“Topsy Turvy” Bonds

“Topsy Turvy” Bonds
-40 percent cos. struggling with price rises as “tame”?

(SEATTLE) 09/16/04 – Few might expect to see Alan Greenspan standing on his head; besides, if he did, his heavy glasses might fall off—and then how could he read the myriad of monthly economic reports?

But recently, such a move by Alan might make sense. In a country fraught with dishonesty, where we “flip-flop” on reasons why we are at war in Iraq, a topsy-turvy vantage point might offer new insight.

And so it is, that upside-down-ness has now come to roost in the US bond market. The last several headline inflation reports have become increasingly unreliable, mostly due to the affects of finance, and retained outlying values, which have come to smooth and invert large portions of the CPI and PPI—very nicely before the election. And yet, the truth can be found buried deeper, for those who are brave enough to spin their heads a bit. To wit, take the last several ISM reports, so naked of politics and credit derivatives. In the last few cases, the prices paid and prices received components have been setting new highs.

The latest example, the September Philadelphia Fed Survey, is in line with previous reports, and provides excellent insight. Coming on the same day as a CPI (ahem) “tamed” once again by vehicle incentive rebates, this report shows equal tameness—er...with new orders up, employment up, and (Huh? What Magoo thing is this)--prices paid and prices received setting new highs not seen in over a decade? (1)

And then as a result of the skyrocketing prices—apparently, the business managers are scared silly--the “general business conditions index” got chopped in two, resulting in a low headline number. Yet, can you blame these guys? In an upside-down world, who wouldn’t be scared--hearing officials talk of “tame” inflation--when you are experiencing skyrocketing inflation? And to see bonds rally, no less.

It's time to give credit, only where credit is due. So tape those glasses on, and prop those bottoms up towards the sky--and the bond prices down where they belong.

(1) “about 40 percent of firms reported increases in the prices of their manufactured goods this month.” (Phil. FRB, 09/16)