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Wednesday, November 17, 2010

Consumer Price Index recap by Michael Pento (all about owner’s equivalent rent)

Wednesday, November 17, 2010
By: Michael Pento

The facts are that 25% of the Consumer Price Index is derived from owner’s equivalent rent and the BLS substitutes out everything that is increasing in price and then claims that most price increases came from quality enhancements, which are then summarily discounted. Despite those manipulations of the data, the government still reported that consumers paid 1.2% more for goods and services than the previous year. Where is this deflation that the Fed and administration is so concerned about? If one quarter of the CPI measures the rental equivalent derived from a humongous asset bubble that has just popped, it’s simply amazing that the reading on inflation is positive at all.

On the housing front we were treated with some sobering news on just how addicted the U.S. has become to artificially induced growth. I’ve often written about the utter economic devastation that will occur once either the Fed or the market forces interest rates much higher. We had a little taste of this from this week’s mortgage application data.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes loans for home purchases and refinancing, fell 14.4 percent to 713.6 in the week ended November 12, the lowest in four months. Borrowing costs on 30-year fixed-rate mortgages jumped to a two-month high of 4.46 percent in the week, up from 4.28 percent in the previous period.

Therefore, an 18 basis point increase in rates sent mortgage applications tumbling. Just think what will occur to the housing market and the economy in general if I’m correct and the U.S. faces an inexorable rise in interest rates? Those rates may rise well into the double digits due to inflation and a surging supply of debt issuance. Think about that the next time Bush, Geithner or Bernanke takes a victory lap over the “successful” TARP program. I wonder if Mr. Buffett will then write a thank you letter to the NY Times about how government caused America to become an insolvent nation.

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.

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