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Five Things You Need to Know: Rent, In(de)flation, Close Encounters, Ford Meets Lassie, Magna Carta


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. All About the Rent!

While everyone has a handle on "core inflation," and rising gasoline prices, and so on and so forth, few seem to be focused on a key component of CPI, Owners' Equivalent Rent. Oh, hey there, Mr. Roper! What, Chrissy didn't give you the check? I'm sure she just forgot.

  • The core CPI yesterday came in with its third 0.3% monthly increase.
  • Look at the numbers: year-on-year inflation is now up 4.2% from 3.5% previously. Yikes!
  • However, while one key element in the inflation rise is (naturally) energy, another perhaps more important component is Owners' Equivalent Rent (OER), up 0.6% on the month.
  • What is OER? OER measures the rent homeowners can obtain for their houses. OER makes up a whopping 30% of the core CPI.
  • Why is OER rising? Partly, because potential home buyers are now finding it easier to rent than buy houses.
  • The National Multi Housing Council reports that affordability in the nation's hottest housing markets has been eroding for some time and US rents overall are up 5% year-over-year.
  • Meanwhile, in South Florida vacancy rates are so low that some landlords are raising rents as much as 28 percent, according to McCabe Research & Consulting, the Wall Street Journal reported earlier this week. That sounds like inflation, right? Read on...

2. Alas poor Inflation. I knew him, Horatio.

  • "A Modest Rise Still Amplifies Inflation Fears," the New York times reports. Special Bonus: The Times article mentions Paul Volcker and Alan Greenspan in back-to-back paragraphs!
  • Hard to blame them. The core CPI yesterday came in with its third 0.3% monthly increase, all but guaranteeing a Fed rate hike of another 25 basis points at the June 29 FOMC meeting.
  • Year-on-year inflation is now up 4.2% from 3.5% previously.
  • We looked at OER above. Sure enough, rents are rising. But, according to Merrill's David Rosenberg, OER is also rising due to a more bizarre and complex factor: natural gas prices.
  • Falling natural gas prices have, ironically, added to the increase in OER because the government subtracts utility prices from the calculation.
  • According to Rosenberg, if you exclude the OER component, then core CPI rose a mere 0.17%. (Yo, that's a typo, right? You meant 1.7%.) No, that's not a typo. 0.17%.
  • So, while the market is reportedly focused on inflation, Minyanville's Todd Harrison this morning noted the real Phantom of the Market: Deflation. "Who is this Phantom I speak of and what does he want? For me, it's a simple yet unpleasant answer, the type of discussion that nobody wants to have until we actually see his shadow. He is Deflation; painful, all-consuming, watershed Deflation."
  • The risk is that if we are at the end of the credit cycle, and what appears to be inflation is simply the result of secular monetary hyperinflation from central banks, then the inevitable unwind of that credit cycle - a saturation of risk appetite becoming risk aversion and a decrease in time preferences - will find the Fed possibly raising rates into the teeth of a deflationary unwind. Just thinking out loud here.

3. Don't Let the Sensex Go Down On Me!

Today Indian shares recorded their largest ever single day rally, closing up 6.9%. Bear market over. Everybody get back to work.

  • The Bombay Stock Exchange's benchmark exchange, the 30-share Sensex Index rose 615.62 points to 9,545.06, a gain of 6.9%.
  • India Sensex Index: May 2000 to Present. Looking good, Billy Ray!

  • Wait a minute. That chart looks familiar, doesn't it? I wonder why? Were have I seen that chart before? Now you got me feeling like Richard Dreyfuss in Close Encounters of the Third Kind over here. Everywhere I look I see that image. Where have I seen that before? What could it be?

  • Nasdaq-100 Index: Sep. 1996 to June 2000. No way. Couldn't be. Are you saying that thing I saw back in 2000 is back? What are those five notes in my head? Do-do-do-do-doooooo.

4. C'mon Everybody! Ford Needs Our Help!

Speaking at the Competitiveness Forum, Ford's president of the Americas Mark Fields asked the federal government for help to "level the playing field" for domestic automakers in the U.S. market.

  • Hey Lassie!
  • Woof!
  • What is it Lassie? What's wrong?
  • Woof!
  • Ford? What about Ford?
  • Woof!
  • Ford fell in a well?
  • Woof!
  • Oh, Timmy fell in a well. But what about Ford, Lassie? Is Ford in trouble?
  • Woof!
  • What!?! Ford's gonna close 14 plants and lay off somewhere between 25,000-30,000 workers! What do we do Lassie?!
  • Woof!
  • Ford wants us to level the playing field? What does that mean? Handouts? Bailouts?
  • Woof!
  • Oh. Tax credits.
  • Woof! Woof!
  • No!!! Oh Lassie, don't tell me Ford's healthcare costs have crippled the company!
  • Woof Woof Woof!
  • Ok, Lassie. You run back to Ford and tell them first thing, stop making all those useless cars. Second close all the plants, they're not going to need them. Third, get them to change their name to Ford HMO... and round up as many doctors and nurses as you can! I'll go get the taxpayers!

5. Magna Carta vs. The US Constitution

On this day in 1215, the Magna Carta (Latin for "great paper") was sealed establishing a written code between England's King John and his barrons and setting boundaries for the king's authority. Much has changed since 1215, yet in many ways our modern Constitution binds us inextricably to the establishment of the Magna Carta as a cornerstone of our democratic development. Today, we look at how the Magna Carta has influenced our very own Constitution.

  • Clause I of the Magna Carta guaranteed the freedom of the English Church.
    - Similarly, Article I of the US Constitution prohibits Starbucks from opening franchises inside US churches.
  • Clause 34 forbade repossession of a feudal barron's serfs and property without a writ praecipe.
    - Likewise, page 15 of the US Constitution established the second mortgage, cash-out refinancing at a low, low rate tied to LIBOR +25 basis points without requiring income verification.
    (Sidebar: The quaint term, "writ praecipe" (literally, Fannie Mae SEC filing), is considered a "beast of an earlier age" and is no longer required by law.)
  • Clauses 28 to 32 of the Magna Carta provided that no royal officer may take any commodity such as corn, wood or transport without payment or consent, or force a knight to pay for something they could do themselves.
    - In a very slight wording change, the back page of the US Constitution created Ex-NYSE chairman Richard Grasso's executive compensation and retirement package.
  • Clause 44 of the Magna Carta decreed that forest law should only apply to those in the King's forest.
    - Article 44 of the US Constitution, taken almost verbatim from the Magna Carta, established the Dick Cheney branch of government and mentions some other stuff about some kind of big domestic spying operation.
  • Clause 54 of the Magna Carta guaranteed that no man may be imprisoned on the testimony of a woman except on the death of her husband.
    - Of course, by our modern standards the need for that type of codification seems unimaginable. Today, women are considered by the US Constitution to be a vital resource for their husbands.
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