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Five Things You Need to Know: Volcker, The Ghost of Crises Past


"If we lose confidence in the ability and the willingness of the Fed to deal with inflationary pressures and sustain confidence in the dollar, we'll be in trouble," Volcker said.


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

1. Volcker: The Ghost of Crises Past

Former Federal Reserve Chairman Paul Volcker, testifying before Congress yesterday afternoon, had strong words for policymakers.

First, he warned of a "resemblance" between the economy today and that of the 1970s stagflation. Then, he noted that confidence in the central bank is critical to maintaining price stability.

"If we lose confidence in the ability and the willingness of the Fed to deal with inflationary pressures and sustain confidence in the dollar, we'll be in trouble," Volcker said.

Oops. Too late! Just last week Pimco's Co-CEO and Co-CIO Mohamed El-Erian wrote in "A Tale of Two Cities" that, "Simply put, policy makers do not have good policy tools to deal with the destabilizing combination of asset price deflation, and goods inflation. The U.S. federal reserve is particularly challenged on account of its "dual mandate" that calls for maintaining solid employment and low inflation."

That seems like a rather unique observation on its face; that somehow the economy has morphed into an entity that exceeds the power of control afforded by the various policy tools at the disposal of the central bank and government agencies and authorities. We disagree.

Central Banks and policymakers have never had the tools necessary to deal with what we call the economy. Never. The only unique thing about this economy, as compared to, say, the late 1920s and 1930s is that we've been able to expand, re-engineer, re-name and re-categorize the speculative vehicles involved. True, the magnitude of those speculative vehicles may be correspondingly higher. But that was just as true in 1930 as it is today.

The bottom line is this is nothing new. How will it end? Simple. The end result will be a vast wave of government regulations and monetary stop-gap measures that rather than "dealing with the economy" will instead ensure that the effects of the credit bust are more widely distributed among the citizens.

2. Tyson Foods: A Chicken In Every Third or Fourth Pot

Eighty years ago President Herbert Hoover ran a successful campaign on the slogan: "A chicken in every pot and a car in every garage." We've come a long way.

The U.S. Department of Transportation claims there are now almost 2 personal vehicles owned or available to U.S. households, more than the number of drivers per household. Chickens seem plentiful too. But according to Tyson Foods (TSN), the largest U.S. meat company, that may change later this year.

At a presentation this morning before the BMO Capital Markets agriculture and protein conference the company said the chicken industry has cut production in reaction to higher feed prices. The company expects feed costs for the chickens it raises to come in $600 more this year than last.

It takes about 1.2 pounds of corn to produce one pound of live chicken, according to Reuters.At $4 per bushel it therefore takes 8.57 cents worth of corn for each pound of chicken and at $6 per bushel it takes 12.86 cents worth of corn, according to industry statistics, Reuters reported.

During the conference, Tyson CEO and COO Richard Bond discussed a very important statistic that will likely impact any company involved in producing consumer discretionary products. "Looking back to the 60s in the US, we used about almost 15% of our income for food," Bond noted. "Over the course of the last 40 years that has dropped down to about 8%. That number is going to start moving back up."

3. Foreclosures Continue Apace

U.S. home foreclosure filings in April increased compared to March and were 65% higher than a year earlier, RealtyTrac said yesterday. Home foreclosure filings in April were 243,353, an increase of 4% from March, RealtyTrac reported,

Speaking of foreclosures...

4. Freddie Mac

Speaking of foreclosures, yesterday Freddie Mac (FRE) posted a $151 million net loss for the first quarter. Below are a couple of slides from the company's conference call.

Slide 8 shows quarterly home price changes.


We think that both Fannie Mae (FNM) and FRE are still underestimating the severity of coming price declines. There remains high inventory coupled with widespread home price deflation.

But isn't all real estate is local? Not according to FRE's slide 9.


U.S. home prices were down 8.2% year-over-year in the first quarter. Only 6 of 50 states showed year-over-year price increases.

Even more worrisome, just as the Office of Federal Housing Enterprise Oversight (OFHEO) is in the process of reducing FNM's and FRE's required capital reserves - protection against
losses - FRE and FNM now have moved from 39% market share of new conventional mortgage issuance in the first quarter of 2006 to more than 80% in the first quarter of this year. So concurrent with FNM and FRE assuming almost total control of new issuances, the OFHEO is actually REDUCING protection against risk.

5. Exchange Comments on "The Inflation Hysteria"

Yesterday' Five Things, "The Inflation Hysteria," drew quite a few interesting responses on Minyanville's Exchange.


Minyan William Geiger writes:

"What balderdash. If I hit you in the nose with my fist, is that an illusion or merely the symptom of my anger? What is the purpose of this article, to tell people that are hurting from rising gas and food prices that if they merely redefine a few terms their troubles will go away? If you are going to use your energy to fill up some written space and I am going to use my energy to read it, please say something MEANINGFUL."

I understand his frustration, but if inflation is to be stopped, the cause must be understood. When politicians and bureaucrats shift the language so that the symptoms of inflation (rising prices) can be referred to as the cause (increasing the money in circulation), it allows the real cause to continue unabated.

That this seems like "balderdash" is typical of why it is allowed to continue and has actually been tacitly encouraged by the majority of citizens for so long. If doctors everywhere began referring to fevers as pneumonia, while ignoring what is causing the fever, deaths from pneumonia would skyrocket. That is what is happening right now. Inflation is the fever; unabated increases in the money supply is the pneumonia.

The symptoms of inflation are indeed serious, and I would say there are few in any form of media that have chronicled just how serious it is than Five Things has over the past few years. What is more serious than symptoms of inflation, however, will be the next step when these symptoms give way to a deflationary credit unwind.

Wall Street: Making Cents of Your Dollars!

And Minyan James Shafland writes:

"I find your sense of the economy is clear and informative and you and Mish among other's are perceptive economics physicians. It is that stock market that I find so inconsistent. I keep trying to find a pattern but there is none."

Just to be clear, please don't think it is silly or foolish to try and find these links between the economy and stocks. Wall Street, and the media that serves it, have built a multi-billion dollar industry around trying to serve up economic data as meaningful to people who are not economists, all the while analyzing the stock market in terms of what it means to the economy and vice versa.

The question is, If this stuff in the context of stock price movement is mostly gibberish, then why does all of Wall Street talk about it so much and pretend it isn't? The answer is simple: money. There are billions of dollars to be made by disseminating it.

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