Asia Times economist sees US inflation ahead

[TexasLawyer]

http://www.atimes.com/atimes/Global_Economy/HC03Dj01.html

Asia Times
Mar 3, 2006


Bernanke's yield curve fallacy
By Axel Merk

The new US Federal Reserve chairman, Ben Bernanke, believes that the current yield-curve inversion does not signal an economic slowdown. Yield-curve inversions occur when short-term interest rates exceed long-term rates.

<snip>



But in our assessment, Bernanke is wrong. An inverted yield curve likely signals an economic slowdown, just as it has many times before. The US consumer is far more interest-rate sensitive than in the past, and consumer spending plays an ever greater role in economic growth; it is now about 70% of gross domestic product (GDP). <snip> Over the past couple of years, consumers have financed their spending by extracting equity out of their homes and by adding to their credit card debt. Real wage growth has been stagnant. High energy prices have thrown the US savings rate into negative territory. Globalization has kept a lid on wage growth as US companies have been forced to accelerate their outsourcing to compete in an environment with high raw-material prices and little pricing power.

Adding these factors together, we have a highly interest-rate-sensitive consumer. As interest rates creep up, spending must slow down sooner rather than later, unless real wages or asset prices rise. Bernanke acknowledges that the housing market will slow; extracting equity from homes through ever higher mortgages is coming to an end. Bernanke may hope that corporate America will put its massive cash buildup to use, but we believe this US "savings glut" is due to the fact that US corporations see a fragile US consumer and better investment opportunities overseas. In our assessment, the US economy is too dependent on the consumer these days; other sectors of the economy will not make up for a slowdown.

US consumer spending has not declined in more than a decade. The consumer was enticed to continue spending as the tech bubble burst - and after September 11, 2001 - through low interest rates, low taxes and cheap imports. We are now faced with an exhausted consumer who required "employee discounts" last summer to buy cars; who was lured to the stores the day after the Thanksgiving holiday in late November with unprecedented discount offers; and who is being offered a "US$100,000 discount" when buying a new home (Centex, one of the United States' largest home builders, recently had a nationwide "special offer" on what we interpreted to be the bursting of the real-estate bubble in real time).

<snip>

It is our view that an inverted yield curve does indeed signal a slowing economy. We are afraid, however, that even as the Fed is likely to raise rates further, it will not forestall inflationary pressures. We are rather concerned that foreigners may be less inclined to finance the massive US current-account deficit as the economy slows. In this environment, gold may continue to do well, and the dollar may continue to be under pressure.

Axel Merk is the portfolio manager of the Merk Hard Currency Fund, a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the US dollar relative to other currencies.

[Art_from_Ark]

1. Guess what, guy?

For the average Joe and Jane American, inflation is already here

[Erika]

2. While Cheney says we should save more

The elitist GOP simply can't relate to the fact that Americans can't save more, because they can hardly scrape by now to face increased medical/insurance costs and energy costs. Our poverty rates are shooting straight up because of these costs?

Save more? The GOP are totally out of touch.

[hvn_nbr_2]

3. Wow, I haven't been paying attention.

I didn't even know that we currently have a yield-curve inversion. My understanding has been that it's a pretty reliable indicator.

However, I think that beginning in May and continuing until May 2008, the Fed will net lower rates, for political and not economic reasons having to do with the presidential election cycle. If anyone is interested in that, I'll look for the link to the analysis. Basically every four-year election cycle since JFK, the Fed has acted to favor Republicans in presidential elections.

I also think inflation is ahead. Stopping reporting the M3 money supply, the broadest measure of money supply, seems to me a transparent sign that they intend to monetize the now-completely-unmanageable national debt but they want to hide that they're doing it so insiders can make another killing before it becomes obvious what they're doing.

[TexasLawyer]

4. I think the Fed will have to raise

interest rates regardless of the election cycle.

Investment in the US economy is getting riskier, and T-bill investors will likely demand a comensurate premium.

It sounds like a recipe for an economic death spiral, though.

[TexasLawyer]

5. Home inventories-- Blue-light specials

I wasn't aware of the extremely generous home purchase rebates that are referenced in the article. Here's a little follow-up, with a link.



As Demand Slows, Home Builders
Sweeten Incentives for Buyers

By Kemba J. Dunham and Ruth Simon
From The Wall Street Journal Online

http://www.realestatejournal.com/propertyreport/residential/20051114-dunham.html?refresh=on

As the housing market's red-hot sales pace shifts to a slow burn, some home builders and developers are beginning to offer buyers a richer array of incentives.

Faced with rising inventories of unsold homes and reluctant buyers in many markets, a number of builders and developers are ratcheting up their promotional efforts. One developer is offering as much as $10,000 toward closing costs, while a home builder is throwing in golf-club memberships. Some incentives are available to any buyer, while others are tied to the buyer making use of a builder's preferred mortgage lender. Builders also are pitching higher commissions or special bonuses to real-estate agents.

Other deals are more creative: A Miami developer is offering to buy back its condo-hotel units at a premium after 18 months. Another builder, taking a cue from last summer's auto makers' deals, is offering "employee pricing" discounts in certain markets.

The moves come as Toll Brothers Inc., a luxury-home builder based in Horsham, Pa., this week lowered its forecast for how many houses it expects to sell in 2006. It cited, among other things, softening demand in a number of its markets, including Chicago, Las Vegas, and Washington, D.C., and certain parts of Northern California, Maryland and Florida.

<snip-- lots of details>