Moneytalk Summary, Commentary and Excepts, May 17-18, 2008
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STOCK MARKET AND ECONOMIC RECOVERY
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“Well, there was good news on the inflation front this week. We’ve been talking about the fact that the inflation numbers have been coming in very, very low, despite the fact that oil has gone through the roof – up around $128 per barrel.
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The favorite inflation gauge at the Federal Reserve is the Personal Consumption Expenditure Index. Those numbers are excellent – 3.2 year-over-year counting everything, 2.1 year-over-year for the core index, excluding food and energy……….But they are better than that because of the underlying conditions. Because these numbers are occurring at a time when gasoline prices over the last year have risen a staggering 20.7%.........Taking the entire energy complex, the year-over-year gain in energy prices at 15.9%. And with the energy intrusion into the food chain……things like ethanol, corn-base, etc. we have food prices now up 5.1% in the United States on a year-over-year basis. Taking all that into consideration, in that key Federal Reserve inflation index, we have very low numbers………so we are seeing some great numbers in terms of inflation.
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And this is what we told you would happen, even though there were many doubters…….That in the event energy prices went up sharply, they would provide an overall contractionary impact on inflation. Why? Because consumers who drive the economy……..get pinched when they have to empty their wallet at the gasoline pump – or when they have to send in extra money to pay their monthly utility bill……and that leaves them with less money in their pocket to spend on discretionary spending.....
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And of course, energy prices go up and they feed into transportation prices. Transportation prices are up 7.2 year-over-year……..but beyond that, we just have not seen it.
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Now we have seen the contractionary impact on the economy. A lot of people mistook that for a guaranteed recessionary outcome. We don’t even have one quarter yet of negative GDP. We need two in a row to get a recession, using the traditional, historical and academic definition of a recession………We had slow growth. For sure, it’s an economic slowdown – 0.6 growth in the last six months, 0.6 growth in the fourth quarter, and that’s the preliminary estimate on the first quarter……..We have a very, very sluggish economy and part of that has to do with the housing recession.
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But so many people on Wall Street fell into the trap of guaranteeing a recession when in fact, it was highly arguable as to whether we were going to have a recession………And as we look at things right now, we just don’t have the statistical evidence to bring any comfort to those that were guaranteeing a recession. And with the stimulus checks now being distributed as of late April, there’s a question mark on the second quarter……..It’s too close to call. It’s certainly not going to be a meaningful growth quarter……….So the question is how close to the flat line do we come in the second quarter. But once again, those guaranteeing a recession, so far, frankly, they are looking pretty ridiculous……..
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.........The other factor is, so far the job losses have been very, very minor. We’ve lost a few hundred thousand jobs, but you should be losing millions of jobs in a recession……….Certainly at least 2 or 3 million………So once again, these people out there guaranteeing a recession, they’re looking like fools right now. They are going to have to muster some statistical evidence to support their case, or of course, the other thing they may do is what they frequently do is simply change the definition of a recession to match whatever comes out. But of course that doesn’t cut anything with reference to history because we have a history of recessions in the United States, and they all had two straight quarters of negative real Gross Domestic Product. So without that, you’re kind of just making a fool of yourself, in my opinion – going out with a forecast like that without the evidence.
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Looking at the inflation numbers around the country, there is some variance with inflation. Year-over-year, using the CPI numbers, New York is up 3.6; Los Angeles is up 3.1; Chicagoland, 4.2; Boston, 2.9; Dallas, 4.4; Detroit, 2.4; San Francisco, 2.9; and Washington D.C., 4.7……….
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.......When we look at the CPI components, we see that the housing component is showing inflation of 3%. Now that seems ridiculous, but remember how this is constructed. This is constructed on a rental equivalent formula. Now I know what you are saying: How could the Consumer Price Index be showing a 3% gain in housing costs year-over-year, when everybody knows we’ve seen a double-digit decline in the price of houses over the last year. And the answer is, they throw that out. They don’t use it. They use the rental equivalent, and the rental equivalent formula shows the housing increase in the CPI at 3.0 year-over-year.
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Another number that tends to be stubbornly high is medical care, and that’s coming in at 4.3%.........There are other areas that have been behaving themselves – none like apparel – apparel showing a year-over-year decline of 0.7%, believe it or not………So, the anticipation is that inflation is going to remain reasonable for the rest of this year."
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CALLER: Said his definition of inflation is, “Too many dollars chasing too many goods and services.” Brinker agreed that was one of the ways that we can have inflation, but another way to have inflation is when there is excessive money supply – in other words, the Federal Reserve throws inflation concerns to the wind and keeps printing money -- which obviously can lead to the situation the caller mentioned. Caller also pointed out that many packages now contain smaller amounts of food than before, but are still selling for the same price, and asked if that is inflationary. Brinker said that is factored in, just as they factor it in when prices come down -- like for instance, in the high tech arena.
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CALLER: Said that the Vanguard Prime Money Market interest rate is down considerably and he was thinking of moving to another Vanguard Fund. Brinker asked about his tax bracket (33%) and recommended that he take a look at Vanguard’s New Jersey Tax Exempt Money Market Fund – that he might find that the yields on the two funds are fairly close.
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CALLER: Asked about the safety of credit unions. Brinker said to be sure to look for membership in the NCUA (National Credit Union Administration) -- which gives you coverage up to $100,000 and in some cases up to $250,000.
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CALLER: Finds it difficult to believe that food and energy are included in the inflation numbers, and wanted to know what other listeners might be thinking. He said that eggs are up about 70% and milk is up 50%, so this has to be passed through to the consumer. Brinker reassured him that it was all in the numbers, and that there are always people who throw the true numbers out and make up their own.
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(Honeybee EC: Brinker adamantly defends the Fed's inflation "numbers," and seems willing to ignore the fact that in the "real world," people, especially poorer people, are being hurt by the huge increases in food. IN SPITE of what the published statistics say, inflation is hurting many.)
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Here are some comments by Jeffchristie, an objective Brinker-commentator:
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"Two observations on inflation. If you are poor inflation is eating you alive. Food and energy are up big and the poor are having trouble just buying food.
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Second Brinker says that inflation is being held in check because average people don't have much money left after buying gasoline and food. My question is does anyone think this is a good thing? He even claimed that many people are not filling their tanks because they don't have the money. Not sure I agree based on what I am seeing at the pump. Most people are using credit cards. Brinker told some hokey story about buying only 4 gallons because his tank was over half full. It didn't make sense to me. Why would he even stop for gas if he still had half a tank..
.......... Brinker says people have less money because of the high price of gasoline. Guess what Bob, I have more money because of it.........A caller from Alaska said the state is making so much money off of oil that each citizen may be getting $100 a month back from the state.........."
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CALLER: Wanted to know if Brinker thought the Federal Reserve had been overly concerned about inflation because of all the federal entitlements that had been signed into law. Brinker said the things that worry the Fed about inflation are the things that have always worried the Fed about inflation – too much monetary growth – a condition that we do not have right now. Another condition they worry about is demand-pull, but that’s an offshoot of excessive monetary growth. And you cannot have cost-push inflation in a sluggish economy because there is too much competition. Competition has been exacerbated by the development of Internet sales – people buy over the internet and save money.
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Brinker said: “…….the most misunderstood inflation concept – is the concept of rising oil prices. Believe it or not, there are people out there who believe that rising oil prices are inflationary – wrong. Rising oil prices are counter-inflationary because they result in a sluggish economy.”
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CALLER: Asked Brinker if he was familiar with Auction Rate Preferred Securities, and then said that because of the credit crises, these securities cannot be sold now – so $330Billion in assets is frozen. The caller had invested $78,000 in them. Brinker commented that, in 22 years of doing Moneytalk, he had never recommended a single penny be invested in them – that he never saw any reason to take the extra risk for a short-term yield. Brinker wished the caller well, and reminded the audience to “know what you own.”
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CALLER: How secure are bridge-loans? Brinker said that’s the question – because they vary. There is credit risk, so if the bridge loan doesn’t get paid in a timely manner, and if the company should go under, “Welcome to bankruptcy court.”
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CALLER: Wanted to know where to find objective information on housing sales in her area. Brinker recommended that she get a real estate broker to give her a print out of comparables in her area. There are a number of ways to evaluate comparables. For instance, you can evaluate comparables by looking at amenities, square-footage and the tax situation – and always put a higher weight on recent transactions. This is the only way to assess the true value of a real estate property – through the transaction records. A property is worth only what someone is willing to pay for it – no more, no less.
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HOUR TWO OPENING MONOLOGUE
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Bob Brinker said: “Well the President of the United States, George W. Bush, says that Saudi Arabia is not going to give us, in response to our request to raise oil output…….what we want. They’ve agreed a paltry increase of 300,000 barrels a day…….and so that’s going to do virtually nothing to satisfy the supply-demand equation out there that has pushed oil into the $126 per barrel range this week. What really has to be done is a Manhattan Project – as we’ve discussed it on Moneytalk. It’s a major program and it is multi-faceted.”
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Brinker Comments Paraphrased: Solar and wind power are fine, but are only a small part of the solution – and would solve less than 10% of our energy problem. Brinker’s Manhattan Project is a plan to build nuclear power generation facilities for making electricity. Sadly, now in the United States, only 20% of our power comes out of nuclear power facilities, 30% comes out of natural gas facilities – which is a waste because we should be using our natural gas for other things. The “nightmare scenario” is that 50% comes from the filthiest source of all – coal-fired electricity plants across America. Since 1954, in the U.S., the military has used nuclear power generation submarine fleet. Yet we have the “nay-sayers” like the “Sierra Club” sorts bashing nuclear power without justification. For those worried about waste – the answer is, we recycle – just like they do in France.
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But where are the candidates, McCain and Obama on this topic? There is nothing more important to the U.S. than energy. Not just because of the price of oil and gas, but also because now we have compromised our food chain through the corn-based ethanol program and other programs that are getting into the food chain and driving up the food. Brinker said, “It’s the primary reason foods up 5.1 year-over-year.”
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BRINKER’S FOUR-STEP ENERGY PLAN
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Step one: Manhattan Project for nuclear generation across America.
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Step two: Coal-liquifaction program – to tap into our plentiful coal resources without burning it in electricity generating plants to a level that’s completely unacceptable.
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Step Three: Raise fleet café-standards/mileage. Informative website
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Step Four: Immediately start drilling in Alaska National Wildlife Reserve.
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HIGH MILEAGE HYBRID PREMIUM-PAYBACK
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Brinker commented that he had checked online at Edmunds and found that the three leaders are: Toyota Camry Hybrid Sedan = 1.7 year. Toyota Prius Hybrid Hatchback = 2.6 year (this is the vehicle Brinker owns). Nissan Altima Hybrid Sedan = 3.4 payback. This assumes 15,000 miles per year driven at $3.67 per gallon.
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- "We are beggars. When the United States president has to fly to Saudi Arabia and kneel down at the altar of the royal family and say, please, please, please, give us a little more oil, how pathetic can you get?”
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“We look like fools on energy consumption today.” - .
“Don’t buy adjustable rate mortgages unless you are living over the short term.” - .
“Hillary is toast.”
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SUNDAY TOPICS: Almost exclusively energy and politics.
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GUEST SPEAKERS:
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Saturday: Craig Karmin, reporter for Money and Investing Section of the Wall Street Journal. Author of “Biography of the Dollar, How the Mighty Buck Conquered the World and Why It’s Under Siege.”
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Sunday: William J. Bernstein who wrote: “A Splendid Exchange: How Trade Shaped the World.”
