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At Arm's Length: 10.20.05

To translate that into regular English, the breaks that the rich would have would stay, while the middle class would find their tax burden significantly higher. Neutral is not always even. A look at the new tax proposals.

The full article

Today's Commentary: 10.17.05
Primary Goals

If you are the type of person who enjoys reading about money, you already have a primary goal. You might call your pursuit of that goal a number of different names such as capital preservation to aggressive growth to just about anything in between. But no matter how you shake it, you are in it to make money, preferably lots and with as little chance of downside risk as possible. Gathering information that might be helpful to achieve your primary goals keeps you focused on the horizon.

Knowing where everyone stands while you are in pursuit of your goal is enormously helpful. We all know now that the Fed has a primary goal and according to St. Louis Fed President William Poole, in a speech delivered just this Friday past, it is inflation stability. We can all be relatively certain that this is a pre-scripted spin. It always helps the primary goal if everyone is focused on the same message and Mr. Poole is no different.

Using inflation as a smoke screen to bail the economy out of trouble before trouble descends, is why the Fed has kept steady with its rate increases and seems intent to do so for the foreseeable future. That is a tricky distance however and could be as short of amount of time as early next year, when the top man, Alan Greenspan steps down. Most of us lack much in the way of vision beyond that.

And who can blame us for being short-sighted? When we have to wrap ourselves around pronouncements from the Oracle of Monetary Policy the likes of: "We appear to be revisiting... the notion that the more flexible an economy, the greater its ability to self-correct after inevitable, often unanticipated disturbances", we are bound to be a little blurry-eyed. Katrina and Rita are disturbances. High energy costs and inflation might be but when you factor in their overall impact to the average American wallet, it turns out to be not so much.

So is the economy as flexible as Greenspan claims or is this the real reason we are in need of much higher rates because the economy is overheating?

Not that long ago, although it seems like an economic millennium, we suffered a Great Depression, which some claim was at the hands of poor Fed policies. Trying to right a wrong, the Fed attempted to get the flat out of the yield curve with little success. In fact, the effort took ten years before long term interest rates began to rise.

We have a similar circumstance taking place now, although we are not as depressed about it. Mr. Greenspan and co. seemed to be the only ones focused on that flattening curve between short and long term rates. The once referred to conundrum continues to persist even if it is hardly mentioned anymore. The point most of us who watch these measured interest rate hikes miss is the fact that the Fed has not quite caught up to where they should be yet.

CPI numbers are not going to retreat any time soon. Last week's shocker of numbers not seen in 25 years will not be as shocking in the coming months. If we hit 5% inflation for the year - we don't ascribe to Greenspan's convenient removal of volatile food and fuel costs to create a core index - there is little likelihood that any Treasury note or bond will be able to compete against that sort of headwind.

For those of us who dally little in the fixed trade markets, a high inflation rate is not good for business. When you purchase a note or bond from the federal government, you expect some sort of return for your money. If the yield is below 5% and inflation is at 5%, you are basically losing money. This, by the way is called a negative yield. This type of data in not good news for a government whose claim to economic success has been on the back of borrowed money.

Unfortunately, Mr. Greenspan is still so far behind where he should be in terms of short term rates that he can't stop now. No three steps and stumble. No last inning of tightening. No stopping at 11 rate hikes either.

Also unfortunately has been Mr. G's inability to talk up mortgage rates from their still historic lows. The attraction of the refinance continues and has kept the economy rolling along at an unhealthy pace. Cheap money has kept corporate profits at 15% plus, job creation at (an anemic) 2%, and GDP (but who cares about that) at 3.5%.

Eventually, mortgage rates will rise but the snail slow pace they have been moving is not indicative of the real risk that remains in this market. Let's face it, nobody gets a thirty year fixed mortgage any more except those stodgy conservative bears who see the whole economy as poised for a slow motion slide.

Now that the cost of gas has been quantified as miniscule in the big picture of personal budgets - overall estimates of the gas pump's impact has been pegged at 3.3% of the average wage earner's income - we can now focus on heating for the winter. In the same study done by Salary.com, they came up with an equally sobering statistic: wages are barely outpacing those gas prices.

So enough about inflation worries. Enough about flat, inverted or negative yield curves. Enough about relative economic strength and flexibility and self-corrections.

Our primary goal is to simply survive to invest another day in a marketplace that hasn't been tinkered with to the point where each little tweak becomes a disturbance itself.

BlueMoney Report

The Blue Money Report
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