INTEREST rates on government bonds jumped to nearly 6 percent on Friday. And stock prices plunged.
This column has been saying for a while that rising oil prices, and especially the cost of gasoline, weren’t being properly reflected in Washington’s inflation indices. Now, with the shocking 0.7 percent rise in the latest consumer price index, Wall Street is finally getting a taste of the bad news.
Stocks had the predictable response – the Dow Jones industrial average lost nearly 200 points on Friday.
But this is probably only the beginning of the story, not the end.
The Wall Street pros now must ask themselves if 7 percent interest rates can be far behind. How about 8 or 9 percent mortgage rates?
Wall Street has to figure out a few things.
First, economics may be a dismal science, but it is also a pretty accurate one in several respects. One of the hard-and-fast rules is that the stronger the economy, the worse the threat of inflation. And with the stock-market bubble keeping the economy rolling along, inflation is likely to be an even bigger problem in the future.
Now that the government’s numbers have finally shed some light on the truth about energy price inflation, what’s the next secret that’ll be exposed?
My guess is that inflation in the real-estate market – probably the worst-kept secret in the economy today – will cause Washington’s inflation numbers to jump even higher in the months ahead.
Realtors and home buyers already know the inventory of houses on the market is low and – with consumers busting with stock-market profits – bidding wars for desirable properties are the norm. Apartments in Manhattan sell in days. Homes in the suburbs of big cities take only slightly longer.
But there’s a second secret, one that my friend John Williams – who edits the Straight Shooter Wall Street report – and I have been discussing for years.
The government recently changed the way it calculates the inflation rate, and these alterations understate the true rate of inflation. So, as bad as the 0.7 percent jump in the CPI was, inflation is worse in real life.
Goldman Sachs recently caught up with the issue, which prompted a Wall Street Journal story that said the drop in inflation isn’t as big as it seems. In fact, a 1.7 percent jump in consumer inflation reported over the past 12 months would really have been 2.0 percent without the government changes.
Washington may be saying it changed the inflation calculations because it believed there was a change in the economy that made the old way of doing things obsolete. But, in fact, by pulling down the inflation numbers, Washington saved itself from paying a lot more in Social Security and other fixed payments.
So Wall Street benefited and old folks lost.
Rates on 30-year government bonds are now more than a full percentage point higher than when the Fed tried to cut interest rates last fall. Alan Greenspan has lost control. The Fed is being pushed around by the world financial markets, and that’s not good.
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Are there any more banks ripe for a takeover?
Investors made a nice piece of change on Republic New York Corp., the bank that agreed last week to be purchased by HSBC Corp., a Hong Kong-based company. Several months ago, this column picked up the stories that Republic New York was up for grabs, mainly because of the ill health of its majority shareholder, Edmond Safra.
There are fewer and fewer banks available. But there are still some. And, as in the Republic New York deal, the buyers are likely to be foreign banks.
The odds-on favorites are Mercantile Bancorp in St. Louis and Huntington Bancshares in Columbus, Ohio, although there are a number of other banks in the Midwest that are possible targets.
The top-three takeover targets on Keefe Bruyette & Wood’s list are First Essex Bancorp, KeyCorp and United Bankshares Inc.
The most likely buyers are foreign banks, including Bank of Montreal and ABN Amro, according to Charles Peabody of Mitchell Securities.
Australian & New Zealand Bank also looks hungry for American acquisitions.
And then there is First American of Tennessee, which is having profit problems, according to Peabody, but whose chairman has a history of positioning his institutions for a sale.
In the New York area, the favorite potential takeover targets remain Dime Bancorp and Greenpoint Financial Corp.