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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (15666)	11/13/2004 5:03:05 PM
From: Chispas	Read Replies (1) \| Respond to of 116555

I applaud you ! I mean for investments, not for your singing voice <G>

To: Elroy Jetson who wrote (15666)	11/13/2004 5:35:26 PM
From: mishedlo	Respond to of 116555

Fed Tightening Negative At Any Level Yesterday’s FOMC meeting was essentially a non-event as the Fed raised the fed funds rate by 25 basis points as widely expected, and made only exceedingly minor changes in wording that everybody jumped on as conveying an important message. On the economy the statement said that “output appears to be growing at a moderate pace” as compared to the prior statement that the economy “regained some traction” Last time they asserted that labor market conditions had improved modestly, while this time they eliminated the word “modestly”. The current release says that “Inflation and longer-term inflation expectations remain well contained”, whereas in September they stated that “…inflation and inflation expectations have eased in recent months.” To those unversed in Fedspeak, the changes seem almost non-existent, but the current interpretation of Fed Kremlinology is that the economy is stronger and inflation lower. The Fed, however, doesn’t seem to interpret it quite that way as they still conclude as they did in September that “The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal.” The Fed also stated that “policy accommodation can be removed at a pace that is likely to be measured”, indicating that further 25 point increase in rates are virtually assured for at least the next meeting and probably the one after that. In our view the difference between removal of policy accommodation and outright tightening is a distinction without a difference, and past periods of such tightening even in a low interest rate environment has often been a precursor of recession. In the late 1950s at a time of relatively low rates when few stock market watchers paid much attention to the Fed, Burton Crane wrote a book suggesting that investors could vastly improve their performance by following central bank policy and determining whether the Fed was easing or tightening. A policy of easing, he said, was bullish while a policy of tightening was bearish. His conclusions were based solely on the direction of rates, not their levels. In fact, at the time he wrote, Crane had probably never witnessed a high rate environment in his entire career. Our current review of the data indicates that Crane was onto something. The recession beginning in May 1937 was preceded by a rise in the 90-day T-bill rate from 0.11 percent to 0.55 percent. In the first four post-war recessions the start of the economic declines were preceded by rate rises as follows: from 0.92 percent to 1.14 percent; 1.74 percent to 2.20 percent; 2.60 percent to 3.35 percent; and 2.85 percent to 4.50 percent. After that rates reached far higher levels, but our point is clear. When it comes to interest rate moves, direction counts even at the low levels of today. We therefore think that the Fed is sort of playing a game of semantics here by calling its current policy a removal of accommodation rather the tightening that it is. The Fed knows that tightening is negative for the economy. Calling it something else won’t change the outcome, although it may help cheer investors. That, after all, is what the Fed is trying to do as it continues its dangerous juggling act. This is particularly true at the current time when the economic recovery has been sub-par and has been so dependent on bubbling asset values rather than rising employment and income from wages and salaries. In this environment we believe that the economy is likely to be even more sensitive than usual to rising rates. In this context we also think that too much has been made of the outwardly strong employment number that, upon examination, has a number of underlying weaknesses. This is the first strong report after four straight months in which expectations were not met even the recent upward revisions. It is also only the third month of 35 in the present recovery to record more than 300,000 new jobs when, going by past recoveries, we should have averaged more than 300,000 additional jobs per month. In addition, of the 337,000 new jobs in October, 47,000 were temps, 41,000 were government and 71,000 construction, probably mostly hurricane-related. Without these, the jobs increase wouldn’t have even reached 200,000. Furthermore, in the household survey, 85 percent of the increase was in part-time jobs while the so-called augmented unemployment rate that adds back those not looking for work but would take it if offered, jumped from 8.4 percent to 8.8 percent, the highest in 12 months. In sum, we still think this is an unsustainable economic recovery, and the Fed’s continued tightening along with the winding down of fiscal stimulation and the far lower level of mortgage refinancing are likely to create strong headwinds against growth. comstockfunds.com

To: Elroy Jetson who wrote (15666)	11/13/2004 5:58:14 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Real Estate - The Deflationary Catalyst comstockfunds.com Our regular readers know that we have concluded that real estate is the most logical catalyst for the deflationary environment we expect to unfold within the next 6 months to a year. We have also mentioned a collapse in the dollar or a major bankruptcy as potential catalysts, but real estate stands out in our minds as the prime candidate. This real estate comment is longer than normal and will serve as to replace the usual Tuesday and Thursday’s comments this week. The rush to refinance over the past few years is without precedent. According to ISI, the cash outs of the refi’s last year were in excess of $200 billion. One of the amazing aspects of the massive refinancing of homes, which is effectively piling on consumer debt at record levels, is the fact that this is being done with the blessings of our esteemed Federal Reserve Chairman, Alan Greenspan. In various testimonies he has stated that borrowing the equity in consumers homes is helping the economy and he supports it. Imagine the head of the Central Bank of the world’s largest economy becoming a cheerleader for individuals to continue borrowing on the equity of their homes while they have already incurred a record amount of debt and the homeowners’ equity is falling to record lows. Could the Fed Chairman actually think it is appropriate to use ones’ home as an ATM cash machine? Real estate bubbles bursting are different than stock markets bubbles bursting because bubbles in the stock market only effect the owners of stock and maybe a few brokerage firms that don’t adhere to strict margin requirements. A collapse in real estate, not only affects the borrower, but it also the lender. Over the past few years poor macro economic fundamentals have diminished the demand for commercial and industrial loans, causing commercial banks to seek other avenues of profit. In particular, the banking sector has increased its exposure to consumer, residential mortgage and commercial real estate (CRE) loans. The irony of banks currently fighting “tooth and nail” over generating loans to real estate is amazing since the spread between home prices and incomes are the widest ever, and the spread between the cost of owning a home to the cost of renting a home is the largest ever. The price versus rent in real estate is similar to the price-earnings ratio of common stocks and presently in RE this ratio is the highest level in history. This is where we were with stock market P/Es at the beginning of the century.