THE inflation index that Alan Greenspan cares about most jumped sharply last month.
And if the Federal Reserve chairman continues to seriously consider this indicator – which happens to have been devised by his mentor and hero – that means Wall Street is betting the absolute wrong way by thinking that interest rates won’t go up any more.
It’s almost a tradition for Wall Street to be incorrect about interest rate increases. The bubblemaniacs need rates to stay low. And predicting something like a rise in borrowing costs, which is usually bad for the markets,won’t please the bosses or suck in new clients.
So that’s why the $1,000,000-a-year pundits are always anxious to predict good news on rates and spin away anything that’s bad. And that is also why Wall Street’s track record of being wrong on rates is nearly perfect.
For instance, investment gurus didn’t see the first rate hike coming from the Fed last June, and they completely missed the second one a couple of months later. In fact, the investment community’s gurus have been wrong about the entire huge rise in rates since last Fall.
And unless Greenspan suddenly is focusing on other things, Wall Street is about to be wrong again.
The stock market, of course, rose sharply Friday on news that job growth was “only” 310,000 in October, with an unemployment rate that fell to 4.1 percent.
Here’s how this scam works.
Wall Street investment houses, which benefit greatly from the continuation of the stock market bubble, make their predictions as optimistic as possible on things like new job growth. If the number comes out lower than these arbitrary predictions, as happened Friday, there’s an excuse to rally the markets.
If the actual number falls more on the inflationary side than what is being predicted, the investment pundits try desperately to spin away the bad news.
The consensus was that the Labor Department would announce that 350,000 new jobs were created in October. When the actual figure came in below what was expected, the bubbleheads did their thing and pushed stocks and bonds higher.
That will turn out to be a big mistake.
First, the Labor Department’s calculation of job growth is nonsense. It is a calculation based on guesses and statistical manipulation. It is useless in predicting inflation.
Second, even if you believe the 310,000 number, that’s a lot of new jobs in an economy that supposedly has 4.1 percent unemployment. It was still a very clear sign of inflation-to-come.
The third problem with the Labor data is that the Fed knows this number is worthless. So it goes to other sources.
Which gets me back to the Future Inflation Gauge (FIG), which has climbed nearly 5 percent since August.
The index is produced by the Economic Cycle Research Institute, which was founded by Greenspan’s mentor, Geoff Moore. He was also the Fed chairman’s professor at NYU.
The FIG rose to 115.5 in October from 113.3 in September. In August, it was 110.3.
This was the largest two-month gain in the last two years. And the index isn’t yet showing any signs of slowing, even though another index produced by Moore’s outfit is indicating that the nation’s economy is weakening.
“We are in an inflationary cycle upturn, and there is no peak in sight,” says a source who helps put together the FIG. “We see a slowdown in growth in the economy, but we are not seeing a peak in inflation.”
The Fed, incidentally, got the FIG number on Friday morning. So even as the stock market was rising sharply on its contorted view of the Labor Department’s nonsense numbers, the Fed chairman was reading the bad news.
The FIG is made up of only eight components. But each is picked because Moore believes it predicts future rises in prices. And since any move that the Federal Reserve makes today on interest rates will take months to have an effect on the economy, Moore’s outfit believes its indicators are more valuable to the Fed than numbers – even if they were reliable – that show how inflation trends did last month.
There’s a fourth reason why Wall Street is mistaken in thinking that the threat of higher interest rates is over. Each time the bubblemaniacs push stock prices higher they give Greenspan another reason to worry about asset inflation and another reason to raise borrowing costs.