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Five Things You Need to Know: The Powerless; No Guts and No Glory for GDP; Do I Have A Mortgage?; Does the Income Gap Carry Childrens' Clothes?; Major Inflation... Literally!


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


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

1. The Powerless

A must read is today an op-ed piece from Fed-watcher John Berry on Bloomberg this morning with a rather ominous headline: "Fed Powerless to Fix Part of Inflation Puzzle."

  • Berry is well-known among market-watchers for being among the pre-eminent journalists covering the Federal Reserve.
  • In fact, back when he was at the Washington Post his columns were frequently viewed (for better or worse, rightly or wrongly) as Fed-driven trial balloons when they hinted at policy shifts or changes in Fed viewpoints on the economy or inflation.
  • These days the Wall Street Journal's Greg Ip has apparently taken first place in line at the Fed's "whisper" chamber (see his recent columns on unemployment and labor costs and the Fed's focus shift toward "inflation expectations).
  • But Berry continues to be an important information outlet, so it's with great interest that Berry's piece this morning suggests Fed powerlessness over inflation in rising rents.
  • Fed Chairman Ben Bernanke acknowledged in testimony before the Joint Economic Committee of Congress yesterday that core inflation "remains uncomfortably high," with core CPI presently running at 2.7%.
  • Indeed, Bernanke noted yesterday that increases in rents "account for a substantial part of the increase in core inflation over the past year."
  • For the year ending in February, rents were up 4.6% and Owners' Equivalent Rents was up 4.2% year-over-year.
  • Those two rental measures combine to make up nearly 40% of core CPI.
  • Why the increase?
  • According to Bernanke yesterday, "the acceleration in rents may have resulted in part from a shift in demand toward rental housing as families found homeownership less financially attractive.''
  • So, according to Berry, "for all the concerns that tight labor and product markets are adding to inflationary pressures, the real culprit keeping core inflation higher than the Fed would like is rents."
  • Ok, so how is this Berry piece an important op-ed column? Take a look:
    "In short, the Fed is in a box. The home price bubble was created in large degree by the big decline in mortgage-interest rates triggered by Fed fears of deflation. Its bursting has added to core inflation and is likely to do so for some time. Given this reality maybe it's time for the Fed to reconsider whether core inflation really is too high. Certainly, under these circumstances raising its lending rate target wouldn't seem to make sense."
  • Sound familiar? We've been writing about this pending reality on Minyanville for more than two years now.
  • Most chilling for those of us who recognize the Fed's inability to "manage the economy" out of a deflationary credit contraction is this "point of recognition" moment in Berry's piece:
    "Why buy when a house or condo may lose value in coming months or years?"
  • That shift in psychology - the psychology of deflation - is what the Fed fears more than anything else.
  • The last decade of Fed policy is almost entirely dependent on increasing the availability of credit, which is dependent on an increasing appetite for credit.
  • The Fed can, in the short term, control the availability of credit - though there are growing signs even as we write that there is pushback in lenders' ability to absorb and spin off continued increases in credit.
  • But any control the Fed has over demand for credit is an illusion.
  • The Fed can theoretically increase the availability of credit forever.
  • Only when credit appetites are fully sated does it matter.
  • No one knows when that will be, but this piece by Berry is a strong indication the Fed is likely concerned that the end is coming sooner rather than later.

2. No Guts and No Glory for GDP

Final fourth-quarter GDP this morning came in at 2.5%, above the previous estimates of a 2.2% increase.

  • The headline reads well, but the nuts and guts don't exactly give Hoofy much to cling to.
  • As was foreshadowed by yesterday's Durable Goods Orders, capital spending remains weak.
  • Spending on equipment and software were revised even lower from preliminary estimates of a 3.2% drop to a decline of a 4.8% annual rate during the fourth quarter, marking the largest decline since 4.9% in the fourth quarter of 2002 - yeah, that 2002.
  • Inventories were higher.
  • The personal consumption expenditure price index fell 1%, annualized, revised from 0.9% reported last month.
  • The core PCE price index, which excludes food and energy, rose 1.8%, revised from 1.9%.
  • The year-over-year increase in core PCE prices was unrevised at 2.2%.
  • Meanwhile, corporate profits declined for the first time in five quarters, down $4.9 billion.

3. Do I Have A Mortgage?

Have you ever wondered why it seems so many people are apparently unconcerned about real estate, subprime and ALT-A lending troubles and the upcoming adjustable-rate mortgage resets?

  • This article from explains why no one seems to care.
  • It's because 34% of homeowners surveyed by Gfk Roper don't know what kind of mortgage they have.
  • Of those homeowners who realize they do have a mortgage, and that it is possibly an adjustable-rate mortgage, another 34% have no idea what they are going to do when it resets.
  • The article quotes a managing director of a financial advisory firm in N.Y., who notes many borrowers "don't know what the market can be paying them in interest, and they don't know how much they should be paying on loans, either."
  • "That's a situation ripe for abuse by unscrupulous mortgage people," he added.
  • Here's a thought: Anyone who doesn't want to be "abused" by "unscrupulous mortgage people" maybe should consider taking just a couple of hours out of their busy house-buying spree to learn about mortgages... because, you know, it's only the most expensive loan agreement most of us will ever sign our names to.
  • But then, that would require accepting personal responsibility for our finances, and it's so much less hassle to let the government handle all of that.

4. Does the Income Gap Carry Children's Clothes?

The New York Times today notes the ever-widening income gap in the United States. After reading that article above, however, we're actually surprised it's not even larger.

  • The top 1 percent of Americans - those with incomes that year of more than $348,000 - received their largest share of national income since 1928, analysis of newly released tax data shows, the New York Times reported.
  • The analysis was conducted by Prof. Emmanuel Saez of the University of California, Berkeley, with Prof. Thomas Piketty of the Paris School of Economics.
  • The analysis found that the top 10%, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.
  • The top 10% of Americans collected 48.5% of all reported income in 2005.
  • And the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans.
  • Not included in the report was a survey showing that a shocking 100% of those 300,000 Americans know exactly what kind of mortgage they have.

5. Major Inflation... Literally!

The Daily Texan notes that as tuition at the University of Texas increases each year, so too are the most popular majors becoming more expensive, a trend being echoed nationwide.

  • The University of Texas implemented the current system of flat-rate tuition, which includes all fees associated with particular programs, University-wide during the 2005-2006 school year.
  • The Tuition Policy Advisory Committee first decides on the cost of tuition for each school or college, and then deans and advisers may make recommendations to change that amount based on the costs of specific materials or services.
  • The most expensive undergraduate programs, based on flat-rate tuition, are the School of Pharmacy, the McCombs School of Business and the College of Engineering.
  • Meanwhile, a recent survey of high school students shows where the cost increases may head next.
  • According to the survey, the 10 most popular majors that high school students said they would select are: Business, Psychology, Elementary Education, Biology, Nursing, Education, English, Communications, Computer Science and Political Science.
  • The rising cost of education related to college majors isn't a new issue, but it can impact which majors students decide to pursue.
  • As an illustration, Minyanville looked at which college majors were most popular following the inflation/stagflation of the mid 1970s, 30 years ago.

    Most Popular College Majors of 1977

    1. Business Administration and The Man
    2. Pre-Club Med
    3. Betamax Science
    4. Synthetic Leisure Suit Design
    5. Municipal Bongwater Waste Treatment Administration
    6. Strobe Technology
    7. Streaking
    8. Comparative Hallucinogenics
    9. CB Radio Broadcasting
    10. Organizational Looting Management

No positions in stocks mentioned.

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