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Rising Prices and the Illusion of Value
by Mark M. Rostenko
Editor, The Sovereign Strategist
June 8, 2004

Stocks were a moderately mixed bag of mediocre mishmash last week as the S&P 500 and Dow edged slightly higher while the Nasdaq Composite slipped back a wee bit. The dollar continued to weaken and gold edged higher. Crude oil futures hit a new lifetime high of $42.38 per barrel but reversed sharply to end the week at $38.49.

Oil’s been the big news for quite some time now. But no worries, folks. Last week OPEC decided to raise output quotas, perpetuating the popular myth that demand is what’s driving prices higher when perceptive folks realize that the Arab nations are simply getting bloody tired of collecting rapidly depreciating colored pieces of American paper in exchange for a tangible and valuable product. “Now that prices are kicking booty, let’s crank open the oil spigots and make up for lost time! (And money.)”

In any event, we can all relax about surging gasoline prices. That’s about to change as according to Reuter’s “most analysts” expect prices to stabilize. I really really hope that these aren’t the same “most analysts” who forecasted $25 oil after America’s “swift victory” in Iraq and who failed to forecast the subsequent surge to record highs.

Frankly, I’d feel a heck of a lot better if “most analysts” would start predicting $100 per barrel oil. Then I could justify buying a huge gas-guzzling SUV and a massive short position in crude. And I could stop worrying about higher gas prices.

Regardless, crude’s quite the important feature in our vast economic landscape. For the past thirty years rising oil prices have been 100% accurate in forecasting forthcoming recessions. I know there’s no need to remind our astute readership but I will just the same: recessions tend to be really really bad for economic recoveries.

It’s hard to imagine that new lifetime highs in crude oil won’t have any impact on our economy, but that’s what we’re supposed to believe. Along with the fact that 23-year highs in the CRB Index of commodity prices and $400 gold are not indicative of inflation. Inflation, I contend, is going to be the single most important feature on our economic horizon in the next year or two. Possibly longer.

The Fed’s obsession with combating deflation (the usual result of burst economic bubbles) has led to an uncomfortable rise in the rate of inflation, the degree of which is not reflected in the official data. That’s because the official data excludes everything relevant and then massages just about everything else into figures that are sufficiently palatable to pacify the public and send it scurrying off to the malls.

Not only have prices of energy, food, and raw goods surged but now wages are beginning to rise as well. A 4.6% increase in hourly earnings according to the Friendly Federales’ Frequently Fabricated Facts report issued last week. Slice it how you’d like, but there’s no denying that inflation has stuck its claws deep into the U.S. economy while the Fed sits around on a 1% interest rate that keeps the money spigots wide open, relentlessly devaluing the dollar and virtually ensuring increasing rates of inflation.

In fact, the Fed has been increasing M3 money supply at an average rate of 9% for the past few years. The last time we saw consistent numbers like that was back in the 70s. You remember the 70s don’t you? That’s when the price of everything went to the moon, the days when Nixon severed any remaining link between the dollar and any semblance of anything substantial. And subsequently the dollar rushed off to hell so bloody quick that it didn’t even bother to notify the hand basket.

Inflation tends not to be so great for the stock market. Unless perhaps it’s the kind of inflation resulting from an overheating, rip-roaring economy. Eventually inflation eats into the rip-roaringness, but for a while all seems hunky-dory and profits are good. But you’d have to be a bloody dingbat to think that our forthcoming round of inflation is due to an overheating economy. This one is still trying to warm the left cheek of its arse in Greenspan’s incessant flow of exceedingly hot air.

Rising wage costs, rising raw materials costs all tend to cut deeply into corporate profits. Not good for stocks. And in today’s economy, it’s going to be especially hard to pass on rising costs to a savings-short and heavily indebted public. Not to mention the fact that the bulk of this so-called recovery seems to exist primarily on paper, in the calculations of government agencies.

No, this inflation is classic inflation: the kind caused by printing-press-happy central bankers. More and more money fetching the same amount of goods. The kind of stuff your momma warned you about (if your mom is an economist, that is.) It’s the kind of inflation that makes stocks look like they’re worth more (for a while). The kind of inflation that makes your house rise 15-30% in “value” when in reality, the increases in PRICE are due primarily to the devaluation of the dollar. 

As I’ve said, all that easy money is going to find a home somewhere. And it’s found it in stocks, homes, milk, gold, crude oil, gasoline, soybeans, platinum, eggs, and beef, among other things. Get this folks: stocks ain’t worth more. Gold ain’t worth more. Crude oil ain’t worth more. THE DOLLAR IS WORTH LESS.

(We told you years ago here at TSS that commodity prices would be the next big bull market and that stocks and the dollar would slide into the gutter. And so it has come to pass.)

And the Fed, I assure you, is hell-bent on seeing to it that the dollar is worth still less because it is only by destroying the dollar that the illusion of rising values can be sustained. Something that 21st century debt-laden America has long forgotten: value is not the same thing as price. Prices are rising. Value is not.

I like to wrap up these reports with a tidy and clever conclusion. This week I don’t have one, for this chapter of federal economic bumbling has only just begun...

© 2004 Mark M. Rostenko
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