Alan Moore Commentary 6-1-2011

    The rise in fuel prices has caused some interesting price changes. Airline tickets for example, it used to be that the price included taking your bags with you and the cost of the gas to fly the plane. Not so any more. You can use your mileage to get a free ticket from New York to London on British Airways, but there is an additional charge of $566 for fuel and airport taxes (WSJ 4-28-11). You could save your miles and buy the ticket outright for $811, including everything; then you could use 90k miles to upgrade to first class for the extra $245. The American airlines aren’t charging separately for fuel yet, but they have cut back on the free seats available for mileage use, to the point you can’t get one. Try using your miles to book a ticket this summer, maybe you can find a redeye to Pierre, South Dakota.

   Look at last year’s increase in your homeowners insurance, or did the premium go down because the value of the house went down; or because you can get repair work done for half what you could four years ago? The neighbor across the street from me got a quote to replace the tile on his roof in 2006 for $32,000; he just had it done for $16,000, but the insurance company calculator still values the roof at 32k. That is where they really stick it to you, in the replacement calculator they use. In addition, when I was in the casualty insurance business 35 years ago, you only had to insure up to 80% of the value of the home, and take the risk that the concrete floor wouldn’t burn up or be blown away by a hurricane---- not anymore due to the insurance lobby. The insurance companies get a 100% premium to assume 80% of the risk, and calculate a value 120% more than the actual replacement cost. Premiums are never going down……… inflation, deflation or even if you buy a fire truck and park it in the driveway.  Inflation is built into the American culture all the way down to the cost of apple pie, which is tied to wheat, sugar and the wages paid to pick the little green apples. Certainly, inflation doesn’t need any help from the Federal Reserve Bank, but the dollar does.

   The dollar is down against the Euro over the last year and gold is up in dollar terms by 15%, but down in Euros. It would have been better to hedge the dollar by holding Singapore dollars. In any case, the dollar is temporarily up, but our exporting companies have enjoyed record earnings, as their prices are very competitive, which is no tribute to them; it is mostly currency trading. Exxon made $10 billion in profits last quarter, which is a windfall due to high oil on the world market; Exxon refineries also helped export 54,000 gallons of fuel to Brazil last month, when our government keeps talking about reliance on foreign oil---why didn’t that gasoline get used in the USA to reduce prices at our pumps?  

   Germany recently reported GDP growth 50% higher than the US and unemployment has dropped to 7.5%. Even with a strong currency they are winning the global trade war. Their real problem is having too continually bail out the weak countries in the EU.

   The important thing about the falling dollar is its recent inverse correlation to the stock market, corporate earnings, oil and gold. The Dow fell to 9600 last July, a month after the dollar soared due to the Greece debt crisis, and gold went down. If the dollar gets stronger, stocks go down. If the dollar is weak, our companies export more. China has been holding down their currency for years in an effort to support their export driven economy; however, this only works well for the exporters. For example, Caterpillar has soared in price, but since the dollar rebounded in mid May, the stock has fallen 10%.

     While the dollar may go up and down, the national debt only goes one way; not that its rapid increase has caused high inflation. In the last four years the official consumer price index is only up 8.8%, because the stimulus didn’t go into consumer’s pockets and wages have barely moved. Since March of 2007, Social Security and Medicare costs have risen 30%, not to mention spending on the military increased 40%----------these items are where the 61% increase in the national debt went to (Barron’s 5-2-11, p 43). Here is the time bomb: even though the debt has gone up 61%, total interest outlays are less today than in 2007 because of the drop in rates due to QE-2 and the recession ($206B over the last 12 months versus $237B in 2007). When the debt ceiling is raised to $16 trillion dollars, if rates go up just 2 % our budgeted interest costs will double. Although, through the summer rates should stay relatively low, because of a flight to safety as Greece collapses again, plus a possible Spanish banking inquisition. The housing market is also getting worse not better as indicated by this report:

 (MarketWatch 5-0-11) — If you thought the housing crisis was bad, think again. It’s worse. New data just out from Zillow, the real-estate information company, show house prices are falling at their fastest rate since the Lehman collapse. Average home prices are down 8% from a year ago, 3% over the quarter, and are falling at about 1% every month, according to Zillow. And the percentage of homeowners in negative-equity positions — with a home worth less than its mortgage — has rocketed to 28%, a new crisis high. Zillow now predicts prices will fall about 8% this year and says it no longer expects the market to bottom before 2012. “

    Far more ominous than the national debt level and the housing crisis is the initiative in Congress to remove the power of the Federal Reserve Board to respond to inflation in kind by raising interest rates; Barney Frank wants to place effective control of the Board in the hands of the  politicians who are responsible for the spending abuse. This was announced on 5-3-2011 and it scares me.

WASHINGTON (MarketWatch) — “Rep. Barney Frank, the top Democrat of the House Financial Services Committee, is taking aim at the hawks on the Federal Reserve. Frank announced Tuesday he will introduce legislation to strip the 12 regional Fed bank presidents of their votes on the central bank’s interest-rate setting Federal Open Market Committee. At the moment, several of these regional Fed bank presidents are more hawkish than the chairman, Ben Bernanke, and the majority of the voting members of the FOMC. That means they generally want the Fed to concentrate more on preventing inflation than stimulating growth. At the moment, several are urging the Fed to hike rates sooner rather than later.”

   The 12 regional Fed presidents are appointed by the states for a set term and they rotate out, unlike the members of the FOMC who are appointed by Congress after testifying circuitously that they will abide by the political agenda at hand; and then they can serve until dementia sets in. If the bill passes, Frank will dictate who can vote on raising interest rates and when, and he possesses a severe conflict of interest. He is also the single most responsible person for the housing bubble and the recession that followed, by ordering Fannie Mae to reduce lending standards and allowing mortgages to be securitized and dumped to investors all over the world---Greenspan was merely the front man in the scam. I rank America’s biggest enemies as follows: 1. al Qaida, 2. Iran, 3. Qaddafi, 4. Barney Frank, and 5^th, Congress in general. If Barney succeeds in gaining control of the Federal Reserve Board, he will move up to number 1.

 The following is from one of the hawks on inflation that Barney and Ben want to disenfranchise:

                    Modest Fed hike needed by year-end: Kocherlakota by Greg Robb

 (MarketWatch 5-5-11) – “A modest rate hike would be appropriate toward the end of 2011, if economic conditions continue to unfold as expected, said Narayana Kocherlakota, the president of the Minneapolis Fed on Thursday. In a speech in Santa Barbara, Ca., Kocherlakota said his call for tightening is based on his own forecast that 2011 will be a better year than 2010, the labor market will slowly continue to heal and inflation will grow slowly from low levels. Kocherlakota is a voting member of the Federal Open Market Committee this year. If there is an upward surprise in inflation, then the rate hike might have to come as early as July or August, he said.”

     As to how gold fits into all this: two giant hedge fund guys went in different directions last month, Paulsen owns a huge position and thinks it is going to $4,000 an oz by 2014; George Soros sold his position and thinks it will crash. In other words, you can flip a coin as to where gold goes--- it is not an investment yielding dividends or income, it is a bet on ideology. I don’t think inflation will get out of hand, nor will the dollar go to zero; besides, long-term capital gains derived from gold bullion investments are taxed at 28%, not 15%, because it is deemed a collectable by the IRS.

       Since January, the speed of diversification has been driven by QE-2 and that is ending this month. Should our interest rates rise, the world will run back to the dollar; albeit, if Congress gets rid of the hawks as voting member of the FOMC, interest rates may never rise fast enough to catch-up with inflation: That is the race interest rates must win and the Fed seems frozen at the starting gate, worried the American workhorse is in poor shape to run---- or dropping the metaphor------ labor is not skilled and educated enough to compete, not to mention being too expensive.

  The bottom line: the growth in corporate earnings is stalling, GDP is stalling, housing is stalling and job growth is anemic. The economy is going nowhere fast and the debt ceiling debate will result in no meaningful spending cuts. Europe is in a debt fallout repeat and inflation is raging in Asia. Facing all of this is a stock market selling at 18 times earnings and treasury bonds yielding ridiculously low interest rates. Go figure because I can’t figure it out; but I can figure that the government’s tax revenues are about $2.5 trillion and Congress is spending 3.7 trillion this year, a shortfall of 32%. There is no way we can cut the deficit by 32% over the next 10 years and neither Republicans nor Democrats have a clue about what to do. What we need is a law that says Senator’s and Congressmen’s pay is automatically cut by the amount of the deficit year by year. At least the villains in this nightmare should pay their fair share of the losses.