When the Scales Fall

By: Fred Sheehan | Wed, Jun 19, 2013
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The U.S. government is losing credibility. That is both an obvious and a useless observation without a sense of the consequences. Maybe, there are none. Maybe, the accumulating doubt concerning Benghazi, IRS intrusions, and NSA confiscation of privacy are wearing thin. If the latter proves correct, how will the people express their disillusion: "Voting with their feet," so to speak? A glaring vulnerability is the gap between falling income and inflation. The government's numbers are propaganda, and seem to have worked. The Fed, Bureau of Labor Statistics, reporters, and the academics who are paid to polish Goebbelism into a scholastic veneer, state that annual price inflation is short of 2%. John Williams, proprietor of Shadow Stats, estimates that if the Bureau of Labor Statistics used the same methodology for calculating the CPI as in 1980, the monthly figure released and disseminated to the public would be 9.4% (as of November, 2012).

There comes a point when a widely held view loses its grip on popular opinion. The move is often swift, though tendencies had been moving to the revised standard for a long time. In March 2013, Richard McGregor at the Financial Times wrote of such an instance: "It is remarkable to remember that only a year ago, when Barrack Obama came out in favor of gay marriage, it seemed he had been bounced into the position by unscripted comments from his deputy, Joe Biden. Now, it is all but inconceivable that the president, or any Democrat running for national office, could be against same-sex unions."

Parenthetically, this subservience to fashion defines the hollow men and women who get elected today. Is it possible that all Democrats running for national office changed their own minds during the interim? Roman galley slaves acted with more gumption. The American people know this all too well by now; even if the acknowledgement lies below the body politics' conscience. The disposal of the has-beens would be greeted, where not by relief, with indifference.

A dramatic event is not necessary for such a change, although that does happen. Even then, there may be a period of reevaluation before minds accept that long-held premises were wrong. Such might be true of Cyprus. "Of" Cyprus, since the assumptions were as true in North Carolina as Nicosia, but have only superficially changed investor behavior - so far. The precipitating event was the discovery that bank depositors did not own their deposits. This has been true for centuries, but in a similar vein, new books about the years 1913 and 1914 record a wide belief that war was passé. In 1913: In Search of the World Before the Great War by Charles Emmerson, the author records the majority view of the people, that view aligning with a long period of the same: "Thank God for Now! .... [T]hese present times are the greatest and the best the world has ever seen."

For several years now, there has been a flock of laws and regulations restricting and redirecting the actions of investors and savers. This has spread throughout the west, particularly since 2008, a demarcation of sorts, since which the suicidal mutations decreed by central banks and governments of western nation-states have demanded more control over the wealth and pocket change of the people.

There is the perpetually ticking chance that deranged markets - which are no longer markets in any real sense - will break down. Absent that, what is described as an ebbing confidence in markets, but might also be expressed as a growing sense of Us against Them, will find resonance in the real problems of the 99% who are consumed by price inflation.

Every day, a discreditable twist is adjoined to official malarkey. "Inflation is the Wild Card for the Fed," in the June 14, 2013, Wall Street Journal, fits. Early on, the article notes: "The Fed has a 2% inflation goal and doesn't want consumer prices to veer too much above or too much below that number over time." There are several misrepresentations, impossibilities, non sequiturs, and clear violations of the job entrusted to the Federal Reserve in that one sentence.

"Inflation is the Wild Card" reminds us the Fed - that is, Chairman Bernanke, since his is the only view that matters - does not care about price inflation as such. It is consumer price inflation expectations that are pursued, better for them since mind games are intangible. At present, according to the article: "Fed officials haven't been too worried since expectations of future inflation were [sic] stable."

The article does not say why the Fed believes consumers are fat, dumb, and happy. It is on-the-fly speculation by authors Victoria McGrane and the ceaseless Hilsenrath. We read how "Fed officials could feel," and "if [Fed officials] thought," and the Fed "may not be too worried."

Running with the bull, a measure often cited is the University of Michigan survey of consumers' inflation expectations. At the starting gate, real people do not think about percentage price changes across the panoply of hair-dos to dishwashers. Leaving that aside, we can be sure that, should the University of Michigan Survey interfere with Fed jumbo, it will crush the dissonance.

We know this because that is what it did in 2011: "According to the Thomson Reuters/University of Michigan survey of consumers, households currently expect inflation to average about 4½% over the next year, up noticeably from 3% at the end of 2010." This is from the May 2011 Federal Reserve Bank of San Francisco Economic Letter. Bharat Trehan, a research advisor in the Economic Research Department at the San Francisco Fed, shoved consumers, and their expectations, into some glutton-free receptacle. Trehan explained: "Since commodity price shocks have occurred relatively often in recent years, this excessive sensitivity has meant that household inflation expectations have performed quite badly as forecasts of future inflation.... However, the increase in expected inflation likely reflects the excess sensitivity of consumers to food and energy prices." Let them eat cake, or not eat cake, in the instance of Trehan's hit-and-run job.

Junk research, such as Trehan's may be losing credibility. Part of the problem is a lack of competition. These Ph.D's, taught by Bernanke and other lifers, have been free to write for themselves, with no questions asked. "Inflation is the Wild Card for the Fed" is not a promising comeuppance, but guest speakers from government satraps have looked foolish at recent Congressional inquisitions. Most recently, Eric Holder has no credibility. That guy from the NSA may be the worst travel poster for the federal government since Las Vegas attracted tourists to watch nuclear detonations from hotel rooftops.

The trend in dubious federal testimony was discussed here in Crony Bureaucrat" and "Eating the Fed for Lunch." Shortly after Chairman Bernanke's discredited excuses, a U.S. Treasury official was shish-kabobbed by a Senate committee. He sounded like an arrogant idiot, which he probably is not, but many years of telling the politicians anything, with inept cross-examination, has attracted and imbedded a sloppiness that neglects, at the very least, an appearance of diligence and care at the Federal Reserve, the Treasury department, Eric Holder (head of the Sometimes Department of Justice), and that iHead from the NSA.

Peggy Noonan wrote in the June 15, 2013, Wall Street Journal: "[T]he surveillance state will in time encourage an air of subtle oppression, and encourage too a sense of paranoia that may in time-not next week, but in time, as the years unfold-loosen and disrupt the ties the people of America feel to our country. "They spy on you here and will abuse the information they get from spying on you here. I don't like 'here.'"

Food prices rising at a 10% annual rate with work weeks cut from 35 to 32 hours may telescope Noonan's anticipated lag.

TO RESURRECT A MORE ELEVATING STORY, the widely read Ambrose Evans-Pritchard devoted his June 16, 2013, Daily Telegraph column to the latest warnings by Charlene Chu ("Fitch Says China Credit Bubble Unprecedented in Modern World History"). Chu told the Telegraph that China's "credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation.... There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signaling..."

Chu's straight talk was the topic of" 'A' for Conduct. 'F' for Guts." Albert Edwards, the widely followed, no-nonsense, Global Strategist at Societe General, titled his June 4, 2013, Global Strategy Weekly "If UK Chancellor George Osborne is a Moron, Fitch's Charlene Chu is a Heroine." Edwards writes: "[A] seething anger has been bubbling within me since UK Chancellor George Osborne's March budget.... By contrast Fitch's Charlene Chu deserves a medal of honor for her stark warnings about the Chinese credit bubble."

Later: "Credit rating agencies came in for a lot of criticism in the aftermath of the financial crisis but Chu stands out from the conspiracy of complacency on China warning loud and clear that China is nearing an abyss. The well known China commentator Michael Pettis calls Chu 'the only analyst who understands what is happening in the Chinese banking system.'"

In a world short of role models, an American credit analyst in Beijing is no match for superheroes and celebrities, but maybe, at least one graduate from our best and brightest institutions could be inspired to pursue the truth, no matter the consequences.

 


Frederick Sheehan writes a blog at www.aucontrarian.com

 


 

Fred Sheehan

Author: Fred Sheehan

Frederick J. Sheehan Jr.
aucontrarian.com

Frederick J. Sheehan

Frederick J. Sheehan Jr. is an investor, investment advisor, writer, and public speaker. He is currently working on a book about Ben Bernanke.

He is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and co-author, with William A. Fleckenstein, of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve (McGraw-Hill, 2008). He writes regularly for Marc Faber's "The Gloom, Boom & Doom Report."

Sheehan serves as an advisor to investment firms and endowments. He is the former Director of Asset Allocation Services at John Hancock Financial Services where he set investment policy and asset allocation for institutional pension plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S. Naval Academy. He is a Chartered Financial Analyst.

Copyright © 2007-2014 Frederick J. Sheehan Jr.

 

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