MONDAY, AUGUST 18, 2008

UP AND DOWN WALL STREET  

Mass Narcosis?

By ALAN ABELSON

The markets -- even gold -- respond to the Russian invasion of Georgia with a resounding ho-hum. The core cabal.

WHAT A SHAME! IT WOULD HAVE BEEN A DREAM TICKET: Edwards and Spitzer. They'd have been a cinch in 2012, if Obama doesn't make it this year, to walk away with the votes of the all-important hot-hormones group, 18-to-29-year-old males. (You know, the coveted cohort that TV networks salivate over as viewers, and not the least of reasons television is not fit for human consumption.)

Just think about what a terrific ad campaign that well-known agency, Smirk and Smirk, would have created showing Edwards and Spitzer winking atop the catchy slogan spelled out in big bold letters: "Vamoose, Viagra! The country needs a real man as president!"

But then Edwards, nary a hair nor a dimple out of place, does his mea culpa bit on the tube and that's a sure turnoff for the testosterone voter, who likes his hamburger raw and his candidate unrepentant. Hang in there, guys, and don't be disconsolate: If history is any guide, you can bet your last dollar we'll never run out of straying Democrats.

Still, we can understand the widespread disappointment. It'd be a wonderfully refreshing change if, when a candidate talked about foreign affairs and conquests, he wasn't boring us to tears with all that guff about realpolitik or boasting about sending in the marines, but, instead, chortling about the liaisons he struck up at the latest boondoggle summit and the sweet nothings he whispered into the ear of one comely lass or another. À la the current president of France.

Alas, the way the world turns these days, there's scant time or inclination for a president to display what Dubya's daddy called a kinder, gentler mien, much less regale the public with accounts of his romantic dalliances. Last week furnished a telling example of the omnipresent pressures the nation's chief executive is prey to.

No sooner was Mr. Bush settling into his privileged perch at the Olympics, poised to enjoy a rare day of fun and games, with his old pal Vladimir Putin nearby, than came the news that the Russians were beating up on their feisty little neighbor, Georgia.

Had the president, as he is wont to do, been able to peer into Mr. Putin's eyes, he might have spotted the venomous black hole where the Putin soul was supposed to be and would have been able to alert the world that serious trouble was brewing. But the wily Russian had slipped on his shades, thus denying Mr. Bush the chance to perform one of his famous soul-searches and perhaps forestall Moscow's power play.

One could argue that Georgia is the latest casualty of Iraq. For if we weren't so inextricably tied down in Iraq or, at least, if our involvement hadn't been so poorly planned and ineptly pursued, it's more than a little doubtful that Russia would have been tempted to flaunt its revived fortunes by unveiling its iron fist.

Maybe it was the competition for traders' attention from the Olympics or that Wall Street merely shrugged it off as a not a really serious business, but the Russian strike and the growls from Washington it triggered caused nary a ripple in markets, whether financial or commodities. Or, it could be that all the nervous types took the week off, giving their frazzled nerves a badly needed vacation.

Stocks ambled on in their by-now familiar unpersuasive fashion, desperately seeking any shred of an excuse to go higher. Oil had the briefest respite from its persistent vertigo, on hopes that the Georgia fracas would interrupt the flow of crude and natural gas, but quickly became discouraged and resumed its skid, hitting a fresh low for the past three months.

Even gold, which feeds on the world's misery and ordinarily would get a nice lift from a confrontation between global heavyweights, extended its swoon. That's the kind of thing that really tests a man's faith: If you can't trust gold to react with quivers (and quantum leaps) when the U.S. and Russia snarl at each, what can you believe in?

Seems like a case of mass narcosis is afflicting investors just about universally. We thought we'd try that one out on some supposedly knowledgeable shrinks, only to discover that in August they all flock to Cape Cod, and studiously leave their cellphones behind.

JUST ABOUT THE LUCKIEST PEOPLE we've ever come across happen to toil in Wall Street and Washington. They vary across a wide spectrum in how much money they make and in the usual distinctions of height, weight, age, intellect and amiability. What they share are three things which are closely related. The first is that, in some significant way, either directly or as mouthpieces, their professional terrain is economics.

The other two things they have in common are: They never need bestir themselves, lay down the book or turn off the television set or tear away from their computer and go out to buy anything, no matter how trivial or important; someone else -- a wife, a husband, say, or an assistant, or perhaps an indentured slave -- performs that task. And, last but not least, they're all of a single mind on inflation -- namely, for all intent and purpose, there isn't any.

Not content with letting the data tell its story (lest, we can only assume, it doesn't comport with their perception), they've devised an alternative to the standard price indexes called "core" inflation, which conforms to what they deem a proper (inevitably sharply lower) measure of inflation. Core is nicely constructed to exclude energy and food, which account for nearly a quarter of consumer expenditures, and occasionally other categories where prices show an untoward tendency to rise.

Last month, reports the Labor Department, consumer prices shot up a scorching 0.8%, twice the consensus guess, and the sharpest rise in 17 years. The core cabal were quick to take comfort in the fact that core inflation was up a much more demur 0.3%, and pooh-poohed the big jump in headline inflation (that's what they snootily dub the consumer-price index, to give it a tabloid veneer, which makes it seem inherently unreliable). Their feverish fetish for the core number also permitted them to blithely ignore that consumer prices in the past 12 months scored the biggest rise since January 1991.

The truth is that inflation, if not rampant, is ubiquitous and gathering strength. It may not be up to the wild inflation we experienced in the 1970s, but it's plenty mean enough and getting worse. It's now firmly embedded in the economy, and it's not going to vanish magically because crude is down to "only" $113 a barrel, or the dollar has inched its way off the bottom, or even if one of the core faithful waves his wand and says Abracadabra!

Getting a true read on consumer prices isn't just an academic exercise. John Williams, proprietor of Shadow Government Statistics, has built rather a brilliant career out of analyzing the official data and showing in exquisite detail where they depart from reality. He points out, moreover, that an awful lot is dependent on the CPI, not least Social Security and other forms of compensation.

On that score, he reckons that changes made over the years aimed at understating inflation have reduced current Social Security payments to half of what they otherwise would have been. In other words, today's Social Security checks would be double what they are, were it not for that serendipitous tinkering, especially during the Clinton years. Ah, well, the geezers never knew what hit them.

Or, as John puts it ever so sweetly, "The CPI worked reasonably well into the early 1980s. In recent decades, however, the reporting system increasingly succumbed to pressures from miscreant politicians, who were intent upon stealing income from Social Security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress."

After World War II, the consumer-price index was included in Detroit's contracts with the auto workers and then "found its way not only into other union agreements, but also into most commercial contracts that required consideration of cost/price changes or inflation." Obviously, then, its reach extends into any number of nooks and corners in the economy.

The changes in the CPI, not a few of them made with the malicious intent of hiding the true rate of inflation, have, John figures, understated inflation by roughly seven percentage points. What this means simply is that the 5.6% rise over the past 12 months officially reported was actually, by his meticulous figuring, a whopping 13.4%. That makes complacency among the core cabal willfully silly.

Or as John neatly puts it, "The Pollyannas on Wall Street like to play games with the CPI...It is common to hear financial pundits cite annual 'core' inflation as a way of showing how contained inflation is. Such comments are moronic and such commentators are due the appropriate respect."

As you can readily tell, we're kinder than John, so, as intimated early on in this screed, we ascribe the core gang's benign view toward inflation not necessarily to a deficient IQ but to their failure to buy even so much as a toothpick on their own.

Finally, we should take due note of John's contention that "the more inflation is understated, the higher the inflation-adjusted rate of GDP that gets reported." But that's another story for another column.


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