things but it's very important to understand as we go forward here also, prices are going to grow further and further detached from reality. And inflations create that kind of environment the same way they did that with the housing bubble, the same way they did that with the dot.coms and sock puppets and so forth. It's gets very, very difficult to really gauge what the real value of a home in a certain region, what is the real value [...] this or that?

Stephan: Let me make a point, because you hit on a very important subject that everyone has to consider. We're taught that demand typically brings up prices, and we're taught that prices going up is inflation okay? That's not what inflation is, what you're alluding to is that the money supply through government spending through the lending of money created out of thin air through our fractional reserve banking system, and again we'll say you know the bank has a million dollars deposited and it can lend out 9 million tomorrow and so on and so on, so you have a multiplier effect. But, the point is what you're hitting on and what's important to sort of crystallize for listeners out there is this: these price increases are not going to be due to demand, these price increases are going to be due to that money sloshing around out there as you are saying, and it has nothing to do whether real wages are going down, people are losing their jobs or the economy is drying up.

Well, that's related to that also is the bond market, people are wondering why the bonds are still staying so low if the dollar is losing its hide as it did. I mean a 3.5 percent drop in the dollar market is a massive slide. It doesn't seem all that big when you talk in terms of equities and so forth, your typical equity trader will see that happen in the market in a day sometimes, I mean it can be that volatile in stocks. And most stock investors kind of think of you know, 3.5 percent not being that big but when you're talking about the currency markets, you're talking about a different animal entirely, especially when we're talking about the dollar index, which is how the U.S. dollar is being measured. Excuse me. And that's the USDX and basically what that is, is it's a basket of currencies, I think it's the 5 major world currencies is the pound, the yen, the Chinese yuan the Euro and so forth. But what you have are the Canadian dollars in there as well. When that thing is shifting, it's not just the dollar verses one country with whom we have a trade in balance, it's basically a partial repudiation. Since mid October, the USDX has plunged by 5.4 percent. And with about two thirds of that happening since November, and through this past Monday. Now this past Monday, since then we've seen a little bit of a rally and little bit of kick up but again that 5.4 percent over that period of time for equity investors it doesn't seem like a lot but it really is a huge amount for currencies. Now, the question is why would people be fleeing currencies and still buying bonds? If we look at the treasury auction that just happened in the past week, I think something in the order of 56 percent of the inventory that was auctioned off of U.S. treasuries was bought up by foreigners. And again foreigners are accumulating all that debt. They're the ones when they provide all that liquidity, all that available cash are the ones that are keeping our interest rates, they're helping us keep our interest rates here at 50 year lows. And we've talked about it at nauseam over the past weeks months and years on our, at Vigilant Investor about how the U.S. basically has become very, very, very addicted and dependent entirely on extremely cheap credit, 50 year low, generational low interest rates and once that begins to unwind then you start having some issues, but again back to the original point. When you start losing the pricing as a reference point then it's the whole purpose of prices and market places. People generally are not taught that unless they go through economics and classes and so forth, get a formal training. But even then it's kind of discounted to some extent, the real excuse me, the real essential purpose of pricing is to really help the entrepreneurs and everybody out there, the entire marketplace, determine the most appropriate allocation for scarce resources. Now that is also compounded by the environment that we have in this country which is heavily regulated, heavily taxed, we have all sorts of complex you know things that the government requires this or that, and you have barriers to entry here and there, so prices get further dislocated by that on top of compounding the whole issue we have with the money supply and the inflationary washing out of those ordinary signals. So, back to the point that we're making, who knows what's going on with the bonds, what is the fair price for bonds, why are people continuing to bid them down at lows that seem to be unsustainable at a bare minimum? Who knows, it could be the mortgage industry trying to hedge, it could be speculative hedge funds, who knows fed monitization, any number of things. But the bottom line is we cannot, anybody who is banking on these rates lasting for the next 10 to 15 years at these rates, that somehow were going to be able to thrive indefinitely at well below average interest rates is just crazy. Once those rates start cranking up inevitably, then we're really going to see some wheels come off of this economy and maybe even you know, with the dollar as a whole, very problematic.

Stephan: Yeah, what I think is interesting also at this point you take a look at the way the Fed views everything, is it really viewpoint that we're seeing out there or is it really spin? November 28th, in his speech, Ben Bernanke, the Fed Chairman said, "to date, there is little evidence that the weakness in housing markets spilling over more broadly to consumer spending or aggregate employment," he said, growth will pick up again in the coming year and emphasize that inflation remains his greatest concern. Well, let's break that statement up just a little bit. Little evidence that weakness in housing is spilling over more broadly to consumer spending, that is yet to be seen yet, because as we have reiterated many times on our show, so much of our economic activity has been propelled by home equity extraction, okay? And that's not, sure that's tied to housing, but that is the hidden, that's the shark swimming under the water so to speak because that is not reflected in home sales Johannes, right?

True...

Stephan: That's not reflected in building jobs, okay? That is money that is spent that is a major component of the driver of our economy. That's not people's savings, that's not people's income, it's extracted from their home quote "equity," alright? And you know what? That's basically a line of credit backed by your house. And once that line of credit is tapped out, it's over. And what have we been seeing with home equity extraction as of late Johannes?

It's beginning to taper off.

Stephan: And if you think it's due to lack of confidence or it due to the fact that the people have tapped it out?

Well, I was just reading a headline earlier today, consumer credit falls at the fastest rate in 14 years and that was basically by 1.2 billion or at an annual rate of about six tenths of a percent, which is the biggest decline in 14 years. That's major, now you know they were talking within that article about how revolving credit actually hasn't picked up as they thought it would since the home equity withdrawals have kind of declined because if you don't have your house prices going up, in fact they're reversing, where are you going to find new home equity? You still have some people who do have home equity in there who are doing some re-filing and so forth with mortgages in order to pay off some higher cards, you know credit cards and so forth. But generally there's a point at which the cycle of being able to you know have a home as a piggy bank or a home as an ATM that just keeps growing, and growing, and growing with you know year after year just because you own a home. That's a cycle that is done and at best you can hope for home prices staying level. We're already seeing that beginning to decelerate to a point where in a lot of areas it's flat and even in negative now year over year. So, it will be interesting to see what's happening there. In the mean time also another note before we wrap up, we're pushing, we'll be on our 15 minute ordinary show, consumer confidence has been dipping as well. And that's basically an index was published today that showed November was the lowest reading since the prior October and it's just coming down and you know usually shopper's spirits they tend to be you know a good indicator around the holidays of how things are really going. And I think that, you know, even though gas prices have come down people are cheering, you know 2 dollars and 33 cents gas here in the Pittsburgh region, you know off of the 3 dollars but that's still dramatically up from before and you're still looking at a tighter pocketbook, less disposable income then you had before. And you know one of those things about the holidays is people will leverage up just a little bit in order to make sure everybody has a happy Christmas, then figure out how to pay it down afterwards. But one of the other potential problems also is that we're 70 percent of our GDP in this country, of our economic growth is dependent on consumption of just personal consumption. Way out of whack of its averages and we always mention that stat because if you're economy is dependent on consumption, you're in trouble if the gas that feeds that fire is slowly getting cut off and that's basically what's happening is the credit, can't get it any cheaper than it is right now, and it basically, the home market with was the ATM for that credit is now grinding to a halt and people are not as excited to be taking out credit card loans at 12, 15 percent, 18, 20, 29 percent as they are to get a home equity loan at 5.5 for an adjustable rate mortgage in which they can, you know because their tapping into their equity when they refinance at you know 3 and a half, what ever they were doing. We should probably wrap up, any final comments on the next 10 seconds here before we terminate recording?

Stephan: Yeah, I would say keep an eye on Japan. Remember Johannes earlier we reported that their trade surplus with the world was cut by about 25 percent, you know going over past the prior year, October to October. And a lot of it was due to weakening consumer demand by Americans. Now, we now today it's reflected in a release that Japanese economy expanded at less than half the estimated pace. And you know, always look to see, it's important to look to see how the American, the American consumer drives the world still. And a lot of that has been with debt extraction or borrowing. And you're starting to see a ripple effect in a country like Japan. Other than that that's all I pretty much have to say.

Sure, and again keep your eye on the hard assets, because they're going to be the real indicator relative to what's going on and I think traditionally people view the dollar and when the dollar drops, gold goes up and when the dollar goes up, gold goes down and you're seeing a decoupling of that old thirty year trend that was very much a pretty reliable especially post the big bubble in commodities and gold in the late 70's and early 80's there where it got a little bit irrational relative to equities and equities of course were at a very cheap discount in 1982 when the bull market started then. But in any event that's it for today, this is Johannes Ernharth and Stephan Ernharth for Vigilant Investor daily. We'll talk to you Monday at 4:15 again, and every day at 4:15 PM Eastern time and Wednesday evenings we have a bonus show that's an hour long, open conversation, tune in 9 PM Eastern time as well, you can visit talkshoe.com, subscribe to our Podcast via iTunes or any other portable device, you can also find that at talkshoe.com or through vigilantinvestor.com which is our web site, which is our daily journal, which you can subscribe to as well. We have all sorts of options, crazy stuff. But, anyway have a good weekend, and we'll talk to you next week.

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