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Seeking Alpha

Wednesday, July 18, 2007

Today's Greek Coffee - Bernanke Building Upon a False Foundation

In Greece, old souls like myself like to drink a Greek coffee in the afternoon, after siesta. It helps drive the passion that drives them to squeeze the lemon of life for all the juice it has.

Topics of Discussion
  1. PPI & CPI Analysis
  2. Bernanke
  3. Housing Data
ECONOMIC DATA & ANALYSIS

Producer & Consumer Price Index Breakdown

After Tuesday's core PPI growth exceeded the headline figure, thanks to a month-to-month decrease in gasoline prices, CPI was reported today. Remember, the "core" figure excludes food and energy prices. The Core CPI metric matched the headline figure at 0.2% growth, and was in line with expectations. It was down from May on that same decrease in gasoline prices that impacted the PPI.

We didn't find any reason to celebrate the report though. Year-over-year, CPI was still up 2.2%, and though this is not the figure the Fed targets for the 1-2% range (the PCE Deflator is), it's still riding high enough to be bothersome. With oil and gasoline prices rising in July, inflation does not seem set to settle anytime soon, in our opinion. Food prices also continued to increase in June. Besides this persistent inflation, consumer spending appears to be weakening, and if the softness does not translate into lower prices, then a state of stagflation would ensue. Apparel prices exhibited a dramatic decrease in June, as the sensitive retail sector adjusted prices to move inventory. Tight commodity supplies and a burgeoning world economy portend trouble for prices, despite the domestic economic weakness we see arriving later this year.

Fed Chief Ben Bernanke Meets the House Financial Services Committee

Today started the two-day semiannual testimony of the Fed Chairman to Congress. After today's report to the House, Mr. Bernanke addresses the Senate Banking Committee on Thursday. Here's to hoping he gets some better questions on that side of the Capitol! Again, who the heck voted for these guys!!! Some of these fools seemed to be purposefully promoting accomplishments for their contingents, realizing they had the national spotlight. One gentleman asked questions that weren't really appropriate for the Fed Chairman, and then had the gall to cut off poor Ben as he tried to be helpful, and actually started answering. Seriously, who voted for them, and are they really suitable for such an important committee! Now there's an opportunity for an investigation or something!

Let's examine Mr. Bernanke's prepared remarks, rather than focusing on the inane discussion initiated by the Congressmen. The Fed took a two-pronged approach to the meeting, first addressing the state of the economy, and second responding to the state of the lending standards that led to the excessive subprime blowout sale and the troubles that have resulted within the housing and consumer pockets of the economy.

While Mr. Bernanke's group addressed all the key topics, we feel that he grouped them wrongly. He presented his base case scenario as a typical robot would, and bunched the new realities of the day within a group of things labeled "risks." It was like the risk disclosures my old supervisors manically added to the center of our reports at my last employer, Mickey Mouse Inc. The robots there were also reactionary, and anticipated future events would follow the trends of the past, just like Ben.

The nature of Mr. Bernanke's very conservative group over there at the Federal Reserve predictably led them in the direction you would expect. I'm sorry to say that, because of this, Wall Street Greek has lost confidence in the group's ability to handle the challenging times that lay before it. They will be reactionary, though diligent. Everything will be set in the right direction, just as soon as it all falls apart. An ounce of foresight and a pound of balls would be helpful to a good many people in the suits downtown, I'm sad to say. Wow folks, these words come to you without even the aid of the afternoon glass of ouzo my grandfather taught me could help elongate a life, like it helped his. Well, that, a daily siesta and living along the peaceful Mediterranean, while enjoying the diet that comes along with it probably all play a role.

Mr. Bernanke's remarks lay out a case for inflation moderation and moderate economic growth; in other words, what would be expected in a normal environment reminiscent of the past. However, his forecast is based on the case for core inflation moderation, as he views "food and energy prices volatile," to paraphrase his words. That's the first false foundation he's building his skyscraper on. We here at The Greek all know the current factors driving rising food and energy prices are secular, not seasonal. This makes today's situation much different than times long gone. To reiterate, increasing global industrial production at the cost of agricultural production, along with rising population and new uses for foods, like for alternative energy, portends to drive food prices higher over an extended time period.

Regarding energy, increasing development of the world community, rising industrial production and limited sources of energy, mean rising fuel costs should persist longer than say the hurricane season... This takes us to Ben's second mistake, his expectation for moderating energy prices. His absence of factoring for a likely war is analogous perhaps to leaving the rebar out of the concrete he's building upon. Besides this, it's clear the normal state of the supply/demand situation is as tight as the noose around Mahmoud Ahmadinejad's neck. You cannot just box strong possibilities up in a cardboard container labeled risks, when their likelihood is high, however abnormal they may be to history.

After discussing his economic fantasy, Ben took to scolding lenders and sending them to their rooms without dinner. Of course, they had already stocked their rooms full of goodies from when they ripped off America, so to speak. Reactionary response will continue until our society allows for a "thinking outside of the box" mentality. As long as independent thinking is ostracized, we will always be one step behind.

Housing Reports

On Tuesday, the National Association of Home Builders reported its Housing Market (Sentiment) Index, and the reading of 24 continued a downward trend to a new bottom in July. In fact, it marked the lowest level of confidence for the housing industry since 1991. We anticipated this in our weekly article, where we wrote, " There's evidence that home builders are finally realizing they need to consolidate operations or risk slipping into insolvency. This means layoffs should be increasing and new inventory coming to market should slow. This is a good thing for the housing sector, as it will allow the fat inventory already flooding the marketplace to work off a bit." There's a bit more you might like to read by referencing the article itself at "The Greek's Week Ahead - The Earnings Rally Takes Off."

Then on Wednesday's report, Housing Starts for June exceeded expectations. However, permits, which reflect the more important outlook and do not reflect weather impact, came in at an annual pace of 1.41 million. This signals that we may be nearing a true bottom in housing. The capitulation of home builders will lead to layoffs, reduced building levels and finally an opportunity for existing inventory to begin selling off. Now, housing prices still may need to adjust further, and the impact of restricted lending could still impair the capacity of aspiring buyers to own a home, so we cannot recommend purchasing housing stocks yet. Still, now that investor sentiment is finally sharply negative, we should be nearing a true bottom. We'll let you know when and which stocks to purchase, and we anticipate a special piece in the near term on the "which" portion of this topic.

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