here's another
Fed Quacks Feast on Statistical Quirks
By Bill Fleckenstein
Special to RealMoney.com
06/20/2003 05:28 PM EDT
Overnight the markets yawned, while preopening our stock index futures rose about 0.5%, largely influenced by expiration machinations. After the opening rotation, we sold off and snapped back, such that a couple hours into the day some indices were modestly up and others modestly down, with nothing to write home about.
The market made one halfhearted attempt to break out over the morning highs, but that fell apart and we sold off to the lows midafternoon. From there, we flopped and chopped until the close, more or less near the lows of the day. Housing stocks were roughed up, down 5%, plus or minus. Otherwise, as the box scores show, not a whole heck of a lot happened, which is pretty interesting, given all of the chatter about today's expiration.
Of JGB and TBC: Away from stocks, the greenback was quite a bit stronger against the euro and the Canadian dollar, but lower vs. the yen. The metals were lower by about 1%-plus. Fixed income was a bit weaker again (I covered the last of my bond short), but JGBs (Japanese government bonds) saw a pretty good-sized bounce. The break in that bond market can thus far be characterized as potentially meaningful, although it could also just be noise. Trying to ferret out the right interpretation will take a little time. (By the way, a thank you to Dennis Gartman for initially noting the break in the Japanese bond market -- other comments from Dennis in a moment.)
Turning to today's editorial comments, and as a counterpoint to the lunacy from the Dallas Fed (see last night's Rap), I would encourage everyone to read Aaron Task's column yesterday, in which he linked to an on-the-money assessment by Kevin Lansing, senior economist of the San Francisco Fed. Lansing's paper demonstrates that at least one person inside the organization called the Federal Reserve understands what our problems are. Sadly, it's not likely that this knowledge will sink into the knuckleheads above him.
Abracadabra Arithmetic: Now that we're on the subject of the Fed and its battle to drive up the rate of inflation to a number it deems successful, I'd like to touch on the subject of the consumer price index. The CPI is what usually comes to mind when people think of inflation (although the CPI is really just a symptom of inflation, inflation itself being the pumping up of money/credit). As I've noted frequently in the past, this statistic has been warped by government calculations known as hedonics, whereby if the price of something goes up, but its quality is deemed to have gone up more, the government calculates that price to actually have gone down. This nonsense pervades almost all government statistics.
And, as if that's not warpage enough, the government precipitates more, via something called "owners' equivalent rent." For those of you who don't know, back in the early 1980s, the Bureau of Labor Statistics changed its method for computing the cost of housing. As best I can understand it, the BLS decided that since housing prices sometimes go up a whole bunch, it wanted to strip that out and produce a more manageable number. So it came up with a calculation to infer the rising cost.
Working at the Understate Department: The point is, whatever level the CPI is running at understates in a meaningful way the real level of inflation. I'd like to give readers a vivid example of this, for which I am again indebted to Dennis Gartman, who discussed owners' equivalent rent in his newsletter. Since I couldn't improve on his comments, I'm just going to quote them verbatim:
The U.S. government has noted a marked decline in the rate of inflation, and that has given pause to Mr. Greenspan's policies. Interestingly, the government has created some of its own problems regarding inflation accounting, given that one of the more important influences on inflation has been in the cost of owner-occupied housing. This is one-quarter of consumer expenditures [the emphasis is mine] . Its influence is material, and it is expanding.
The 'owner occupied' segment of consumer prices is up only 2.5% in the year through May, and that is significantly below that of a year ago. The reason is rather circuitous and discomfiting, especially because there has been no correlative deceleration in apartment rent increases. The problem is in how the figure is computed to produce what the government calls the cost of home ownership. As we understand it, the Bureau of Labor Statistics has its researchers look into the rental market to estimate how much a home owner might or should charge to rent out his house. The BLS calls this 'owners' equivalent rent.'
Here's the problem: Some rents (especially those in the Northeast) include the cost of natural gas, which requires the Bureau to subtract an estimated gas charge from rent figures compiled. However, the reality of renting is that rents are 'sticky.' That is, rarely are rents revised downward as nat-gas prices fall, and they are revised upward only after a sustained period of high and rising nat-gas prices. Thus, in periods such as this year, when the cost of gas soared, owners' equivalent rents appear to have dropped.
A Malleability of Convenience: Dennis concludes: "This is a statistical quirk. It is clearly not what is happening in the 'real' world, but it is what is happening in the government's statistics." So, there you go, folks. Statistical quirks help hand the Fed a rate of inflation it deems too low (calling it "deflation"). Perhaps if the Fed calculated the CPI more honestly and accurately, it would find out that there is currently "enough" inflation to satisfy its concerns. Of course, then the Fed would lose its excuse to pour on easy money, unless it was ready to own up to the fact that it was trying to bail out its past mistakes that caused the bubble -- the economic and financial threat for which it has no cure.
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