All Good News, All the Time

The good news has been so overwhelming of late, and our futile attempt to cast aspersion on the data supporting the good news has been so ineffective, today we explore a different tack. While changing the name of this blog to something like "The Marvel that Greenspan Made" would be both labor intensive and perhaps premature, a simple experiment with today's fare, in the form of a week-in-review, may prove illuminating to both writer and reader.

And, maybe not.

Federal Reserve Policy Meeting

On Tuesday the Federal Reserve continued tightening credit, hiking the federal funds rate another quarter point to 4.25 percent, the highest level since early in 2001. Dropping the word 'accommodative' and altering the use of 'measured', the policy statement accompanying the rate announcement was widely viewed as a preliminary signal that the rate-raising cycle would soon end.

While the language signaled further rate increases in the near future, most market observers concluded that in light of reduced inflation fears in recent weeks, longer-term policy will be more equally balanced between price stability and economic growth. The stock market reacted very positively to the change in wording; the Dow Jones industrial Average rallying nearly 100 points immediately after the policy statement was released.

It is clear that Alan Greenspan, in his second to last open market committee meeting as Fed Chairman, has deftly maneuvered monetary policy stance to an idyllic state in preparation for next month's handover to incoming Chairman Ben Bernanke. The touch that has been demonstrated leading up to this transition has been wondrous to behold. Mr. Bernanke will be in The Maestro's debt for years to come - with robust GDP growth, low inflation, and full employment what more could any incoming Chairman possibly want?

Inflation Once Again Under Control

The Labor Department reported yesterday that consumer prices dropped 0.6 percent during the month of November, the largest monthly decline in over 50 years. Energy prices declined 8 percent, led by a drop of 16 percent in gasoline prices, accounting for most of the overall decline. The year-over-year change for all items in the index totaled 3.5 percent, down markedly from the annual rate of the 4.7 and 4.3 percent in recent months.

"Core" CPI, which excludes the volatile food and energy categories, rose at a 0.2 percent rate for the month with a year-over-year change of 2.4 percent. Analysts noted that rising energy prices have not fed into "core" inflation, which has remained stable in recent months as wildly fluctuating energy prices caused the overall rate of inflation to rise from under 3 percent to almost 5 percent at its peak, then back to 3.5 percent in November.

The stability of the "core" rate of inflation bodes well for the economy. Price stability is central to current monetary policy decision-making, and as economists and the financial media continue shifting the focus of inflation reporting away from the higher "all-items” rate to the more benign "core" rate of inflation, the prospects for continued robust economic growth are increased.

Some analysts warned that rising foreclosures and a cooling housing market have recently put upward pressure on home rental costs which have been used in place of actual home prices for over two decades, effectively suppressing core inflation. Accounting for 30 percent of core inflation, some observers suggested that should rising rental prices feed into core inflation, the Bureau of Labor Statistics may once again revise the calculation methodology to more accurately reflect the benign inflation environment to which the nation has become accustomed.

Real Wages Rise (from guest blogger John Snow)

Following on last week's record household wealth levels and a 0.5 percent increase in real hourly earnings in October, today's announcement that inflation adjusted hourly wages grew 1 percent in November is welcome news for America's workers and another sign of the strength of the U.S. economy.

One way to look at the health of the economy is to view where we are compared to previous business cycles. Real hourly wages are up 1.1 percent versus the previous business cycle peak in early 2001. That means workers are today earning more per hour in real terms than they did at the height of the 1990s expansion. By comparison, at the same point in the business cycle of the 1990s, real hourly wages were down 2.1 percent.

When the ingenuity of American workers and entrepreneurs is free to create and innovate, the result is economic growth and higher standards of living. That is why it is so important that we keep in place President Bush's economic policies of lower taxes on individuals and investment. These policies, combined with sound monetary policy from the Federal Reserve, have set our economy on the right course of sustained economic growth.

Higher real wages, combined with 4.5 million new jobs created since May of 2003 and GDP growth that has averaged 4.1 percent, with 4.3 percent growth in the most recent quarter, gives us much reason for good cheer in this holiday season.

Gold Continues Its Slide

Gold futures continued their retreat from 24-year highs earlier in the week, dropping another $3.20 to close at $503 yesterday. Analysts said the market remained volatile as overbought conditions were quickly corrected in a matter of four trading sessions, driven largely by activity on the Tokyo exchange.

Earlier in the week, Japanese monetary authorities doubled margin requirement for speculative trades spurring massive selling of futures contracts at the TOCOM exchange. This resulted in daily price limits being enforced halting the slide, however, analysts indicate there could be more downward price action as more Japanese investors sell in the coming days.

Investors had been buying gold as a hedge against rising energy costs and other inflationary expectations, however, in recent days, these fears have proven to be unfounded. As Fed Chairman Alan Greenspan has famously stated, "The inflation rate, properly measured, at this particular stage, has been very close to zero for a very long period of time."

Look for the 2005 gold price movements to become but a footnote in history, as gold once again retreats to its proper position of irrelevance within the world's monetary system.

Southern California Home Sales Report

Southern California home prices set new records again last month and sales remained near historic highs, Dataquick reported Thursday. Strong demand and the expectation of rising interest rates combined to spur sales, just as many observers had been expecting sales volume to slow and prices to moderate.

The median price paid for a Southern California home was $479,000 last month, up 15.4 percent from November 2004. Yearly price gains by county ranged from 6 percent in San Diego to 23 percent in San Bernardino, demonstrating solid support for current price levels, with the possibility of renewed acceleration in appreciation as sales volume returns to normal levels next spring.

While affordability using traditional mortgage products is at new all-time lows, buyers have embraced many of the financial industry's most innovative new loan products in order to purchase homes they otherwise could not afford. As more untraditional mortgage products become available, analysts project median home prices in Southern California will top $1 million by the end of the decade.

This Week's Recommended Reading

Our Brave New World by Charles Gave, Anatole Kaletsky, and Louis-Vincent Gave