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The First Step: Overcoming Denial

People who still believe you can predict broad price movements by the price of gold will continue being wrong until they admit they have a problem.


JACKSON HOLE, Wyo. -- Hey. Forgot to mention something at the end of last week.


Center for International Business Cycle Research

always releases its

leading inflation index

on the same day the


numbers are reported; July figures hit on Friday. They, along with the recent performance of the LII, appear in the accompanying table.

This index troughed in January 1998, when it was falling at a 4.4% annual rate. Ten months later, it began to post increases -- no points for guessing when bonds bottomed -- and it has been scooting higher ever since.

The July pace of increase goes down as the fastest in more than four years.


The people who have been watching leading price indicators like the CIBCR measure -- also include here the

Philly Fed

six-months-ahead prices-paid

index and the



index -- are not surprised to see what's gone on in bonds lately.

And the people who have been watching medieval metals are.

They're frightfully surprised.

Indeed. The people who cling to the notion that the price of gold is the one thing you need to know to predict movements in the broad price measures, and hence


policy, send notes to your narrator like the one that appears below.

With no material rise in gold prices, I see the bond yield averaging at current levels for the rest of the year and, more likely, falling 20 to 30 basis points or so.

The senior economist at a major brokerage wrote that to yours truly March 9.

When the yield on the bond, which now stands at 6.23%, stood at 5.54%.

The point here being, of course, that the notion that gold has been (and will continue to be) one truly important policy tell -- if not


most important policy tell -- is complete bullshit (or

expletive deleted if you prefer).

Gold bugs like

Larry Kudlow


The Tool

have been swearing since November that the Fed would not tighten (and, in fact, that it would ease), that price pressure would not intensify (and, in fact, that it would diminish), that market rates would not move higher (and, in fact, that they would fall).

They have cited the price of yellow as the force behind every one of those forecasts.

And they have been dead wrong on every count.

Star People

And keep it in mind, for these folks are now dreadfully desperate.

Just how desperate?

Your correspondent serves up two examples.

The first involves denial.

The Tool -- for those of you who do not know, The Tool is a guy named Brian Wesbury who works as chief economist for a company called

Griffin Kubik Stephens & Thompson Inc.

, and do see this

column for a truly fascinating Tool Timeline -- wrote the nugget below precisely two weeks ago.

The drop in orders for core (excluding aircraft and defense) capital goods in July creates a great deal of uncertainty about the widely anticipated recovery in U.S. manufacturing. ... A slowdown in this data series indicates a slowdown ahead for manufacturing.

Keep in mind that this was written


the NAPM


had already risen for six straight months -- to a level not seen since July 1997.

Keep in mind that


it was written, the July employment report delivered its strongest set of manufacturing-sector statistics since early 1998.

And when the July

industrial production

report to be released Aug. 17 prints big and beefy?

More denials still. Bank on it.

The second example involves picking and choosing.

The most studious of the

Tool Juniors

-- and his

timeline is the one that appears below his master's -- is particularly whiny about the gubmint not being able to measure productivity accurately.

The argument goes like this: The gubmint's published productivity numbers understate real-world productivity by a lot -- prolly by as much as a full percentage point. So, because the "real" trend in productivity growth sits at 4% or higher, and not the 3% reported by the gubmint, the Fed is stupid to tighten. It shouldn't tighten, and it is wrong to do so. (See this recent

column for details about how productivity relates to Fed policy.)

And the odd thing about this? The same people who don't at all believe in the published productivity numbers believe fully in the published wage numbers.

Even though the same gubmint agency -- the


-- produces both sets of figures.

You heard right.

Do you believe that compensation growth decelerated between 1996 and 1997? Was that your experience? And the experience of those around you? Do you believe that compensation growth didn't accelerate at all between 1997 and 1998? Was that your experience? And the experience of those around you? Do you believe that compensation growth hasn't accelerated at all between this year and last? Has that been your experience? If you're a manager, is that consistent with what you've had to do to keep employees? And to draw new ones?

Tool Juniors answer Yes to every one of those questions. Why? Because the

average hourly earnings


answers Yes, and that's what they're looking at. And believing in.

It just isn't possible that a wage series that produces some truly head-scratching results (and one, incidentally, that doesn't include stock options) understates real-world wages by a lot. Just like the productivity numbers understate "real" productivity.

Nah. Couldn't be.

The wage numbers are dead on -- compensation growth isn't accelerating at all -- but the productivity numbers are way off -- output per hour is growing far faster than any of us know.

Uh-huh. Keep operating under that assumption.

It's worked wonderfully all year.

Side Dish

All apologies for being terribly slow about email responses lately. I have been lying around down in Florida (sorry about the inaccurate byline), goofing around with my nephew and feasting on Mom's cooking, and I just don't feel like doing much of anything else.

Best job?





Claman Co-Anchor.