Bill Fleckenstein’s speech from the New Orleans Investment Conference: Is the Fed a Short Sale? reviews Alan Greenspan’s incompetent management of the money supply using Greenspan’s own words.

In other news, the CPI was up only 0.6% this morning ( a mere 7.4% annualized). Of course, part of this is the riptides between higher energy and commodity prices and stagnant labor prices (wages) as a result of the previously discussed oversupply of labor.

The Producer Price Index came in at +1.7% month-over-month today. An annual rate of 22%. A little whiff of inflation. Why the sudden increase? Because one of the “adjustment” techniques that the government uses is to factor out sudden or rapid price changes on the theory that they are aberrational in nature. The problem with this procedure is that, if the changes turn out to be persistent, then they eventually have to be put back in to the index, potentially (as in this case) leading to shockingly large changes. I suspect, however, that it is no coincidence that these changes suddenly appear right after the election.

The spin is that, if you remove food and energy, the remainder of the index is increasing at only a 3.7% annual rate. Only. With short rates at 2%? So the cost of money is about -1.7% even if you ignore the soaring prices of food and energy. No wonder there’s a credit bubble.

Alan Newman’s Crosscurrents: “All our incarnations of emotional intensity have soared to levels consistent with mass hysteria…..we can only sit back and marvel at the current insanity, comfortable in the notion that the bear market has not yet ended.”

Fred Hickey’s High Tech Strategist: “Like my new hero Curt Schilling, I promise not to let the continuing tough environment get me down. I will ignore the taunting, and even if I’m bloodied (which I have not been to date, thanks to the foreign currencies, precious metals and semiconductor put option positions), I will not give in. I await the return to sanity. My gut tells me it’s very near.”

Bill Fleckenstein’s Daily Rap: “I myself continue to expect the investment business to revert to the saner style that I grew up with. This is not to say that the market then didn’t do weird things, confound people, or get out of whack. It did. It just wasn’t anywhere nearly as maniacal as it has become. To repeat, I fully believe that we will eventually revert to a more conservative environment. But I think the only way that can happen is through some sort of a market dislocation, as I have been discussing for at least the last six months. Though it has not yet occurred, I continue to think it will at some point. I just don’t see how the structure presently in place can unwind in anything but a violent manner that involves some dislocation.”

Charles Kirk’s Kirk Report: “The bulls have the benefit of the doubt with these inflows, but a market that runs away without any consolidation and which doesn’t have firm footing in improving fundamentals, is a very dangerous one. And, that, my friends, is the bottom line. Have a great day!”

Don Coxe’s Basic Points: “The dollar must be devalued—by at least 25%. The longer devaluation is delayed, the greater the risk the market will panic and force a huge devaluation amid a catastrophic crash. The stock market crash of 1987 was triggered by a sudden, market-driven plunge in the dollar, which caused a crisis in the Eurodollar market. (The details of how that crisis developed and unfolded are included in my book, The New Reality of Wall Street.)”

Jeremy Grantham’s GMO Quarterly Letter: “Our summary advice on an absolute basis is much more painful to deliver though shorter: PANIC. With the rallies in the third quarter in global fixed income, emerging equity and debt, and US REITs, there has never been a more broadly overpriced mix of assets.”

Richard Russell’s Dow Theory Letters: “So Mr. Market has all of us playing the greater-fool game. Buy an overpriced stock and then wait to sell it at higher price to a greater fool. Of course, if your stock goes down, you discover that you’re the greater fool. Furthermore, you don’t want to hold the damn thing, because it pays no dividend and you know in your heart that it’s only worth half its current price, if that”

A particular gem. The headline reads: Record jump in housing costs. But in the text: “Single-family resale homes, the largest segment of San Diego’s housing market, experienced a second straight month of price declines, down $4,000 to $516,000 in October after a $5,000 drop to $520,000 in September. It was the first back-to-back monthly decline since September-October 2002.”

The US stock market has rallied nearly 100 points in about a month. The New York Average is now within 2% of its all-time highs (yes, the bubble highs). The economy is growing, interest rates remain low and inflation is reported to be modest. So what’s the problem, why not climb on board the train and abandon negativity along with everyone else? Well there are many. Here are some of the major issues:

• Deficits. Individuals, government and the whole country are running staggering deficits. Households are spending more than they take in, and of course so is the government. As a nation, the US is consuming more than it produces. These deficits are being financed by the countries like China and Japan that suffer from a shortage of domestic demand and so have excess savings. The US is consuming over 80% of the world’s savings. This is unsustainable.
• Valuation. Shares are very expensive. I favor John Hussman’s price-to-peak-earnings method, but virtually any measure will show that they are historically expensive. Yes, earnings have improved but the improvement is mostly an artifact of interest rates. GM makes most of its money from its mortgage business, for heaven’s sake.
• Sentiment. There are way too many bulls and they are overconfident. Yes, they are confident because they are getting their way. But who are they going to sell to? There will be a setback, eventually. Then everyone who wants to buy will have bought and there will be no shorts left to provide their usual safety net.
• Growth. Domestic business is not growing. Especially the technology business, where end demand is reported weak and the semiconductor industry in particular is drowning in inventory and overcapacity. Consumer demand is being satisfied by imported goods. Even though reported GDP increases, remember that imports are subtracted at cost, not selling price. But shares are being bought anyway.
• Speculation. Since low interest rates and business returns make it difficult to achieve decent investment returns, people have turned to speculation. In stocks, in houses, in virtually anything tradable. Anything that goes up is bought, bought and chased some more in pursuit of profit. This is dangerous and unhealthy because it engenders leverage. And excess leverage is what causes deflation when it unwinds.

There is an opportunity cost associated with not joining in the momentum chase. But it is all about risk. At the end of the cycle we will see who managed risk effectively.