Tuesday, May 10, 2005


There are a number of indications that Greenspan will need to let up on the brakes soon. For example, the conference board issues a set of leading indicators and a set of lagging indicators. The ratio of the two indicators shows if tight money or lose money is needed. The current reading is that the Fed has been tight long enough to cause stress in the economy. It is approaching the level where the Fed has traditionally needed to ease money supply.

Durable goods orders have slowed dramatically. The personal consumption expenditures deflator or PCED has turned down; Greenspan's favorite measure of inflation is flashing a no problem signal. The fly in the ointment is the real estate market!

The most recent posting of existing home sales was "out the roof", one million, four hundred thousand homes! Toll Brothers reported this morning their largest backlog in history! In other words, the real estate market is very hot! Baby boomers are trading up and buying second homes and echo boomers are buying their first home.

Based on the manufacturing economy indicators, including good vendor performance, a drop in commodity prices and relatively tame labor costs, short rates are too high. The yield curve has flattened; forecasting a slow down in GNP growth. At the same time, corporate profits are very strong, productivity continues at an unprecedented pace and the labor market is strong; these indicators forecast an increase in GNP! How can it be both ways?

The housing market is so strong that total jobs, profits and productivity is strong even during the middle of a slower manufacturing pace!

Greenspan is keeping the brakes on the economy because of the super strong real estate market. The tightening of short rates and the slowing of the money supply is going to hurt the economy if Greenspan does not let up soon. He knows he will be forced to let up soon. He is fighting to prevent a real estate bubble but the second home market in particular still has fast growth ahead. When Greenspan stops raising short rates, stocks are going to leap forward. Since the market is anticipatory and since there is excess money on the sidelines, the surge forward will probably occur before he actually stops raising rates.

The good news is that investors are worried. This is a necessary ingredient for a strong stock market. As I have pointed out before, it is not the other investors that are buying up stocks. Day after day, there are numerous announcements of buy outs by firms. The big purchase offer from ET yesterday is a great case in point; both stocks went up! AMTD went up the most but both stocks had already moved up on Friday. To make money in the stock market you have to be in the stock market!

BUY they BIG, BULL, BOOM, BUBBLE! Stocks are cheap relative to real estate and bonds!