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Anti-trust verdict against Tyson is reversed but case continues on appeal

Section: Daily Dispatches

9:02p ET Monday, April 26, 2004

Dear Friend of GATA and Gold:

If you haven't signed up for daily commentary from Bill
Bonner's Daily Reckoning site, you should. It's insightful,
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CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Why the Fed Can't Raise Rates

By Dan Denning
Monday, April 26, 2004

Investors convinced that the recent spate of good economic
news will cause the Federal Reserve to raise interest rates
before the end of the year. They're dead wrong. But that's
OK. It's a great opportunity for you to buy gold and precious
metals at a discount, and make some short-term profits in
a few sectors.

Here's the fact investor are missing: Consumers can't afford
rising interest rates. Need proof? Away we go. ...

First, rewind back to the consumer credit figures from
February. Consumer credit was up $4.2 billion from January.
But in January, consumer debt had rise by $15.8 billion from
December's level. What's going on here? Easy. Interest
rates have been creeping up and are already hurting
consumers at the margin, especially on their credit card
debt. The February increase was the smallest increase in
consumer debt in five months.

Rising interest rates are causing consumers to cut back
on their use of credit. Of course, that appears to be
contradicted by recent retail sales reports, right? Not so
fast. ...

True, March retail sales showed the biggest gain in a year
-- up 8.2 percetn from the same time last year. But here
are three striking details. First, department store sales
actually fell from February to March by 0.8 percent. Second,
sales of sporting goods, books, and music FELL 0.7
percent from February to March. And third, sales of building
materials grew by 10.8 percent, the largest gain of any

Notice a pattern here? This is the kind of behavior you'd
expect from a consumer who expects interest rates to rise.
He locks in housing-related purchases before rates move
up from historic lows. And he cuts back on purchases at
the margin ... the little things that start to make a difference
once more of your income goes into servicing your debts.

In other words, as rates rise, the consumer starts
consuming less. Absent a huge increase in income, rising
rates are deflationary to consumer spending.

For example, take the most rate-sensitive of purchases,
your house. The Mortgage Bankers Association said its
refinancing index tumbled 30.7 percent for the week ended
April 9 -- the biggest one-week drop since late July. The
purchase index, which gauges new loan requests, fell by
9.5 percent. What's more, the group's weekly mortgage
gauge fell for the fourth week in a row to its lowest level
since the week of Jan. 9.

Even if you excluded the effect of rising rates on borrowers
with adjustable-rate mortgages, the whole effect of rising
interest rates is to put a chill on consumer spending.
When 70 percent of GDP comes from consumer spending,
the Fed had better be darn sure the recovery is on solid
ground before it starts raising rates.

But if you listen to the Fed, it's not sure at all. Far from it.
In fact, I'd say it's downright skeptical. At a luncheon in
St. Louis last week (this from my man on the case, Greg
Weldon), Fed inflation hawk William Poole said, "We do
not want to respond to inflation noise, which would add
further instability to the economy. We cannot reliably
conclude that today's material price inflation will be
tomorrow's finished goods inflation."

Poole also said, "It is going to take some string of
months, but I cannot really put a time frame on it."
Referring to inflationary PPI numbers, the Boston Fed
Research Director said last week, "We need a good
many months like this." And Dallas Fed Research
Director Harvey Rosenblum added, "There is room for
further disappointment between this number and the
end of June."

Does this sound like a central bank that's planning to
raise rates?

It doesn't to me. And even the BLS's recent consumer
price inflation numbers wouldn't bother me much.
Consumer prices were up 0.5 percent. To the market,
this suggests that inflation is finally showing up in
finished goods. And indeed, that may be true.

But the Fed's response to this CANNOT be to raise rates
until the final piece of the inflation puzzle is in place: rising
consumer INCOMES. Until that happens, rising prices will
simply make consumers cut back on spending. Throw in
rising interest rates and energy prices and you have two
more factors that lead to slower consumer spending and
economic growth.

Bottom line: The economy can't grow until the consumer
can spend more. And the consumer can't spend more
when prices and interest rates are rising. If consumer
incomes don't inflate, inflation in producer prices or
consumer prices won't matter. Until consumer incomes
rise, the Fed stands pat.

And here's a prediction for you, the Fed will become so
concerned with the market pricing in rising rates (and
pushing mortgage rates up) that it will cut rates by 25
basis points at its May 4 or June 30 meeting.

That's not to say that the Fed will be effective in stopping
the selloff in bonds and in interest-rate-sensitive stocks
(REITS, for example). But it is to say the Fed still
considers deflation its sworn enemy. And until consumer
incomes pick up, rising rates are likely to lead to much
lower consumer borrowing and spending ... which, in the
last 50 years, has been very bad for American GDP.

It's pretty simple: Consumer prices won't rise much if
consumers don't have money to spend.


Dan Denning is editor of the Strategic Investment newsletter.


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