Our readers will know that we have long criticized our Fed for not raising interest rates to combat what we call stealth inflation.
Two main factors divide our reasoning from that of our Fed.
The first is that a slowing economy will curb inflation, especially when money supply and liquidity are increasing while our dollar plunges.
The second is about the credibility of our government's CPI inflation figures.
Yesterday, Bloomberg ran a most interesting item exposing the dilemma faced by our Fed, with its dual mandate to combat inflation but also to encourage economic growth.
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Richmond Fed Chairman Jeffrey Lacker, who was alone in voting for an interest rate hike in the last four meetings of 2006, was in New York yesterday for a speech to the Money Marketeers of New York University. He also gave a most interesting interview on CNBC.
Mr. Lacker gave the impressive appearance of understanding fully the damaging virus of inflation. (Unfortunately, he is no longer a voting member of the FOMC.)
According to Bloomberg, Lacker remarked that it is "the central bank's responsibility to curb inflation and it would be a mistake to rely on a slowing economy to stem price increases."
Lacker went on, "It is central banks, not the labor market, that drive inflation down."
Bloomberg also reported Lacker as saying that he doubted that slower growth will cause inflation to recede.
We, at MoneyNews.com, heartedly agree with those three statements. However, we are acutely aware that they fly in stark contrast to the views of other FOMC members.
[Editor's Note:Bernanke Reveals `Fiscal Crisis` Ahead]
In particular, Fed Chairman Ben Bernanke and other FOMC members, including San Francisco Fed Chairman Janet Yellen, appear, from their statements, to predict that price gains will slow into 2008 as the economy expands at a "moderate" pace.
On April 26, Bloomberg reported Janet Yellen as saying she expected, "A modest amount of slack in the labor market would help bring inflation down."
Yellen went on, "At the same time that we must keep inflation moving down over time, we must be careful not to tighten too much, thereby posing unnecessary risks to continued expansion."
We feel that Janet Yellen's remarks are overly cautious and will allow stealth inflation to take hold in the form of stagflation. Indeed, we believe such views are typical of the timid, wishy-washy, liberal policies that allowed for economic abuse and unleashed not only inflation but stagflation in the 1970s and 80s.
Our readers will remember that it took President Reagan standing full square behind Fed Chairman Paul Volcker and saying, "do whatever it takes," to bring inflation and stagflation under control.
We shudder when we remember that Volcker had to take interest rates into double digits to achieve that great task.
In our opinion, the Fed is too timid and now risks unleashing stagflation.
[Editor's Note:12 Ways to Recession Proof Your Portfolio]
Our readers may ask, "How does our Fed get away with timidly leaving its rate on hold, while it merely mouths words of concern about inflation?"
The answer is that, as we have often said, the government's CPI figures are politically cooked to the downside. In short we do not believe the CPI figures, published by the same government that took us to war on the "shady" evidence that we were threatened by weapons of mass destruction in Iraq.
We ask our readers, if they can believe any inflation statistic that allowed: the exclusion of certain factual price data as "too volatile" or contained "government subsidies" (e.g. airport security or housing for the poor); assumed customers will move to cheaper prices (e.g. in food) lowered certain prices for so called "quality improvements", but made no adjustments for quality reductions (e.g. less postal service at greater cost)?
We also ask our readers to ask themselves whether, when filling in their 2006 tax returns, their expenses for 2006 were honestly only 2.1 percent more that they were for 2005.
When you add in the normally inflationary stimulants of massive money supply, a plunging dollar and a liquidity binge that now has the world awash with cash and booming prices in almost every asset class, other than residential real estate, we wonder how anyone can truly believe that inflation is at only 2.1 percent.
We are not alone in our suspicions that what we term "stealth inflation" now stalks our economy.
Recently, in an interview for our sister publication NewsMax, Lou Dobbs of CNN's Tonight said, "I have no faith in the CPI numbers. I have no faith in the unemployment numbers. My faith has been shaken by the insistence of government not to reveal what our officials do know. ."
Late last year, Barron's contained an article in which Rudolph-Riad Younes, co manager of Julius Bear International Equity Fund (with an average growth of 17.55 percent for each of the past five years) said he felt the Bank of England was correct in saying that, to be accurate, the American CPI should include energy. Younes added that, "if only housing were included in the make up of the true CPI, the index would be between 7 percent and 10 percent."
[Editor's Note:Cash in on dollar slide. Make 25 to 50% in six months.]
Even these comments do not stand alone.
Most of the world's important central bankers (including those of Great Britain, Australia, Japan, Canada and of the European Union), feel that inflation is increasing and are raising their key interest rates.
One key element is that most U.S market practitioners appear to believe their own government CPI.
Maybe, they merely "want" to believe the American CPI, but believe it they do and they invest accordingly. They have driven medium and long bonds to ever lower yields (even to a reversed yield curve) and both credit and TIPS spreads to historically low levels.
All this gives the appearance of a low inflation American economy. This allows our government to save tens of billions of costs in Social Security and interest payments.
All looks well - on the surface. Except that is for the "net" view of the outside world. They continue to sell the U.S. dollar pushing it further into a downward spiral.
The "cheap" dollar makes our assets and our exports cheap, but our imports progressively more expensive. This is highly inflationary.
We believe that stealth inflation stalks our economy.
By hiding the true CPI, our government allows our Fed to sit by, afraid to raise its rate and inviting both more inflation and then stagflation.
This leads us to maintain our highly defensive asset allocation for our most conservative readers: cash; short-term, high quality, high coupon bonds/CDs and gold.
For our less conservative readers we point out that, despite their high prices and currency levels, overseas equities still offer some good relative potential.
Furthermore, with a depressed U.S. dollar, foreign investors may be tempted to buy increasingly into ever frothy U.S. equities.
As the prices of U.S. equities rise and P/E ratios fall, we urge our readers to recognize that they are skating on very thin ice. Because when our Fed is finally forced to raise rates, as we feel they will be, a serious shock wave will be felt in both our stock and bond markets.
Editor's note:
Bernanke Reveals `Fiscal Crisis` Ahead
Cash in on dollar slide. Make 25 to 50% in six months.
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