by James Smith of PEI.
In the last 20 years there have been more than 18 revisions to CPI and they all have one thing in common, every revision has had the effect of reducing inflation.
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You will see in quite a number of articles Martin Armstrong
refers to the games the government has played with CPI.
The government has every incentive to understate CPI
because many entitlement programs are linked to it. Hundreds
of billions of dollars can be saved by the govt over the
course of 10 years by simply understating inflation by 1% or more.
Therefore it should come as no surprise that the Bureau
of Labor Statistics is again playing games. After all, this
is an election year. Anything and everything is fair game
in an election year. And given the fact that inflation is
very much on the minds of the FED as well as investors,
PPI and CPI are becoming ever more so key market
moving figures.
I'm not going to repeat his article here, but get your hands
on John Crudele's column from the Thursday edition of the
NY Post. Effectively, PPI and CPI are systematically being
understated for the effects of rising oil prices.
" Shocked I tell you...I'm shocked to find there's gambling
going on in this establishment!" (Casablanca)
This line is from "Casablanca," but don't be surprised
to hear something similar from the administration if anyone
ever decides to hold them accountable for the actions of the BLS.
But this is not a diatribe against democrats.
We know that every adminstration has understated CPI
for the last 20 years, so there is plenty of blame to pass
around. The only difference is perhaps the number of
government agencies that have recently been subverted
for poltical reasons. (i.e. the transparent manipulation
of the yield curve by the Treasury department).
But just once......just once, I'd like to see an election where
all the polticiians lose. An "honest poltician" is an oxymoron.
STEEPENING YIELD CURVE WILL HAMMER THE STOCK MARKET!!
In a previous email I mentioned the fact that the currently
inverted yield curve will soon steepen sharply. In the context
of the political subversion of CPI and PPI by the BLS for
short-term political gain, and the Treasury Department's
transparent manipulation of the yield curve, it is obvious
what's coming down the road.
Bonds will rise in yield as investors grow to distrust all statisitics
put out by the Bureau of Labor Statistics. Investors will want a
fudge factor (extra yield) to compensate for the games politicians
play. Buyers of the 30 year bond will also require more yield
to compensate them for the fact that they are no longer buying
into a liquid instrument that they can get in and out of easily.
Traders and investors pay a premium for liquidity, but that
liquidity is fast disappearing in the 30 year bond.
GREENSPAN SEES NO CONFLICT IN THE TREASURY DEPT'S
ACTION OF PAYING DOWN THE DEBT.
In recent congressional testimony, Greenspan was asked whether
the actions of the Treasury Dept in paying down the debt in any way
hinders the FED's ability to slow down the economy. Greenspan
said, "No."
Because our Congress is too thick to ask the right question, they never
get at the crux of the matter. They should have asked Greenspan
the following:
"If you were at the Treasury Dept, would you be paying down the
30 year bond aggressively or would you spread your buying out
across the curve so as to cause the least amount of interference
to the markets?"
The Treasury's actions to pay down the long end of the curve
have artifically inverted the yield curve and deprived the markets
of a very valuable source of information? The markets normally
view an inverted yield curve as a sign that a recession in on the way,
but now that the Treasury Dept is manipulating the yield curve,
the market is no longer sure what signs the shape
of the yield curve is signalling about the economy.
If the economy is slowing down, no one will know it by looking
at the yield curve. My suspicion is that the economy is in no
way slowing down. One unemployment figure (at 4.1% last
Friday) does not change anything. Most economists still
expect the economy to grow at 4.0% or higher. That ain't
slow. Productivity is also gaining momentum (6.9%)
not losing momentum. The weath effect posited by
Greenspan is real and is adding to asset inflation
which eventually finds its way into commodities and
labor costs and the real prices overall.
ANOTHER REASON MANIPULATING THE CURVE WAS WRONG:
It leaves the bond market vulnerable to higher degrees of volatility.
Instead of focusing on the 30 year bond, the Treasury should be
actively buying in the 5 year note, which yield more, and issuing
more 30 year bonds, not fewer. This would save money
for the govt and lower inflation longerterm.
It all hinges on your view of coming inflation. If Greenspan will
have trouble slowing the economy with his long favored 1/4
point rate hikes, issuing more, not fewer, 30 year bonds now would be
the wise thing to do. It would lock in funding for 30 years at a
lower longterm rate as compared to coming rates.
The WSJ commented a few weeks ago on this idea. They
believed the adminstration's logic that the Tsy was saving the
taxpayer money by issuing mostly on the short-end of the
curve and buying in the long end. But if inflation is at a
relative low the 1990's and is coming back strongly, then surely
it would make more sense to issue more 30 year bonds
now to avoid having to come to market so frequently as
in a rising rate environment.
Remember this is the same govt that forecasted that
oil will stay between $20--$25 range all the way out to
2020!!!
If they govt refuses to believe in cycles, its because it
is not to their advantage to believe in cycles. It hamstrings
their ability to manipulate the markets for short-term poltical
gain.
Once people understand that commodities are beginning
a secular bull market and that inflation is coming back bigtime,
the administration would have more difficulty to manipulating
the yield curve during an election year and in understating
PPI and CPI.
HOW MUCH PATIENCE DOE THE MARKET HAVE?
If the market senses that the FED will not be able to slow
the economy appreciably in the near future, it may fear that
inflation will move higher and therefore bonds should also
move higher in yield to compensate for higher real inflation.
Maybe comparing Greenspan to Dirty Harry is not the right
analogy. He is more like a kid shooting a rogue elephant
that has run amuk with a beebee gun.
Each quarter point rate hike is another beebee out of
Greenspan's gun. He has shot 4 of them to no effect.
Who is to say that the 5th time is gonna have any effect?
In fact, one can make the argument that his 1/4 point hikes
are only fanning the flames of an emerging Nasdaq wildfire.
Each rate hike causes more capital to flee the DOW and
move into internet/biotech/tech stocks that are "perceived"
to be invulnerable to rate hikes. If the DOW continues down
this week, I believe a weekly close below 9700 basis the
March contract of the DOW will signal the end of
the silly season for the Nasdaq. Breaking below and
more importantly closing a week below 9700 (march),
will confirm a plunge to 9080 if not lower still.
There is no way the Nasdaq can continue higher while
the DOW plunges to 9080. The silly season is almost over.
A CHANGE FROM MY VIEWS OF LAST WEEK:
I had thought the DOW might rally back to the 50%
retracment level as the Nasdaq began a plunge.
I still believe the DOW will find some more breathing
space as and when the Nasdaq tumbles. There will
be some sort of "temporary" flight out of tech stocks
into the beaten down DOW stocks. For now though
this is not yet happening.
In actual fact the DOW is leading the way down here as we start
a new week...which I believe will be well remembered
long after its over. I am not too fussed by the turn of events.
I still believe the Nasdaq will continue to outperform the
DOW and the S&P...only this time it will outperform to the
downside. There is no way the DOW is going to continue
this plunge and Nasdaq continue on its merry way ever skyward.
Either the DOW & S&P have to rally to New Highs, confirming
the Nasdaq, or the Nasdaq must join its earth-bound cousins &
begin a correction. Especially ominous is the rejection
of 1414.50 Daily System Resistance on the S&P March contract.
. This may have completed a 3rd Lower High--often a setup for
Panic Selling. Today's selloff in the S&P could easily
turn into a rout.. A test of 1320.50 wkly supt or even 1303 mthly
supt is entirely possible..."this week!" You may or may not want
to short the mkt. Shorting is very very risky. Ask anyone who has
shorted the Nasdaq in the last year. But you are advised not to
buy stocks this week. At least wait for a close above 1414.50
basis the March S&P before you consider buying this mkt.
Having extra money in cash will allow you to buy stocks
much more cheaply at a later date. If I'm right, there
won't be any safety in bonds, stocks or even gold.
Gold probably has one more leg down to go before it can
start a new secular bull market. Buying gold too soon
would be a mistake. Even if gold takes off from here,
what have you lost by waiting for a monthly close above
334.7 Gold NY Spot. ....Not much when you consider
where its headed longerterm. |
