Given the advantage of the passage of time, historians will surely note that one of the less appreciated long-term effects of the Greenspan term at the Fed was the impact on the American culture. Few are able or willing to make this association today (and certainly no one can prove it) but a link certainly exists, at least to some extent.

Things are now changing rather dramatically (and certainly for the better), but up until the housing boom went bust a year or two ago, we were a nation overflowing with leveraged speculators and everyone seemed OK with that whole idea.

Why not? What's wrong with everyone getting rich?

You'll probably never read in the history books that European Central Bank President Jean-Claude Trichet "looked the other way" or was somehow negligent in his duties when he mumbled about something (e.g., "froth") when maybe he should have used his bully pulpit or regulatory power to discourage bad behavior (e.g., poor lending practices) that would surely, in the long-run, end badly (e.g., the bursting of the largest asset bubble in the history of mankind).

But in America, it was clearly different.

So when you read a comment like the one made by Robert Shiller the other day, you have to wonder if it was a throw-away line or if there was a darker meaning intended, more than what most people would ever read into it.

When talking about the current "housing slump" (aren't we beyond that sort of characterization yet?) Dr. Shiller noted that there's a good chance home prices will fall more than the 30 percent decline experienced during the Great Depression.

Then he commented:
Basically we’re in uncharted territory. It seems we have developed a speculative culture about housing that never existed on a national basis before.You could have said the same thing about stocks in 2001.

Equities, however, weren't quite inclusive enough. After the turn of the century, those who didn't know the difference between Cisco Systems and Pets.com seemed more than willing to take the plunge on something they did understand - real estate.

This sort of thing doesn't just happen by itself. It takes an entire society changing the way they think to get an asset bubble as big as the one we had in real estate.

Real estate was (and always should be) a place to live - not an ATM machine or a retirement plan. If you work hard enough, you should be able to make a living buying houses and fixing them up or if you have good connections in the local community and plenty of "positive mental attitude", it's reasonable to expect that you could make a decent living as a realtor.

You have to wonder where we go from here now that the culture has been completely transformed - everyone expects another bubble.

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Does anyone know what the latest is for the Dow Theory signal? I can't keep up:

• Dec. 1, 2007 - Dow Theory Sell Signal and The Run on the Florida State Bank
• Jan. 8, 2008 - Dow Theory Sell signal confirmed
• Apr. 18, 2008 - Venerable Dow Theory poised to trigger a buy signal
• Apr. 21, 2008 - Thanks a Lot, Dow Theory

From Barry Ritholtz at The Big Picture via James Bednar at the New Jersey Real Estate Report via RentingInNJ comes an excellent graphic to go along with a compilation of rosy commentary from the National Association of Realtors.1. "There's no question there is a strong demand for housing from a growing population." -David Lereah, NAR Chief Economist

2. "For the foreseeable future, the demand for homes will continue to outstrip supply" -Al Mansell, NAR President

3. "We've been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream." -David Lereah, NAR Chief Economist

4. "We are returning to more balanced markets between home buyers and sellers… We feel confident that housing is landing softly as rates continue to rise." -David Lereah, NAR Chief Economist

5. "This is part of the market adjustment we've been discussing, with a soft landing in sight for the housing sector. The level of home sales activity is now at a sustainable level. Overall fundamentals remain solid…" -David Lereah, NAR Chief Economist

6. "Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector which remains at historically high levels." -David Lereah, NAR Chief Economist

"After five years of booming sales, we are now experiencing normal market conditions across most of the country… most owners can expect steadier gains in home values for the foreseeable future." -Thomas M. Stevens, NAR President

7. "Over the last three months home sales have held in a narrow range, easing to a level that is near our annual projection, which tells us the market is stabilizing" -David Lereah, NAR Chief Economist

8. "Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it'll likely take some months for price appreciation to rise." -David Lereah, NAR Chief Economist

9. Existing-home sales stabilized at a sustainable pace in August -NAR

10. "…the worst is behind us as far as a market correction — this is likely the trough for sales. When consumers recognize that home sales are stabilizing, we'll see the buyers who've been on the sidelines get back into the market" -David Lereah, NAR Chief Economist

11. "It looks like we're moving beyond the low for the housing cycle last fall, and buyers are responding to historically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory of homes on the market is supporting prices." -David Lereah, NAR Chief Economist

12. "Fundamentals have improved in the housing market and buyers see a window now with historically-low mortgage interest rates and competitive pricing by sellers," -David Lereah, NAR Chief Economist

13. "We also may be seeing some losses as a result of the subprime fallout. However, this is masking improved fundamentals in the housing market, with lower mortgage interest rates and motivated sellers." -David Lereah, NAR Chief Economist

14. "Buyers who've been on the sidelines may want to take a closer look at current conditions in their area – if they wait for sales to rise, their choices and negotiating position won't be as good as they are now." -Pat V. Combs, NAR President

15. "The rise in sales and prices in the Northeast region on a fairly consistent basis in recent months is promising because this was the first region that underwent sales and price weakness after the boom. Now, it appears that it will be the first region to climb back, indicating that other regions could follow a similar path." -Lawrence Yun, NAR Chief Economist

16. "The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales…Once we get through these disruptions, we'll get a better sense of where the actual market is in late fall as conditions begin to normalize," -Lawrence Yun, NAR Chief Economist

17. "Existing-Home Sales Rise in November, Market Likely Stabilizing" -NAR

18. "Home sales remain weak despite improved affordability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate," -Lawrence Yun, NAR Chief Economist

19. Existing-Home Sales to Stablize Before Upturn in Second Half of 2008 -NARWithout a doubt, my favorite is comment #3 that occurred at the very peak in 2005, "We've been expecting sales to remain at historically high levels".

This is not too different than, just days before the stock market crash in 1929, Irving Fisher commented, "Stock prices have reached what looks like a permanently high plateau."

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After figuring out how to create animated .gifs a couple weeks ago, there now seem to be a virtually endless number of good data sets with static graphics to animate.

This one is from data at the Wall Street Journal where they have some pretty cool "mouse-over" features and moving bar charts at the bottom (but no animation).

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Maybe passing on that recent offer to extend my Wall Street Journal subscription for two more years at the current rate will turn out to be a good decision.

By then, who knows what the paper will look like.

The political content moving forward in the first section of the print edition over the last few months was something that was eventually going to be mentioned here. It's kind of like a game now - count the business articles in the first part of the paper and see if you have to use one hand or two.

The next thing you know they'll just have a separate section titled "Business".

And that could come sooner than you think according to this report in, well, the Wall Street Journal:
Editor Out as Murdoch Speeds Change at WSJ
By JESSICA E. VASCELLARO, MERISSA MARR and SAM SCHECHNER
April 23, 2008

Four months after buying The Wall Street Journal, News Corp. is poised to choose its own person to run its news pages.

Marcus Brauchli, who took over as Journal managing editor less than a year ago, confirmed Tuesday he was stepping down. "Now that the ownership transition has taken place, I have come to believe the new owners should have a managing editor of their choosing," he said in a note to the staff.

Mr. Brauchli's departure likely heralds a more dramatic shake-up at the Journal, which has seen a shift in focus since News Corp. bought the Journal's parent, Dow Jones & Co., in December for $5.16 billion. In recent months, the paper has begun putting more emphasis on shorter news stories and more general news, as part of a push by News Corp. Chairman Rupert Murdoch to broaden readership and to compete more directly with the New York Times.

Mr. Murdoch was impatient with the pace of change, say people close to the situation, and whoever takes over is apt to speed up the change process. The identity of the next editor isn't clear. Dow Jones said in a statement it would "begin a search for Mr. Brauchli's replacement immediately."

Current Journal publisher and former Times of London editor Robert Thomson isn't expected to take the title of interim managing editor, but he may take a more active role in the newsroom in the meantime.

About 10 days ago, Mr. Thomson and Dow Jones Chief Executive Officer Leslie Hinton summoned Mr. Brauchli to a meeting about his future, according to people familiar with the situation. They suggested it might be better to have their own person running the newspaper, these people say. He agreed, these people say, and the two sides began talking about his next step, and about a financial package.
It must be weird writing about the company you work for when the company you work for is a major newspaper. In this case, "people familiar with the situation" could be anyone hanging around the water cooler with a juicy rumor.

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Today is the last day for entries in the fourth semi-annual "Guess the price of oil and gold" contest - be sure to get your guesses in by midnight PST or they will not be accepted. Here's one last look at the historical chart:
A free one-year subscription to the companion investment website Iacono Research will be awarded to the contestant with the lowest combined percentage error between their guesses and the prices for these two important commodities on June 30th. The closing price for the near-month (August) NYMEX futures contract for WTI crude oil and the closing price for spot gold on the COMEX will be used.

Here's one last look at how things ended up last year:
A new graphic will be provided later this week containing all the entries for the current contest and then regular updates will occur between now and the end of June. See the contest kickoff post and last week's reminder for more details.

Entries may be made either by posting them in the comments section of this post (or either of the prior two posts above) or sending mail to either tim-at-iaconoresearch.com or tliacono-at-yahoo.com.

The winner will be announced on June 30th - good luck to all!

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To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

In the National Association of Realtors' monthly report on existing home sales, where sales fell 2.0 percent in March (now down 19.9 percent on a year-over-year basis) and home prices continued to tumble (down 7.9 percent from a year ago), NAR chief economist Lawrence Yun had the following comments:Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets. At the same time, many buyers continue to bide their time with a large number of homes to choose from, while other potential buyers remain on the sidelines.If Lawrence had wanted to paint a more accurate picture of current conditions, he might have said something like this:
Look, everyone is scared to death right now - lenders, buyers, realtors - never, ever in a million years did we think that prices would drop like this. I mean, who wants to buy a house that is probably going to lose $20,000, $50,000, or $100,000 over the next year? If you can buy a foreclosed property at a steep discount, have it at. Otherwise, stay away.
Here's the chart:
High inventory + low sales = falling prices.

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There's a new study out by Professor Craig Israelsen at BYU that provides more good news about commodities as an asset class.

As a number of other reports have also done in recent years, it dismisses the notion that commodities should be viewed as some sort of a "No Go Zone" for individual investors. Instead, in this report, commodities are shown to provide good diversification for typical investment portfolios while boosting overall returns.

The original report is available at Index Universe and an interview with Professor Israelsen is up over at my new favorite website HAI (Hard Assets Investor):

• The Benefits of Low Correlation - Index Universe
• Craig Israelsen's Seven Asset Portfolio - HAI

From the interview:
Professor Craig Israelsen of Brigham Young University is emerging as an important voice in the asset allocation debate. The reason? He keeps things simple.

In a November/December 2007 article in the Journal of Indexes ("The Benefits Of Low Correlation"), Israelsen examined the performance of a simple portfolio built with combinations of up to seven different asset classes: large-cap U.S. equities, small-cap U.S. equities, non-U.S. equities, U.S. intermediate-term bonds, cash, REITs and commodities.

His conclusion? Only REITs and commodities added a major diversification benefit, and they deserve to be included in all portfolios ... including conservative retirement portfolios.This is a particularly difficult subject for many individuals who are managing investment portfolios while in retirement because most people either think that commodities don't provide enough returns or that they are too volatile.

According to this study, which goes back 37 years, both of these claims are unfounded.

The most interesting part of the report (at least to me) is shown in the chart below - not so much the combination of adding REITs and commodities (as noted above), but the effect of just adding commodities.

First you start with an equally weighted six assets investment portfolio consisting of the following:

1. Large-cap U.S. equities
2. Small-cap U.S. equities
3. Non-U.S. equities
4. U.S. intermediate-term bonds
5. Cash
6. REITs

And then you add in commodities in the form of the GSCI Commodities Index. Note how the overall rate of return goes up slightly, but, more importantly, the worst years are much less severe.
As the seven assets portfolio was constructed, there were no periods with cumulative losses of 10 percent or worse whereas for the six assets portfolio these losses occurred up to 5 percent of the time. For a "stocks only" portfolio, losses of 10 percent or worse happened up to 14 percent of the time, depending on the mix of stocks.

This is a subject that doesn't get near the attention that it should - after one, two, or three years of losses, a lot of individual investors bail on their investment approach, locking in those losses, as many did earlier in the decade.

More from Professor Israelsen:
I've recently updated the data on this study. Between 1970 and 2006, large-cap U.S. equities had about an 11% return. But there were eight years in that 37-year period where large-cap stocks had a negative return. Moreover, the worst 3-year cumulative return was about 38%, from 2000-2002.

Over that same time period, commodities had an average annual return of 11.5%. They had nine years with a loss, so one more than large-cap U.S. stocks. But the worst 3-year return for commodities was only 26% - much better than equities.

I think that surprises people. It runs up again the idea of commodities being risky investments.It doesn't surprise me.

The returns get even better if you favor the asset class(es) that happen to be in a secular bull market and reduce your exposure to the one(s) in a secular bear market.

You can see the secular bulls and bears in the chart below using data from the report.
The period from 1966 to 1982 is generally considered a commodity bull/stock bear market which was then followed by the opposite conditions from 1982 to 2000.

Since the turn of the century, despite what you may hear on CNBC, it's pretty clear that it has flipped back to commodity bull/stock bear.

What's striking in the chart above is how you can have a big up year or two during a bear market and a horrible year or two within a bull market. Also, the best six years of gains - 1973, 2000, 1972, 1999, 2007, 1974, 1989 - were all for commodities.

Unfortunately, by the time your typical retail investor embraces the whole idea of commodities as an important asset class - sometime in the next decade - the commodity bull market will probably be nearing its end.

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To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

This is a true story. In late 2003 I sat next to Mason Gordon on a flight from Los Angeles to somewhere in the Midwest where I had a connecting flight and he was meeting up with LeBron James of the Cleveland Cavaliers for a promotional shoot of some sort for Slamball.

Mason founded the sport of SlamBall which is basically basketball with trampolines and lots of full-body contact between players.

Since he was in the middle seat and I was on the aisle, we talked for most of the flight.

I remember that he had either just bought a house or was about to and my wife and I were getting ready to sell ours, so we talked about that for quite a while. Also, I must have told him about ten times to buy gold - not bad for free advice since you could have bought it at $350 an ounce back then.

We were both very curious about what the other was doing in their life - the sort of mutual inquisitiveness that you don't find much these days between two strangers. I explained fiat money and Fed policy to him and he talked about HBO and SlamBall. It was the fastest four hour flight I've ever had.

Anyway, SlamBall showed up in this WSJ article the other day.
Ex-HBO Executive Stakes His Comeback on SlamBall
A year ago, Chris Albrecht was on the receiving end of a very public dismissal from a very lofty perch in the entertainment world.

After a night of heavy drinking in Las Vegas, the longtime creative chief of Time Warner Inc.'s HBO and driving force behind the likes of "The Sopranos" and "Sex and the City" was arrested for attacking his girlfriend in a parking lot. He pleaded no contest to the charge and resigned under pressure days later.

Now, Mr. Albrecht is trying for a comeback. And he's staking much of it on a bizarre, futuristic sport called SlamBall, which failed to break out in an earlier debut. With the feel of a live-action videogame, SlamBall is essentially basketball combined with rugby and trampoline gymnastics, and if Mr. Albrecht is right, it will become a phenomenon as successful and profitable as the latest sports craze, ultimate fighting.
...
SlamBall appeared briefly in 2002 and 2003 on Spike TV. Viewers who caught a glimpse saw a full-contact version of basketball where players fly off a spring-loaded floor and soar as high as 15 feet on the way to dunks that earn a team three points. Outside shots earn two points unless they are beyond a three-point arc. Mid-air collisions are encouraged.

But SlamBall largely disappeared after it attracted little attention and its creators feared network executives wanted to turn it into a spectacle along the lines of "American Gladiator."

"We wanted this to be seen as a sport and taken seriously," said Mason Gordon, who invented the game in 2000.

At that time, Mr. Gordon was answering phones at Tollin-Robbins, the Los Angeles production company that created the HBO hit "Arli$," about a sports agent, and many other films and TV shows.

Michael Tollin, a founder of the company whose producer credits include the TV series "One Tree Hill" and miniseries "The Bronx is Burning," said he hired Mr. Gordon, a well-known street basketball player, mainly to improve the quality of his Sunday morning full-court games at his backyard court in Fryman Canyon.

A few months into the job, Mr. Gordon approached Mr. Tollin with the outline of a SlamBall court on a napkin, complete with the strategically placed spring-pads. A short-lived run on then-fledgling Spike followed, with little impact.
That's pretty much the way it was described to me - on a napkin. I remember catching it on Spike TV once or twice before it went off the air and thinking it was pretty crazy.

It looks like it's going to get another chance. For more info, see the SlamBall website.

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From the "thematic maps" section of the California Labor Market Info Data Library:

A voluminous piece of writing by Steve Matthews is up at Bloomberg this morning on the subject of Fed Chairman Ben Bernanke - his background, his predecessors, and the challenges he faces today.

It's funny that one could write something like this without casting aspersions toward his immediate predecessor.
Ben Bernanke, the son of a small-town drugstore owner, has been preparing his entire adult life for the fight against what Greenspan has called the "most wrenching" economic crisis since World War II.
...
During Greenspan's 18 years in charge of the Fed, the U.S. endured only two recessions, both lasting less than a year, and enjoyed the longest economic expansion in U.S. history.

"He has a legitimate claim to being the greatest central banker who ever lived," wrote Princeton economist Blinder, who spent 19 months as the Fed's No. 2 in the mid-1990s, in a paper presented in August 2005 at a Fed conference devoted to the "Greenspan Era."
As hard as it might be to believe, former sycophant Blinder has since changed his tune a bit when it comes to assessing the former Fed Chief's legacy.

With all the Greenspan critics that have surfaced lately, it's not clear why the author had to go to Bill Fleckenstein for a contrary view - well, aside from the fact that he "wrote the book" on the subject. And it was a mild opposing view at that.
Critics say Greenspan was also partly responsible for speculative bubbles, first in tech and Internet stocks in the late '90s, then in housing prices. The housing bubble swelled as Greenspan kept the fed funds rate at 1 percent in 2003 and '04.

"One of the reasons we are in this particular predicament is because for 20 years the Fed has been trying to suppress the downside of the business cycle and has been proposing bailouts and easing money whenever money needed easing," says William Fleckenstein, president of Fleckenstein Capital Inc. in Seattle, Washington, and co-author of "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve." My copy is sitting here waiting for me to give it some attention - it should be good.

If you worked at Bloomberg, all you really had to do put the Greenspan era in its proper light was to search the company archives (which someone over at Patrick.net apparently did), and you'd find some of the most incriminating evidence available, this report coming over four years ago in March of 2004.
U.S. homeowners have amassed a record $6.82 trillion of mortgage debt as real estate values jumped in the past decade, and have borrowed against their homes for spending money. Federal Reserve Chairman Alan Greenspan, the nation's guardian of financial stability, is supporting them.

"We know that increases in home values and the borrowing against home equity likely helped cushion the effects of a declining stock market during 2001 and 2002," Greenspan said in a Feb. 23 speech in Washington.
...
Rising home prices contributed to a 12 percent jump in household net worth last year to a record $44.4 trillion in the fourth quarter, according to the Fed.

That helped convince Greenspan that Americans can continue to accumulate debt. If households run into trouble, they can use their home equity to get out of it, the argument goes. The 78- year-old central banker also has said that rising real estate values are supported in many markets by a shortage of land and by immigration.

"Without an examination of what is happening to both assets and liabilities, it is difficult to ascertain the true burden of debt service," Greenspan told the Credit Union National Association Feb. 23 in Washington. "Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress."Translation: "As long as house prices continue to go up - no problem!"

You don't hear too much about "equity cushions" anymore - they were all the rage just a couple years ago. Here's how they were viewed in a September 2005 speech from the former Fed chairman:
In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.
Not such a vast majority anymore and not so sizable a cushion.

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It's been two years since the Federal Reserve discontinued reporting of the M3 Money Supply statistic. Supposedly, it was too expensive to maintain and provided no useful information for formulating monetary policy.
Apparently, it can be done for a lot less than they were paying - at least that's the working assumption since websites such as NowAndFutures.com don't seem to be going broke doing it.

As for whether it provides any useful information, that is apparently very subjective. It looks useful to me and probably goes a long way in explaining why prices are now soaring everywhere but in the government's inflation statistics.

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Food prices are rising sharply in the U.K. - if not according to the government's statistics, then certainly according to this report in the Daily Mail after they went on a trip to the grocery store.

It can't be too different here in the U.S., yet there seems to be little coverage (if any) in the U.S. mainstream media like this.
The REAL cost of inflation

The true, devastating scale of rising prices is revealed today - by the new Daily Mail Cost of Living Index. It shows that families are having to find more than £100 a month extra this year to cope with increases in the cost of food, heat, light and transport.

According to the Consumer Price Index, inflation is running at only 2.5 per cent. Yet the Mail's index finds that food costs alone are rising at 15.5 per cent a year - more than six times the official rate.
And there are double-digit increases in other "must-pay" essentials such as petrol, gas and electricity. Many families need to find more than £1,200 extra a year just to stand still.

Once higher mortgage costs are added, millions are having to pay out at least another £2,000 a year to keep their heads above water.

The Bank of England's chief economist Charlie Bean admitted last night that higher food and energy costs are likely to push the Consumer Price Index over 3 per cent this year.

Yet this rate fails to reflect the real problems in homes up and down the country because it includes the cost of luxury items such as flat-screen TVs, whose prices are falling.

It also fails to take increased housing costs into account.

The Mail's new index has been compiled in association with the price comparison websites uSwitch.com and MySupermarket.co.uk. It will be published monthly to chart the burden of "must pay" bills as families struggle to keep afloat in the midst of an uncertain economic period.
At some point in time, perhaps not long from now, more reports like this will be seen and heard in North America, though it has become increasingly difficult to measure food price increases due to the many and varied promotional offers and "club card savings" at large grocery stores.

ooo
This week's cartoon from The Economist:

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Continued weakness in retails sales, manufacturing, and home construction along with soaring prices at the wholesale level highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index up 4.3 percent to 1,390, now down 5.3 percent for the year, and the yield of the 10-year U.S. Treasury note rose 28 basis points to 3.75 percent.
Retail Sales: In a surprise to most analysts, retails sales rose 0.2 percent in March after an upwardly revised decline of 0.4 percent in February. The increase, however, was largely due to surging gasoline prices - excluding gasoline sales, retail sales were unchanged.

On a year over year basis, overall retail sales have risen just 1.97 percent. Since these figures are not adjusted for inflation, real retail sales (adjusted for inflation) are now well into negative territory.
Retail gasoline prices rose 6.9 percent in March pushing gasoline station sales up 1.1 percent. From year-ago levels, gasoline purchases have risen 18.9 percent though actual consumption of gasoline has been flat during the same period.

Excluding gasoline station sales from overall retail sales results in just a 0.3 percent increase in the last year, a clear indication of how weak consumer spending has become and of much higher prices at the pump.

Producer Prices: Led by rising energy prices, wholesale prices posted their second largest increase in the past 33 years, rising 1.1 per cent in March after a 0.3 percent gain in February (the largest increase since 1975 occurred last November when producer prices rose 2.6 percent. On a year-over-year basis, producer prices have risen 6.9 percent.

Energy prices surged 2.9 percent for the month paced by a 13.1 percent jump in home heating oil while natural gas prices rose 4.2 percent and gasoline prices increased 1.3 percent. Consumer food prices increased 1.2 percent and have now increased at an annual rate of 10.1 percent over the last three months. Faced with these rapidly rising prices, businesses face one of two choices - either pass the cost increases on to consumers or take a hit to their bottom line. Their decision should be apparent in both the consumer price index and company earnings in the months ahead.

New York and Philly Fed Manufacturing Surveys: The two regional surveys of manufacturing activity in the Northeast moved in markedly different directions last month, but these are very volatile surveys and the month-to-month moves are really unimportant - it's the general trend that matters and that trend remains decidedly down.

The New York Fed's Empire State survey improved from -22.2 in March to +0.6 in April on rising shipments and stabilizing new orders. Meanwhile, conditions worsened considerably to the southwest as the Philadelphia Fed survey fell from -17.4 in March to -24.9 in April with a severe contraction in new orders which fell from -9.3 in March to -18.8 in April. Recall that numbers above zero indicate expansion and numbers below zero indicate contraction. In both reports, prices rose considerably and more weakness in employment was reported, corroborating recent manufacturing job losses in the monthly payrolls data from the Labor Department.

Consumer Prices: After no increase during the month of February, government-reported inflation rose 0.3 percent in March and is now up 4.0 percent from year-ago levels.Energy prices once again rose sharply, heating oil surging 7.9 percent in March and now up 40.2 percent on a year-over-year basis. Gasoline prices rose 1.3 percent for the month and 26 percent from last year at this time. Overall energy costs rose 1.9 percent last month and 17.0 percent from a year ago.

Helping to keep the overall inflation figure down, clothing prices fell 1.3 percent in March and are now down 1.4 percent over the past year. The cost of women's and girl's apparel fell 2.6 percent last month and prices have dropped 5.4 percent from year-ago levels.

Food costs continue to rise, however, as the price of bread rose 14.7 percent over the past year and milk prices have increased 13.3 percent.

As noted on a number of occasions in recent months (see Stagflation, then and now) it is virtually impossible for government-reported inflation to move much higher than the current 4 percent rate unless rental prices move up considerably, something that is not likely now that there is a glut of unoccupied homes (although a report last week indicated that rental costs have been increasing in Western states).

With the rising price of food and energy having a big impact everywhere but in the government's headline inflation numbers, the manipulation of the inflation statistics over the last 25 years is becoming more and more noticeable to ordinary consumers who are having an increasingly difficult time reconciling the four percent inflation rate they hear on the evening news with their own experiences making purchases at grocery stores and gasoline stations.

New Home Construction: Housing starts and permits for new construction plumbed new 17-year lows in March, dashing the hopes of some who continue to believe that the homebuilding industry can't have much further to fall given the dramatic move down over the last two years.

Housing starts fell 11.9 percent for the month and 36.5 percent on a year-over-year basis while permits for new construction, a leading indicator for future homebuilding activity, dropped 5.8 percent from February to March, now down 40.9 percent from year-ago levels.
Tightening credit conditions, uncertain labor markets, a glut of unsold homes for sale, and an increasing number of foreclosures coming onto the market at depressed prices (in some parts of California, as many as two-thirds of all homes sold are foreclosure sales) continue to depress the housing sector with no sign of a turn-around on the horizon.

Multi-family housing starts fell 24.6 percent and single-family starts declined 5.7 percent. Starts dropped in all four regions, led by a 21 percent plunge in the Midwest.

Earlier in the week the National Association of Home Builders reported a flat month-to-month reading for their housing market index at 20, a historically low level just above the all-time low of 19 and far from readings of over 50 reported at the peak of the housing boom.

The homebuilders' group forecast housing starts would fall 30 percent this year, compared with a previously estimated 27 percent drop, as the housing and credit crises continue. Southern California-based RealtyTrac, Inc. reported a huge jump of 57 percent in foreclosures during March from year-ago levels and bank repossessions more than doubled from this time last year. They reported an increasing number of homeowners "walking away" from their homes as property values tumble and adjustable-rate mortgages continue to reset.

The nation's housing market is likely to get worse before it gets better.

Initial Jobless Claims: After reaching the psychologically important level of 400,000 three weeks ago and then tumbling by over 50,000 a week later, last week initial claims for unemployment insurance rose 17,000 to 372,000, a figure consistent with the recent trend. The four week moving average held about steady at 376,000, now up 17 percent on year-over-year basis, and still near its highest level since the hurricane-affected spike in late-2005.

As more evidence of the further deterioration in the nation's labor market, continuing claims for unemployment insurance, a good indicator of the difficulty that displaced workers are having in securing new employment, rose to highs last seen in early-2004. Unemployment in California now stands at 6.2 percent, far above the national rate of 5.1 percent.

Summary: It was really just more of the same last week for bad economic news - weak retail sales with higher energy prices, more contraction in both the manufacturing and housing industries, soaring prices at the wholesale level, and rising consumer prices that show up almost everywhere but in the headline consumer price index.

There were three bright spots last week, however, though none of these portend a major rebound for the U.S. economy. A continuing high rate of capital flows into the U.S. indicate that foreigners have not yet tired of supporting the huge debt that continues to be racked up by government, businesses, and individuals. Also, worker productivity unexpectedly improved and the Conference Board's index of leading economic indicators posted its first gain in six months, rising 0.1 percent.

There hasn't been much good economic news lately - this is about as good as it gets.

The Week Ahead: In a relatively light week of data, the coming week will be highlighted by two reports on the nation's troubled housing market - existing home sales on Tuesday and new home sales on Thursday. Also scheduled for release are reports on durable goods orders on Thursday and consumer sentiment on Friday.

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When historians look back on this period of time in the U.S., they will surely be amazed at how long the economic "good times" were sustained when, after a stock market bubble had collapsed, a new period of "prosperity" was ushered in via a housing bubble which, as should be clear to everyone by now, is well into the collapse phase.

They will also be surprised at how quickly the tide turned and how dramatically public opinion eroded after it became clear to even the most casual observer that everyone wasn't going to become wealthy beyond their wildest dreams just by owning a house.

This new survey from the Washington Post fills in some of the details on the rapidly eroding public opinion about the economy:
The public's ratings of the national economy continue to sour, with assessments deteriorating faster than at any point in Washington Post-ABC News polling.
...
Nine in 10 Americans now give the economy a negative rating, with a majority saying it is in "poor" shape, the most to say so in more than 15 years. And the sense that things are bad has spread swiftly. The percentage who hold a negative view of the economy is up 33 points over the past year, and the percentage who rate the economy "poor" has increased 13 points in the past two months. That is the quickest 60-day decline since The Post and ABC started asking the question, in 1985.
...
One force behind declining assessments of the economy is the soaring cost of gasoline. With retail prices averaging $3.39 per gallon (a record high, according to the Energy Department), two-thirds of those polled said recent price increases have been a hardship, including about four in 10 who called the cost of filling their tanks a "serious" burden. Among those with annual family incomes under $50,000, 52 percent said gas prices cause serious hardship, double the number of those from higher-income families to say so.

The government's plan to alleviate some of the economic stress -- through economic stimulus rebates and new tax breaks for businesses -- is viewed even more skeptically than it was in early February. Nearly eight in 10 now think the package will not be enough to avert or soften a recession.
Pull up a seat folks - the most dramatic economic slowdown in many, many years and the sharpest reversal of consumer sentiment in decades are now underway, reinforcing each other as part of a vicious circle during an election year.

It's going to be (well, actually, it already is) quite a spectacle.

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That is one spooky looking image on the cover of this week's Economist magazine - it must be that weird, threatening cloud on the right.
The story that goes along with the cover is no less foreboding.
The silent tsunami
Food prices are causing misery and strife around the world. Radical solutions are needed

PICTURES of hunger usually show passive eyes and swollen bellies. The harvest fails because of war or strife; the onset of crisis is sudden and localised. Its burden falls on those already at the margin.

Today's pictures are different. “This is a silent tsunami,” says Josette Sheeran of the World Food Programme, a United Nations agency. A wave of food-price inflation is moving through the world, leaving riots and shaken governments in its wake. For the first time in 30 years, food protests are erupting in many places at once. Bangladesh is in turmoil (see article); even China is worried (see article). Elsewhere, the food crisis of 2008 will test the assertion of Amartya Sen, an Indian economist, that famines do not happen in democracies.

Famine traditionally means mass starvation. The measures of today's crisis are misery and malnutrition. The middle classes in poor countries are giving up health care and cutting out meat so they can eat three meals a day. The middling poor, those on $2 a day, are pulling children from school and cutting back on vegetables so they can still afford rice. Those on $1 a day are cutting back on meat, vegetables and one or two meals, so they can afford one bowl. The desperate—those on 50 cents a day—face disaster.

Roughly a billion people live on $1 a day. If, on a conservative estimate, the cost of their food rises 20% (and in some places, it has risen a lot more), 100m people could be forced back to this level, the common measure of absolute poverty. In some countries, that would undo all the gains in poverty reduction they have made during the past decade of growth. Because food markets are in turmoil, civil strife is growing; and because trade and openness itself could be undermined, the food crisis of 2008 may become a challenge to globalisation.

Rich countries need to take the food problems as seriously as they take the credit crunch...
Corn-based ethanol production in the U.S. is, of course, a huge part of the problem and in Asian countries where the currency is pegged to the U.S. dollar, a weaker dollar makes rising food prices even more problematic.

As evidenced by recent increases in the Chinese and Vietnamese currencies, the threat of civil unrest is proving to be much more effective than any arm-twisting by U.S. officials in cajoling policymakers to let the local currency strengthen.

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In searching for the late-2006 data required for the last post, the ad campaign by the NAR (National Association of Realtors) from that period popped up - it's worth having another look at almost a year and a half later.

Recall that the following full-page ad appeared on at least two consecutive Sundays in major newspapers - this probably influenced more than a few people on their home purchase decisions though the logic of it being a great time to buy OR sell continues to escape me.
As it turns out, notwithstanding the encouragement from former Fed chairman Alan Greenspan, late-2006 was one of the absolute worst times to buy a house. If you bought a house almost anywhere in California, you've probably seen your new place lose $100,000 in value - in some areas, much more.

Should there be any wonder why realtors are getting sued these days?

Shown above is the original version of the ad from early in November of 2006. The next revision of the ad conveniently dropped the "4.3 percent increase in pending home sales" line after pending home sales fell the next month.

Pending home sales are now down more than 20 percent from that period.

That was some pretty awful advice for potential homebuyers.

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These days, inflation seems to strike almost everywhere and the companion investment website for this blog - Iacono Research - is no exception. Subscription rates are going up, but, unlike many other investment approaches, subscribers are making money this year.
It's been almost a year and a half since rates were last raised and, during that time, subscribers constructing an investment portfolio based on the model portfolio have come out way ahead.

I expect that to continue.

Interestingly, in the post announcing the last rate increase in November of 2006, the following comment was left:
Tim has not yet proven himself as an investment guru.
Housing has not crashed and commodities are not on fire ...As I commented at the time, I have no desire to attain guru status, but it is worth noting that, in November of 2006, a barrel of oil cost under $60, gold sold for less than $625 per ounce, and the National Association of Realtors had just launched a national ad campaign claiming that it was "a great time to buy OR sell a home" - they were half right.

Wow, time really flies...

Anyway, after April 30th - less than two weeks from today - the one-year subscription rate will increase from $129 to $159 with a similar increase for the two-year rate, from $229 to $279.

If you want to have a look around over the next week or so, you may use the following free-trial account through April 26th:

• Username: ftexp0426
• Password: noaxoemo

The following chart was recently prepared for the Approach page at the investment site. The actual model portfolio has performed even better than the basic version shown below, which isn't too shabby either.

The investment service is now in its third year with the official anniversary of the public announcement coming next month on May 15th. I'll still be in the New York area after my speaking engagement at the Hard Assets Investment Conference so I may or may not be able to offer a "one-day only" special rate as I've done before on such occasions.

One last note - anyone requesting a FREE 30-DAY TRIAL on or before April 30th will be eligible for the current subscription rate for the duration of their free trial period.


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To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

German weekly Der Spiegel inspires some of the most uncomfortable imagery yet in this commentary describing the state of U.S. central banking, likening the current and former Fed chairmen to two long-time entertainers in Las Vegas.
The dollar is in a tailspin, the trade deficit is growing and a recession is on the horizon. The American way of life is in serious danger. But the head of the Federal Reserve keeps on pumping easy credit into the system -- a crazy policy that will worsen the crisis.

Alan Greenspan and Ben Bernanke have more in common with the big cat entertainers Siegfried & Roy than any of us can be comfortable with.

The Las Vegas magicians call themselves "Masters of the Impossible" and have been fascinating audiences for decades by getting snow-white tigers to leap through burning rings.

The legendary Federal Reserve Chairman and his successor were equally adept at fascinating their audiences -- with a policy of miraculous monetary growth that gave America one of the longest periods of economic expansion in modern times. Many saw them as "Masters of the Universe." It seemed as if the central bankers had tamed predatory capitalism with their constant interest rate cuts.

Siegfried & Roy at times seemed at one with their cats, until the day everything went out of control. A tiger bit Roy in the neck during a show and looked as though it were about to devour him alive.

Greenspan and Bernanke too have lost their magic touch, and their image has been shredded by the real estate crisis and the dollar slide. The ravages of the financial markets aren't doing them any personal harm. But devalued stocks, bad mortgage loans and the diving dollar are damaging millions of small investors and savers.

It's as if the tiger has leapt of the stage and is mauling the audience. We can't blame wild cats or financial markets for being ruthless. It's in their nature to be brutal. Their unmistakeable message is: you can take things this far and no further.The article is titled "The Madness of Ben Bernanke" (hat tip Patrick.net) and is well worth reading in its entirety - the Germans have an understandably different view of how central banks should be run given their experience of some 80 years ago during the Weimar Republic.

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This is just a reminder for those of you in the New York area that I'll be speaking at the New York Hard Assets Investment Conference less than a month from now on May 12th and 13th at the Marriott Marquis in Times Square.

As I understand the schedule as it stands at present, I'll be participating in a "Power Panel" early Tuesday morning titled Causes and Consequences of the Credit Crisis and I have a pretty good idea whose name might come up...

He was in the news quite a bit last week...

Then later Tuesday morning, I'll be conducting a half-hour Newsletter Writer Masterclass with the working title Buy the Stocks, or Buy the Commodities?

The presentation is coming along nicely so far I may be able to post the related document over at Iacono Research after the conference is over for those of you who are interested but unable to attend.

Here's one of the mailings that was sent out recently - there goes the neighborhood!

Seriously, I'm really looking forward to this event and the folks at International Investment Conferences have really been good about everything so far.

Meeting some of the other people whose names appear above should be lots of fun and I'm sure there will be lots to talk about.

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To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.