The Rude Awakening
Wall Street, New York
Thursday, June 30, 2005
------------------------- The Rude Awakening PRESENTS: As the saying goes, there are
lies, damned lies and statistics. One of the most blatant
examples of government manipulation is the consumer price
index.
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------------------------- MANIPULATIVE TRICKSTERS
By Justice Litle Must admit I'm in a rather cynical mood today, as you will
soon see. Things started off on the wrong foot, with an
annoying radio interview circa 5:00 a.m. Pacific time. I
have no problem with the early hour - you get used to that
on the West Coast. But when the talk show host pronounces
your name wrong, doesn't care, and then demonstrates a
total lack of interest or knowledge in the subject at hand,
it's not the best way to start the day. Fortunately, 90% of
the interviews have been great so far, and a lot of fun.
Ah, well, have to take the bad with the good. I'm also in a cynical mood because of the time of year…
fiscal year, that is. We're headed into the end of the
second quarter, which means it's time for mutual funds to
engage in their longstanding practice of "window dressing."
What is window dressing? It's basically a game that money
managers play, buying "hot" stocks or dumping "cold" stocks
immediately before their quarterly performance is tallied.
Back in the good old days, the funds could get together and
push the market up nicely come window-dressing time… thus
creating a self-fulfilling prophecy. This quarter, the timing of the Federal Reserve meeting has
complicated things a bit. What's more, the market
environment isn't nearly as friendly for such activities.
When it comes to manipulative tricks, though, mutual fund
managers are strictly amateurs. The true professionals are
in Washington, and the biggest mutual fund manager in the
world is a two-bit piker compared to Greenspan and his
data-crunching minions. As the saying goes, there are lies, damned lies and
statistics. One of the most blatant examples of government
manipulation is the consumer price index. These data are
stretched, smoothed and distorted in every conceivable way
possible to dampen any sign of inflation. Here is an excerpt from Jim Puplava at Financialsense.com
to give you the flavor: "The 'core rate' is a fictional concept designed to soothe
the financial markets and distract them from the reality of
rising inflation. The core rate does not exist anywhere in
our economy. It is a fictional concept designed to
obfuscate inflation. "The next time you go to the grocery store and experience
shock and awe as the checker rings up your shopping cart,
ask him or her for the 'core rate.' See what kind of look
you get. For that matter, when it comes time to make your
monthly mortgage payment, instead of making the payment,
send a bill to your lender for 'owners' equivalent rent.'
And the next time you pay your taxes in any form, whether
income or property, hedonically adjust the bill for the
lower quality of government service. If your tax bill went
up, just use hedonics to adjust the bill downward. Ah, you
might say, 'This is impractical. Nobody can ever get away
with that.' You would be right, but perhaps it is a
question we must now ask of government. Somebody should
start questioning the reported inflation numbers as our
caller did at the beginning of this article. Problems can
only be solved when they are acknowledged first.
Washington, we have a problem: It is inflation, not
deflation." I could also rant and rave about the silliness of
substituting "equivalent rents" for housing prices or
excluding energy costs from inflation calculations or
"hedonically adjusting" the price of a big-screen TV
because the screen has 30% more pixels. Some may not understand why data manipulation is a big
deal. The simple answer is that by pretending everything is
OK now, we are guaranteed to make everything worse later.
The federal government, in concert with Wall Street, is
engaged in a long-standing fiction to convince us that all
is well. Meanwhile, this false assurance leads us down a
path of complacency, as the problem gets worse. For the life of me, I can't understand why anyone listens
to what Greenspan says. As a forecaster, the man has one of
the worst track records in history. How many times has he
assured us that everything would be fine just before it
blew up in our faces? I think the smarter money managers are starting to see
what's coming and rotating into gold. I have to wonder too,
what happens when the government is caught manipulating the
data? By that I mean, what happens when the average man in
the street - Joe Homebuyer, if you will - realizes that it
is completely idiotic and insane to rely on an inflation
gauge that does not take the real world into account? Am I ranting? Gosh, I just might be… [Ed. Note: Justice's day doesn't always start out with
laborious interviews and he is not always this grumpy. He
is, however, always insightful when it comes to hunting
down gains for readers of his newsletter, Outstanding
Investments. Check out a slightly more upbeat version of
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------------------------- Did You Notice…?
By Dan Denning A Bloomberg article today picks up where The Bull Hunter
ended, anticipating China's strategy of spending dollar
reserves on real assets, be they raw commodities or
industrial assets. Unaddressed is the fact that a
revaluation of the Chinese currency would increase China's
purchasing power on international markets. Today, the
target is UNOCAL. Tomorrow, why not GM?
"The year is 2050. The Middle Kingdom, formerly known as
the People's Republic of China, is the richest, most
powerful nation on the planet. Its thousands of factories
hum 24/7, cranking out 60 percent of the world's textiles,
sophisticated electronics and computers for the world's IT
industry, and over 40 percent of all cars-including the
largest auto company in the world, General Motors
International, a Chinese blue chip."
So begins the last chapter of The Bull Hunter, Wildness
Lies in Wait. In that chapter, I speculate that within 50
years, China will have completed a remarkable transition.
Part of than transition is trading the enormous dollar
reserves it has accumulated in U.S. trade for a global
array of real assets. Turns out it may not take fifty years
after all.
"Could GM or Microsoft end up in Chinese Hands?" asks
William Pesek Jr. in the Bloomberg story published today.
Pesek goes on to make an intriguing point, which I'll get
to in a minute. But keep in mind the overall context.
"China's strategic desire for natural resources, global
brands, and a short cut to international markets, combined
with unprecedented access to cheap money from the country's
state-owned banks, means its companies are ready to outbid
more traditional trade purchasers and private equity
groups."
In The Bull Hunter, I call this the "The Global Mineral
Grab." Perhaps resource grab would have been more to the
point. But the point itself is crystal clear: China's need
for strategic resources is very bullish for certain sectors
of the stock market. Which ones? Energy, obviously. But
there are others; food, uranium, coal, and even capital
goods. This isn't the Japanese binging on Monet. "But in
contrast to the Japanese acquisitions of New York's
Rockefeller Center, the Pebble Beach golf course, and
Hollywood studios, Chinese companies seem more interested
in industrial businesses than trophy assets."
I've outlined several such businesses in the final chapters
of The Bull Hunter. They are what you might call "old
economy industrial dinosaurs." But they have real value.
The Chinese already know this. "The century-old Ingersoll
Productions Systems, an Illinois-based maker of systems for
building automotive power trains, was bought three years
ago by Dalian Machine Tool, China's largest tool maker,"
says the Ft.
There are similar stories in The Bull Hunter. But my
emphasis is not merely on deciphering China's economic
Grand Strategy. That seems pretty clear. My focus is how
investors might profit from the global resource grab. In a nutshell: capital goods, resources, and energy. [Ed. Note: People have been banging on about China for some
time now. If you want to stay ahead of the game then Dan's
book, The Bull Hunter, delivers the goods. The astute
investor looking towards profiting from the explosion of
this emerging super-power can learn more here: The Bull Hunter ------------------------- And the Markets… | Wednesday | Tuesday | This week | Year-to-Date | DOW | 10,374 | 10,406 | -138 | -3.8% | S&P | 1,200 | 1,202 | 2 | -1.0% | NASDAQ | 2,069 | 2,070 | 6 | -4.9% | 10-year Treasury | 3.98% | 3.97% | -0.06 | -0.23 | 30-year Treasury | 4.26% | 4.25% | -0.06 | -0.56 | Russell 2000 | 643 | 641 | 16 | -1.4% | Gold | $437.15 | $435.45 | $10.10 | -0.1% | Silver | $7.08 | $7.08 | -$0.19 | 3.9% | CRB | 303.10 | 304.48 | 0.62 | 6.8% | WTI NYMEX CRUDE | $57.26 | $58.20 | $3.72 | 31.8% | Yen (YEN/USD) | JPY 110.54 | JPY 110.03 | -1.91 | -7.8% | Dollar (USD/EUR) | $1.2064 | $1.2057 | 55 | 11.0% | Dollar (USD/GBP) | $1.8046 | $1.8146 | 75 | 5.9% |
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