Taylor On The Financial Markets
Exploding Inflation, Compliments of Greenspan, Bernanke, & Co.
The statement by the Fed this past week when it raised interest rates by another quarter % "measured pace" has to be seen as a turning point. True to form, Greenspan chickened out once again. The "Greenman" is very much like a parent scared to death of his little brat child. We've all seen this situation. The little brat at the grocery store screams for candy at the top of his lungs and the mother or father too fearful to smack him on the posterior end to set things straight, simply takes the easy out and gives the kid what he wants.
Think back to the end of last week-the week ending August 5. After news of rising strength in the jobs market and some very strong economic news, the markets figured the Fed would, if anything, become more aggressive in controlling the supply of money and thus allow interest rates to rise more nearly where they should be for a country that is spending more than it saves. With that fear, home building and real estate investment stocks began a cascading decline for three successive days starting on Wednesday, August 3.
True to form, the Fed under Alan Greenspan did not have the stomach to restrain increasingly out-of-control markets because if it had come out with some tough anti inflation language in the FOMC meeting last week and say a ½ % rise increase in rates, the above noted declines in the housing and real estate markets would likely have kept on plummeting. Not only did the Fed raise interest rates by a mere one-quarter %, but it used the same kind of "measured" language as it has used persistently during this period of excessively easy monetary accommodation. Immediately as the minutes of the last FOMC meeting were released which gave the signal from Greenspan, Bernanke, and Company said "party on, party animals," the markets immediately went wild. As Richard Russell observed, the most significant message was "sell the dollar and buy everything in sight." And so, our Inflation/Deflation Indicator hit a new high during the week. It increased by 1.29 % to close at 108.29.
In other words, our indicator has risen by 8.29 % since we started
calculating it on January 31, 2005. Anything above 100 indicates inflation, and anything below that base value indicates deflation from that starting time frame. Like the parent unable to handle the temper of the two year old at the grocery story, Alan Greenspan and the Fed gave the baby the candy at the grocery checkout counter.
This past week, following the "GO, GO, GO!" signal from the Federal
Reserve, inflation began to rear its ugly in a rapidly accelerating manner. Within our indicator, share prices in India as measured by ETF-IIF, exploded upward by 12.01% for the week! Chinese equities as measured by ETF-FXI rose by a not so shabby 4 % for the week. And the Japanese stock market, which has been in a funk for the longest time also came to live. In our indicator, Japan and the auto industry is represented by the shares of Toyota, which surged upward by 6.55 % on the week.
Aside from foreign equity prices, oil and gas prices hit new highs, in part on fears of instability in Saudi Arabia. Light sweet crude exploded by 8.12 % on the week, and largely because of that, the energy-heavy Rogers Raw Materials Index fund rose by 2.57 % on the week.
Helping to keep our Inflation/Deflation Indicator from instantly exploding into hyperinflation mode were the following moderating components:
- A 2.27 % decline in Wal-Mart
- A 0.92 % decline in the hosing index
- An 0.87 % decline in the real estate investment trust ETF
- A 1.80 % increase (and thus a decrease in our indicator) in long dated
- U.S. Treasuries as measured by our long treasury ETF, namely, TLT.
- Copper declined by 2.34 %
- Silver declined by 1.53 %
- Gold/U.S. dollar index rose (thusly declined for our index) by 1.42 %
- Gold/Silver rose (and thus declined for our index) by 4.25 %
What can we take from the action last week? I would say that, if there were a message in last week's market action, it would be "SELL THE DOLLAR! SELL AMERICA! SELL IT FAST!"
And as I look at longer-term charts, what seems to be emerging is a major long term topping out in U.S. equities, while equities of other countries appear to be taking off like a rocket. And that would in my view be very appropriate because the West is, unfortunately, in the early stages of a long-term decline. We can try to fool ourselves by printing money and pretending we can create wealth from that activity as Mr. Greenspan and Bernanke and others at the Fed and in the banking industry are so keen to do. And to the extend foreign nations are willing to keep accepting these increasingly worthless pieces of paper, so we can keep borrowing them back from China and Japan and Korea to buy all these new houses and all these new cars and new gadgets and all manner of junk, we are able to delude ourselves into thinking we are wealthy when in fact we are engaging in a
ruinous last gasp orgy before our decline. Trouble is, we Americans don't really own that stuff. China does or Japan does. And when we can no longer service that debt, and when for whatever reason, foreign wealth flees from the dollar, the message will be "Look out below!" Unfortunately the direction of markets last week suggest that day of reckoning may now be at hand.
JAugust 13, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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