Interest rates won’t rise until it’s too late
That’s the real message in Alan Greenspan’s testimony to Congress last week. The Fed and the Fed's boss are in serious denial about inflation.
By Bill Fleckenstein
4/26/2004
On Day One of Alan Greenspan's congressional testimony last Tuesday, nearly every market was roiled dramatically by the perception that the Fed might raise rates at some point. Though the "away-from-stocks" markets continued their slide on Day Two, equity land exhaled at the chairman's soothing words.
As for the substance of this gibberish, he basically told folks exactly what I assumed he would tell them: Just because we've conquered deflation doesn't mean you have to worry about inflation. I'll handle inflation when needed, but it won't be needed, because my inflation gauges will never register any.
The guy is never going to have to tighten unless he's got a gun to his head. Right now, there is no gun at his head because everyone is pretty happy. And no one's up in arms about the inflationary pressures that are, in fact, building. (Just look at what Starbucks (SBUX, news, msgs) is saying about their dairy costs.)
Traders engage in whitewater rafting
As noted, however, his silly rhetoric was no cause for celebration in the precious- and base-metals markets, which saw huge declines last week. But there is more to the picture than that, since these markets were (a) already in the process of a correction/setback, and (b) pressured further by the continued contra-trend rally in the dollar.
I think the size of the moves reflects the panicky late stages of liquidation, as motion begets more motion, versus any real fear of rising rates. When 8,000 or so hedge funds and 8,000 mutual funds change their mind for 15 minutes before changing it back again, the end result is gyrations like those we've seen in the precious metals.
A 'tighter' Al, the metals' pal
What many fail to understand about interest rates and precious metals is that if Al is compelled to raise rates, the reasons that force his hand -- and the damage so unleashed -- will be bullish for precious metals, not bearish. After all, a modest rise in rates does not change any of the reasons one would want to hold precious metals, most of which still lie in front of us:
* A resumption of the dollar decline.
* Our monstrous trade and budget deficits.
* Geopolitical problems.
* Prospective weakness in the U.S. economy.
One of these days, stock-market speculators will see a panic much like the precious metals have witnessed recently. (What comes to mind is silver's recent 25% blast to the downside in the space of seven sessions.)
Sometime in the next six months or so, folks are going to realize that the economy is not on a self-sustaining path, that we have inflation problems, as well as a litany of other woes I've previously described. That will undermine folks' cult-like confidence in the Fed, and stocks will experience a white-knuckle ride to make the white-knuckle ride we've just seen in precious metals appear like a picnic.
Debunking the deflation/metals' correction connection
Turning to the subject of deflation, I myself am a little tired of hearing that we're about to endure deflation every time there's a hiccup in the precious-metals market. To regard the cascade in the metals as a sign of deflation is preposterous, in my opinion. With the Dow at 10,000 and home prices at record highs, that's a "signal" about 15 moves in advance. Dare I say that perhaps someday (remembering that the Fed is totally out of bullets), after stocks have collapsed, after the dollar has collapsed, and after real estate has collapsed, then perhaps we'll experience some deflation, and we can worry about it as those events loom closer.
Finally, for folks who believe you can't lose money in real estate, since "they're not making any more of it," or "there's not enough of it to go around," I would direct their attention to that little country known as Japan. While only about the size of California, it's got roughly half as many people as the United States. Even though Japan has less land to fight over, that hasn't stopped the price of its real estate from declining for 13 consecutive years. Since 1991, residential land prices have declined about 43%, and commercial prices about 67% -- the lowest levels since the government started tracking land prices in 1974. (I am indebted to Dennis Gartman of The Gartman Letter for those statistics, which come from Japan's Ministry of Land, Infrastructure and Transport.)
Given the debt supporting America's housing market, just imagine the consequences of a Japan-like decline happening here. The fear of a collapse in real estate, and of the equity bubble unwinding, is what led the Fed to do what it has done.
But circling back to my comment about the Fed being out of bullets, it's easy to see how the train wreck ahead could get so ugly. The train wreck you should be envisioning is not two, but multiple trains colliding.
moneycentral.msn.com |
