December 4, 2006 – This month, Vice Chairman Donald L. Kohn of the U.S. Federal Reserve Board, spoke at the Fourth Conference of the International Research Forum on Monetary Policy in Washington, D.C. Interestingly, he noted that, “In informal terms, we are uncertain about where the economy has been, where it is now, and where it is going.” Furthermore, he noted that “Consider our estimates of real economic activity. These estimates often change markedly with the receipt of just a few more days or weeks of data.” (emphasis mine) and that “In gauging the past and current state of the economy, measurement difficulties are rife.”
Given that Chairman Kohn stated that uncertainty is “pervasive” in almost every manner, from economic indices that may be greatly erroneous to measurements of consumer expectations, how can we then receive reports from the major media that relay the following:
“This is what an economic soft landing looks and feels like. This is what the Federal Reserve has been working for. The economy downshifted to its slowest growth in three years during the third quarter, expanding at a tepid 1.6% annual rate, the Commerce Department said. It’s about half the growth rate that most economists think is sustainable. But it’s still moving forward. Consumer price inflation has now grown at an uncomfortable 2.4% over the past year, the fastest pace since 1995.”
The article goes on to say that a few more quarters of moderate growth in the U.S. will produce a soft landing, and that, “On the upside, however, lower energy costs should free up money for both consumers and businesses to spend on other things, perhaps enough to offset the drag stemming from the housing recession.”
How does the media get away with producing such crappy analysis time and time again? Even if a soft landing does occur, which I believe won’t happen, it won’t be due to the analysis above. If you take into account that lower energy costs were manufactured in light of the recent mid-term elections in the United States, coupled with the fact that for much of the world, winter months are ahead, which should cut into supplies of natural gas and what not, lower energy costs will not last very long.
And as far as moderate growth, given the fact that one of the Fed Vice Chairman finally admitted that there is a lot of error in the economic measures they release to the public and that estimates can change markedly with just a few more days of data, how can the media use these estimates to predict a soft landing? Personally I don’t believe the Feds’ assertion that the economy is way too muddled and perplexing to predict what is going to happen in the future. I believe that they know, that the picture is grim, that they don’t want the public to know, so much better to say that everything is just too confusing to call.
Again, as far as why I believe a hard landing is much more likely than a soft landing, you can find many, though not all, of the reasons why I believe this spread out in the past three months of blog entries here, including massively high insider sell:insider buy ratios, so I’m not going to rehash these reasons again. You can go back and read my previous blogs if you so desire. In any event, I’d take significant portions of large gains off the table now, and buy double inverse funds (however, this statement doesn’t apply to precious metal stocks as we addressed how to handle this asset class in an earlier blog). There are two ways to make money in the stock markets. From rises and falls. No reason you shouldn’t make money from the inevitable decline as well.
But again, it’s a case of looking far below the surface figures released by the government and understanding the tendencies of governments to release suspect economic data.
__________________
J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
