This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Easy Al's 1% Wonder

Why the CPI Matters

So before you bet the farm on the accuracy or fairness of the core CPI report, remember some of these factors. They remove food and energy prices. They fabricate the largest component, housing costs, from an indecipherable concept, owner's equivalent rent. And they adjust for quality the base pricing of many other components to mitigate actual price changes in goods and services. You see, prices are not really increasing; everything you consume is "improving." Talk about fudging the numbers! In my opinion, a 1% inflation rate today is as mythical as the "New Economy" of the last bubble. Unfortunately, market participants have bought into it just as much.

Why does the CPI matter, you ask? A low CPI does keep cost-of-living adjustments lower and helps with the government's budget. Well, it matters very much if you use the concept of low inflation to justify a fed funds rate of 100 meager basis points. It matters very much if the government wonks insult our collective intelligence with spin and deceit. As we experienced just a few years ago, it matters very much if the financial markets value cash flows with artificially low discount rates. It matters very, very much when that 1% rate normalizes back to 4% or 5%. But for today, that understated CPI justifies Easy Al's "1% Wonder."

That 1% fed funds rate sets the stage for T-bills and much of the rest of the yield curve. It also drives economic activity higher than it would be otherwise. In my opinion, this 1% Wonder has really kept the whole economy and the financial markets together! But it comes with a price.

With cash and fixed-income rates so low, many kinds of imbalances are created. Unnaturally low interest rates dissuade savers and forces investors out on the risk curve. Savings rates plummet. Asset prices increase, and speculation builds.

You can see this in 2003 performance: With cash forced from the sidelines, all major asset classes -- stocks, bonds, commodities, raw materials, collectibles, etc. -- appreciated significantly. Financial leverage also increases as investors attempt to gear lower nominal returns. This sets the stage for a more disruptive reliquification process when rates do return to normal levels.

Those unsustainably low interest rates also affect the real economy by stimulating the housing and durable goods markets. Much of the strong economic activity over the past few quarters can be tied to deficit spending and increased consumer borrowing. Zero-percent auto loans, minimal equity and interest-only mortgages are a product of this rate environment.

With real income growth rates at their lowest levels in a long time, consumers have once again turned to asset monetization and leverage to support current consumption. The million-dollar question remains the sustainability of this type of demand. Or will the inevitable increase in interest rates initiate a vicious cycle of lower asset pricing and consumer retrenchment?

3 of 4

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs