At first, President Bush asked Congress for $10 billion to cover emergency Gulf Coast recovery efforts. But that was clearly not enough.
Next, in the wake of a virulent and venomous public attack, he hastily doubled the pledge. But it was still not enough.
So yesterday the President upped the ante to $51.8 billion, the largest emergency expenditure in the history of our nation. And now Washington budget experts both in the White House and Congress are saying that its STILL hardly enough. The federal cost alone, they estimate, will soon shoot past $100 billion.
Thats more than the total budget for the entire Department of Agriculture. Its more than the combined yearly budgets of the Department of Homeland Security, the Department of Justice, the Department of Commerce and the Department of Labor.
Its four times the amount spent for the White House and the Executive branch of government, and its over TWENTY times whats spent for members of Congress and for the entire legislative branch.
Nevertheless, no one, not one single individual from either branch of government dares stand in the way of the spending stampede. Theyre afraid of the public outcry and the political backlash. They have decided that the last thing they need right now is to be branded as insensitive and uncaring.
Apparently, they have failed to completely grasp the phenomenal outpouring of Americans helping Americans without the intervention of the federal government.
They dont realize that government giveaways may not always be the best solution. And unlike many governments of developing countries, where federal money is far scarcer, they simply dont know HOW to coordinate or mobilize non-governmental organizations that are anxious and able to play a much bigger role.
Thats too bad. Because the inevitable economic consequences of busting the budget could ultimately do more harm to the victims of Katrina and to all of us seeking to support them than the economic consequences of the storm itself.
Before Katrina, inflation in the
was already on the brink of exploding higher. Now, with over $100 billion in new money chasing already-scarce resources, how much MORE inflation will be created?
Before Katrina, interest rates were already creeping steadily higher, threatening to burst the housing bubble. Now, with the extra inflation and with the government borrowing at least $100 billion more than expected, how much faster will interest rates be rising?
Before Katrina, the
was already spending many times more than expected in
and
. Now, when faced with the choice of (a) adding still more money and troops to the war efforts or (b) redirecting those resources to the Katrina recovery efforts, which will we choose? And what will we do if
continues to plunge into a civil war?
What will we be our response if there is another Mid-East war, another African famine, another 9/11, tsunami or Katrina?
It is too soon to provide the answers. But it is certainly not too soon to ask the questions. Yet, I see no one doing so — no one asking: How can we save some money for the next rainy day?
The Inevitability
of Inflationary Impacts
When I was nine years old, I lived on a small farm five miles outside of the town of Anpolis, in the central highlands of
.
One day, my family and I took a day trip to a largely uninhabited area to the north, about 60 miles away. There, on an open plain of tall grass and sparse trees, we saw a hand-painted sign, with just one Portuguese spelling error:
The future site of capital city of
Brazil
, Brasilia.
Sure enough, in a remarkably short period of time, a new super-modern city rose out of the wilderness.
But the cost was far more than anyone dreamed possible — enough to bust the federal budget wide open, bankrupt the entire country and create the second worst inflationary rampage of the 20th Century. (The worst was in
between the two world wars.)
The Katrina rescue efforts remind me of this half-century old experience because of its potential consequences.
Like now, the federal government spent billions of dollars it did not have.
Like now, the government had no plans to raise the money through normal revenue collections.
And like now, the nations leaders spent the money without restraint, printed and borrowed money without controls, and drove the entire nation into an inflationary spiral beyond their worst nightmares.
Is that the path we have now embarked upon? It seems that some members of the Federal Reserve Board are asking similar questions …
Federal Reserve Official
Speaks out on Inflation,
Interest Rates and Housing
Michael Moskow, the president of the Chicago Federal Reserve, has just given a speech that gives us some clues as to what they may be thinking.
Oil prices have more than doubled since 2002, driven by increases in world demand combined with smaller increases in supply capacity. Furthermore, futures markets see crude oil prices remaining high for some time …
Rising oil prices, like other unfavorable cost shocks, can also feed through and raise underlying core inflation. So there is also a risk on the inflation front, and the risk is higher now than it was a year ago.
Because the economy is running nearer to potential, unfavorable cost developments are more likely to pass through to core inflation. And we’ve seen another source of potential cost shocks hurricane-related distribution disruptions.
For interest rates, the implications are obvious: In the first days after Hurricane Katrina, Wall Street was hoping that the Federal Reserve would pause its rate hikes. But now, if anything, it appears the storm’s impact is INCREASING the pressure on interest rates by boosting prices throughout the economy.
For housing, the consequences are equally severe. Moskow puts it this way: Housing has been an area of strength in the economy throughout this business cycle. But there is concern that housing is overvalued and that prices may decline, adversely affecting residential construction and household spending on other goods and services.
Naturally, a Federal Reserve official cannot yet talk loudly and publicly about rampant inflation, surging interest rates and housing busts. But I can. And Im telling you flatly: All three were real possibilities before Katrina. They are now becoming real probabilities in the wake of the outpouring of federal expenditures after Katrina.
The American people certainly want to help without having to pinch pennies in a time of crisis. But we dont necessarily need to funnel our already-scarce resources through the same massive government bureaucracy that failed miserably to respond to the crisis in the first place.
A Post-Katrina Profit Warning:
The First of Many More to Come
Wall Street is just beginning to take stock of the impact Katrina will have on corporate profits, and yesterday we saw the first of the profit warnings in the wake of the storm.
Spice-maker McCormick (NYSE:MCK) lowered its Q3 and full-year earnings forecast largely because of Hurricane Katrina.
McCormick now sees 2005 earnings of $1.58 to $1.62 a share instead of $1.66 to $1.70 a share. For Q3, it expects to report 33 to 35 cents of profit, below the 37 cents Wall Street was counting on.
Whats the problem? In their own words: Our growth in 2005 has been limited by issues including sales to industrial customers and hurricane Katrina.
Is Katrina the true cause? Or is it simply a convenient scapegoat business that was already slowing down anyway?
Thats a question that Wall Street analysts will be asking over and over again in the months ahead. So brace yourself for some serious earnings declines … plus some continuing doubts regarding the true CAUSES of those declines.
For example, the company also says: At this time, our industrial business is experiencing continued volatility in demand with certain customers as well as pricing pressure due to competitive activity.
Industrial business is McCormicks term for restaurants, which means that the restaurant industry is slowing down.
Weve talked several times about how sky-high gas prices are sucking up Americans disposable income and forcing them to cut back in other areas like eating out at restaurants.
Mark my words; youre going to hear hundreds of other companies blame Hurricane Katrina for their problems. It is sure a lot easier than admitting that business is simply bad. Period.
Homebuilder Hovnanian
Drops 2006 Guidance
Who should you believe? The real-estate-cant-go-down crowd or the CEOs that actually run the companies that build houses?
If the answer is the latter, you better listen to Hovnanian, who reported Q3 earnings that were below Wall Street expectations and pulled down guidance for 2006.
For the quarter ending July 31, Hovnanian made $1.76 a share, slightly below the $1.78 Wall Street was expecting. The problem was simple: sales are slowing down.
The bigger blow, however, was for a substantial revision to 2006 forecasts. Wall Street had its fingers crossed for $8.55 of profits, but Hovnanian lowered its guidance to $8.05 to $8.40 instead.
Unless you think Hovnanian is suffering from some sort of isolated problem that isnt affecting the rest of the real estate world, you should walk away with a jaded view of the real estate mania.
Prices are peaking. Sales are slowing.
And the real-estate-cant-go-down crowd has set themselves up for some very large disappointments.
Spectrum Brands Complains
about Raw Material Inflation
Plus, dont forget about the cost inflation that has been the mantra of corporate profit reports and warnings in recent months, long before the inflationary impacts of Katrina that Martin has warned you about.
Heres another one: Spectrum Brands, better know by its former name of Rayovac, dropped its profit guidance because of weak demand and rising raw material prices. Some problems:
First of all, this is the second profit warning in six weeks.
Second, Spectrum warned that its problems are simply slowing consumer demand. But I find it amazing that Spectrum would issue a warning about slumping demand while our country is in the midst of one of the worst natural disasters in history. Batteries should be flying off the shelves.
But theyre not … and that is very telling.
Third, Spectrum is having a tough time dealing with the rapid rise in costs. Raw materials cost increases, they say have accelerated recently in oil and natural gas, negatively impacting urea, plastics and packaging materials and transportation costs.
This is exactly why you should pay zero attention to the dont-eat-dont-drive core inflation numbers that Wall Street and Alan Greenspan keep telling you to focus on.
Inflation is a problem.
Interest rates are headed higher.
And stocks in companies that do not profit from rising raw materials and natural resources, are ultimately headed lower.
Best wishes,
Martin Weiss and
Tony Sagami
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
2005 by Weiss Research, Inc. All rights reserved.
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