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November 10, 2004

Canaries and Coal Mines
by Rob Kirby

In a speech this summer to a credit union conference, Mr. Greenspan reiterated that the balance sheets of American households are generally in "good shape." With personal and corporate debt levels in the U.S. running at unprecedented [some would argue unsustainable] levels, fueled only by currency debasing historic low rates of interest Mr. Greenspan insists that everything is ok? While trying to get my head around this exaltation I cannot help but wonder how much disdain this elitist man must have for us commoners. With the tone of the man's utterances I get the distinct feeling that we're all being talked down to-like we all don't 'get it.' Maybe he's right. Perhaps we're too naïve and truly don't 'get it.'

Perhaps we've finally made it to the Emerald City and we truly are standing before the wise and omnipotent wizard of Oz? Perhaps unprecedented debt levels don't matter? Perhaps foreigners will fund unprecedented and unlimited amounts of American debt and conspicuous consumerism indefinitely? Somehow I doubt this is truly the case. I am deeply suspicious that this story does not have a very happy ending. I also feel queasy that the man/men behind the curtain pushing and pulling all the levers is/are really not a very good wizard[s] at all.

You see folks, the kind of inflation [monetary debasement] we are currently experiencing amounts to government sanctioned theft - and remember, it's only sanctioned because it is government that is doing the stealing. Historically, inflation is measured in the economy in much the same way noxious fumes are meant to be detected by a canary in mine. In the mining sense, the death of the canary notifies unwary miners that air quality is unfit for human consumption. In the case of the economy, PPI [producer price index], precious metals prices and CPI [consumer price index] are generally regarded as the primary gauges of inflation. Big upside moves in any of these is a harbinger of imminent inflation.

PPI is or used to be released every month at the same time. This index by and large measures inputs or raw materials that go into the manufacture of consumer goods. Reporting of the PPI has been delayed by the Bureau of Labor Statistics no less than 2 times thus far this year. On one occasion we were told that data gathered was "unfit" for consumption? I ask, does this not sound eerily familiar [perhaps toxic]? On the other occasion we were told that government computer obsolescence rendered computers unable to perform a "new method" of calculating the data set. You will have to excuse me, dear reader, for my reluctance to accept the notion that "new" or "improved" [when it relates to the manner in which governments ultimately measure their liabilities] doesn't really mean more as in "usurious."

In more than 20 years around financial markets I have never known PPI to be delayed like this. I can say with clear conscience that a great many base materials and inputs that one would normally associate with PPI have recently undergone unprecedented price increases. Reporting of much higher producer prices would not only increase costs/obligations of government but be highly inconsistent with the Fed's low interest rate policy we are currently experiencing.

Sharply rising precious metals prices have traditionally signaled inflationary pressures building in the economy. In response to rising inflation, prudent central bankers generally raise interest rates to quell demand for goods thus slowing the economy and enticing would be consumers to save. By capping the prices of precious metals [gold and silver] with derivatives or through outright gold sales [or leases that amount to the same thing], a central bank would mask a critical telltale symptom of rising inflation.

When the consumer price index is reported each month the financial markets largely react to the headline number-which is most often reported or referred to in the financial press. A more thorough examination of the published number one generally finds a 'statement of confession,' which can usually be found in the footnotes to the number. The footnotes are seldom reported in the mainstream press. The footnotes to a recent CPI release contained the following confession:

"Extreme values and/or sharp movements which might distort the seasonal pattern are estimated and removed from the data prior to calculation of seasonal factors... For the fuel oil, natural gas, motor fuels, and educational books and supplies indexes, this procedure was used to offset the effects that extreme price volatility would otherwise have had on the estimates of seasonally adjusted data for those series. For the Nonalcoholic beverages index, the procedure was used to offset the effects of labor and supply problems for coffee. The procedure was used to account for unusual butter fat supply reductions, decreases in milk supply, and large swings in soybean oil inventories affecting the Fats and oils series. For the Water and sewerage maintenance index, the procedure was used to account for a data collection anomaly and dry weather in California. For Dairy products, it mitigated the effects of significant changes in milk production levels and higher demand for cheese. For Electricity, it was used to offset an increase in demand due to warmer than expected weather, increased rates to conserve supplies, and declining natural gas inventories. For New vehicles, New cars, and New trucks, the procedure was used to offset the effects of a model changeover combined with financing incentives."

In essence, this confession amounts to an admission - that anything that goes up in price is essentially excluded from the Bureau of Labor Statistics measure of CPI.

So where does it all end-I'm not exactly sure? Maybe we'll all muster up the courage or find the heart or come to the conclusion through some good old-fashioned smarts that the wizard must be confronted? While the allure of a system awash in artificially cheap credit has produced an ether-induced giddiness and complacency - I do pinch myself as a reminder that we all live in places a lot like Kansas. Funny thing - in Kansas there really are no yellow brick roads or good or bad witches. But seemingly we have been cursed with an abundance of extremely lousy huckster wizards.

The canaries in the coal mine [PPI, precious metals prices and CPI] have been removed from the equation altogether or rendered ineffective by manipulation. With the advent of hedonic taxidermy, the canaries we can see are of little more use than hood ornaments. The fact that the canaries have all been removed from the mine tells me we're in a very dangerous place and it's highly likely that the end is perilously close at hand. Although no one in the mainstream [Wall Street subsidized] media wishes to tell us this story, I managed to figure this much out on my own.

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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