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Everything is Under Control
by Mark M. Rostenko
Editor, The Sovereign Strategist
June 21, 2004

Stocks were narrowly mixed last week as the major indices closed barely changed. The dollar finished on a weak note while gold posted healthy gains. Crude oil edged upwards a bit while prices at the pump continued to retreat from record highs.

Stocks finished out another rather uneventful week as participants continued to weigh various geopolitical concerns and economic uncertainties. The market is still neither here nor there, continuing to carve out a wide trading range or very possibly, a massive topping formation. Seems that every month we have something new to be concerned about and every month someone from the Fed comes out to tell us there’s nothing to worry about. And the market simply teeters back and forth, worrying and then feeling relieved again.

Deflation? “We’ve got it licked. Inflation? “Licking it as we speak.” Housing bubble? “No such thing.” Iraq? “Under control. Never mind all the dead soldiers. Out of sight, out of mind.” Terrorism? “We’ve confiscated over 300,000 Swiss Army nail files from American business travelers in the last 15 months alone. Enjoy your flight.”

The Administration has been gloating over the 5.6% unemployment rate for some time. But the hidden numbers tell a different story. A broader number which attempts to account for the “hidden unemployed” suggests the rate is closer to 9.7%.

No worries says Fed Governor Lyle Gramley. “It shows there is more slack in the labor market than appears on the surface...That means fears that inflation is about break out all over the place do not seem warranted.”

Truly we’re blessed to live under the firm guidance of a Fed that has managed the ultimate “Goldilocks economy” in which all news is good news and that includes the bad news. Which is of course in fact good news only masquerading as bad for variety.

Feds: “Looky here at the low unemployment numbers! That means the economy is great!”

Reality: “Uh, they’re not really all that low if you take frustrated workers and those who have given up looking for jobs into account.”

Feds: “Hey that’s great! That means we don’t have to worry about inflation!”

Reality: “What about record highs in crude oil and gasoline prices?”

Feds: “Adjusted for inflation, gas prices are lower than they were 20 years ago.”

Reality: “Can I pay for gas in 1984 dollars?"

Feds: “No. We’ve cut them all in half, stretched them out, and reissued twice as many. Enjoy your new-found illusory prosperity.”

Inflation is on the rise with May CPI coming in at an annualized 7.2%. No worries. When you strip out the most relevant stuff, ignore rising housing prices and massage the rest of the numbers just right, you end up with the “core rate” which came in at a paltry 2.4%. Those of you who don’t eat or drive and spend most of your paycheck on mint-flavored dental floss and generic kitty litter should feel relieved.

As you know, the Ministry of Statistical Massagery needed a little extra time to produce figures “acceptable” for the U.S. public and finally released their belated PPI figures for May, revealing an annualized inflation rate of 9.6%. But, when stripped of everything that is most relevant today, we’re looking at only a 3.6% rate.

“Inflation? No worries. We’ve got our best data-manipulators working on making its presence invisible as we speak.”

You see? It’s all good news. Not too warm, not too cold, but just right.

Interest rates are set to rise. But we’re not worry about that either because the rise will be “measured.” There was a time when that might have meant something. When interest rates were raised because the economy was in a cyclical upswing and could afford a rise that serves to temper inflation pressures.

The difference today, however, is that we work in an economy that is almost wholly DEPENDENT UPON LOW INTEREST RATES. The financial community makes its money borrowing at absurdly low rates and lending at higher rates to anyone with a pulse, confident that the Fed will keep the game profitable with low rates. Corporate America is propped up by consumers enticed to spend more and more by absurdly low interest rates. It doesn’t matter what anything costs anymore, so long as we can afford the monthly payment.

Have you noticed how much the Fed has been out jawboning this year? Because they must. Because America CANNOT afford a significant rate hike. Not the housing market, not the credit markets, not the consumer, not the stock market. And so, like I discussed last week, the Fed works overtime assuaging any concerns the market has. “We’ll raise rates. But don’t worry. It’ll be at a measured rate. Inflation concerns? Ok, well maybe it won’t be so measured. We may have to be more aggressive. What else are you worried about? We have an answer.”

And next week, next concern, there will be some other response. Greenscam and his merry band of bubble-blowers will go on saying whatever needs to be SAID to keep the markets afloat for just a bit longer. What they will DO is another question entirely because there’s not much they can do. Raising rates will unwind the very underpinning of our illusory state of increasing prosperity, destroy the only foundation for whatever semblance of a so-called recovery the statistamagicians in D.C. can conjure up.

What does it all mean for stocks? I don’t know. I’m beginning to give up on the notion that the market discounts much of anything, that it still serves as a barometer of the economy. Nowadays it appears that the markets reflect the degree to which the Fed is able to comfort market participants. The stock market doesn’t care much for valuations, only for much confidence it has that Greenspan can keep inflating the credit and housing bubbles.

Nobody with even a tenuous grasp on reality believes that this game can go on forever. Everyone knows that the party has to be end. But in the meantime everyone would rather go on believing in Uncle Al’s smooth talk. Because the alternative isn’t pretty and it’s no fun to consider. So money keeps getting whipped up out of thin air in order to sustain the illusion and indeed the illusion is sustained. For just a bit longer...

© 2004 Mark M. Rostenko
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