NEXT stop, interest rates at 7 percent. And how about a 9,000 Dow?
Now that producer prices in September rose an astounding 1.1 percent, Wall Street will have to stop pretending that there is only a little inflation.
As this column has been saying, inflation has been climbing at a much brisker pace than Washington’s numbers were letting on.
This catch-up for the PPI has been in the cards for months. Before the stock market opens tomorrow, the government will hit Wall Street with its guess on consumer inflation.
Wall Street “experts” – almost all of whom have been off the mark on inflation and interest rates for more than a year – think the CPI will rise 0.4 percent. The CPI also has some catching up to do. Consumer inflation numbers have not even come close to reflecting the full rise in energy costs this year.
If tomorrow’s number is too shocking, the Federal Reserve will probably boost interest rates soon. Walter J. Williams, one of the few guys who’s been right on inflation, says even if the CPI comes in as expected at 0.4 percent, “that’s high by itself. That would normally be enough for the Fed to tighten.”
Williams, who runs a consulting firm called American Business Econometrics, says the CPI figure could hurt the market badly.
As I’ve been saying for too long, all of the government’s economic statistics are poor-quality. Some, like the labor numbers, are easily manipulated.
But since Wall Street reacts to these statistics, we’ll have to keep playing the game.
Right now the score is Inflation 13, Wall Street 0. Why that score?
Because if producer prices continue to rise at September’s pace, the inflation rate would be a market-rattling 13 percent a year.
And Wall Street gets a “0” because that’s the stock market’s chance of ignoring inflation figures that high.
Interest rates held mostly steady on Friday, but that was a quirk. The rate on the closely watched 30-year bond actually fell to 6.27 percent from 6.32 percent the night before. Bonds were helped by the fact that people were petrified of investing in stocks, which fell 266 Dow points on Friday alone and were lower by nearly 6 percent for the week.
But stocks and bonds could have a rough week ahead. With inflation causing a scare, bond prices have to fall and rates will climb. Asset shifts out of stocks and into bonds – like the one Friday – can keep rates down only temporarily.
And with the value of the dollar taking a pounding on Friday, interest rates are destined to rise.
The 6.50 percent interest level on the 30-year bond could be history as early as tomorrow if the CPI is bad. And even if consumer inflation didn’t accelerate last month, the next troubling economic number should send bonds toward the 7 percent mark.
Now, for stocks. Stock prices fell sharply late last week.
But the fact that a sizable number of stock options expired on Friday actually helped the market. Professionals tend to keep stock prices up on expiration days. But there won’t be any artificial support under the stock market this week. No false hope anymore that the Fed won’t be raising interest rates.
And even the Wall Street shills will have a hard time convincing regular people that this stock market bubble represents an unusually good value.
And why the Dow at 9,000? Because I didn’t want to say 7,000 or 6,000 in the lead of this column. But once small investors lose their confidence in the Fed and the markets, there’s no telling how low the Dow can drop.
Worse, there’s little the Fed can do to stop a precipitous market drop. It could – and should – overtly rig the stock market. But because of the bad inflation numbers now coming out, the Fed can’t lower interest rates.
If you want to sleep at night, put your assets into money market funds. If you thrive on risk, gold should give you a charge.