The Economy, The Fed & 'Able Danger' Revisited  

Posted Aug 23 2005, 08:54 PM
by Gary D. Halbert

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So The Economy Is Really Bad? Not So.

The media and President Bush's detractors continue to tell us that the economy is in bad shape, and apparently a lot of Americans believe them. Yet the economic data tell quite a different story, one of stronger than expected growth.

We all know that skyrocketing oil prices have a negative effect on the economy, both at home and abroad. Yet if we look at the latest economic news, the US economy, at least, is holding up quite well. Despite the fact that oil prices were well north of $50 per barrel in April, May and June, Gross Domestic Product expanded at a 3.4% annual rate in the 2Q, just slightly below 3.8% in the 1Q.

Continued strong consumer spending, exports and business investment were the main drivers in the 2Q. Personal consumption spending, which accounts for over two-thirds of GDP, increased 3.3% in the 2Q, while new business investment climbed a better than expected 9%.

The latest data, which we will look at below, suggest that the 3Q GDP number will be higher than the 2Q number, despite surging oil and gasoline prices. Bloomberg's latest survey of leading economists indicates an average estimate for 3Q growth of 4.1%. I wonder how the media will spin that!

Consumer spending remained robust in July with retail sales rising by 1.8%. For the 12 months ended July, retail sales were up 8.8%. The latest unemployment report showed a surprising 207,000 new jobs created in July and over 2 million in just the last year. The unemployment rate is down to 5%. Doesn't sound like an economy in bad shape to me!

The much-watched ISM manufacturing index rose to its highest level this year with a reading of 56.6 in July. New orders for durable goods rose another 1.4% in the latest report. Factory orders, a broader measure than durable goods, rose almost 3% in the latest report.

Housing starts rose another 0.5% in July. New home sales rose 4% in the latest report. Here, too, no signs of a bad economy. While we may agree that there is a "bubble" in the housing market, the latest reports continue to look encouraging.

Consumer Confidence Is Tanking? No.

President Bush's approval ratings have fallen to new lows this summer - currently 45% approve, 51% disapprove, and 4% unsure -- according to the latest CNN/USA Today/Gallup poll. His approval ratings for his handling of the economy are even worse -- 40% approve while 52% disapprove -- according to the latest Newsweek poll taken last week.

Here again, we have the media to thank for creating a national impression that the economy is in bad shape, when in fact it is expanding strongly. The media would also have us believe that consumer confidence is plunging, when in fact it has held up extremely well given soaring gas prices and continued problems with the war in Iraq.

The Consumer Confidence Index was the highest it's been in over a year at the end of June. It did dip slightly (-0.3) in July. In the same month, the University of Michigan's Consumer Sentiment Index was also at its high point for the year (96.5), despite the fact that oil prices hit $60 a barrel last month. UM's preliminary sentiment index for August suggests a modest decline (92.7).

Let's face it: oil prices have almost doubled in the span of a year. How could that not have negative effects on consumer confidence? Certainly it does. I would argue, however, that consumer confidence has held up much better than expected this year, and it is certainly not tanking as the media would have us believe. Again, I'll be interested to see how they spin it if the 3Q GDP number is 4-4 1/2%!

New Inflation Fears -- Cover For The Fed.

The Consumer Price Index rose 0.5% in July, above pre-report expectations, after being essentially unchanged in May and June. For the 12 months ended July, the CPI rose 3.2%. The Producer Price Index rose a full 1% in July, also well above expectations, after being unchanged in June and down 0.6% in May. Yet the latest increase has, as usual, heightened inflationary concerns.

Yet just because the CPI and PPI were somewhat above expectations in July, should we assume that inflation is on the road to being a major problem? I don't think so. As I have written over the last couple of months, I actually believe that deflation will be the greater concern over the next 2-3 years. Of course, that is a much more over-arching issue to consider, which space does not permit this month, so let's just stick with the July inflation numbers.

Monthly inflation numbers, as measured by the CPI, are still random in my opinion. Look at the monthly CPI numbers this year so far: Jan +0.1%; Feb +0.4%; Mar +0.6%; Apr +0.5%; May --0.1%; Jun 0.0%; and July +0.5%. Many analysts concluded that inflation was ramping-up way after the monthly CPI increases in Feb/Mar/Apr, but then we saw a drop of --0.1% in May and 0.0% in June.

So I don't believe we should be overly concerned about the latest +0.5% CPI increase in July, except...

As we all know, there is a national debate about whether the Fed should continue to ratchet-up short-term interest rates. The Fed maintains that it is merely readjusting the Fed Funds rate back up to a "neutral level" after slashing rates in order to stimulate the economy out of a brief recession following 9/11.

Earlier this year, most economists and market analysts (myself included) reached a consensus that a 3 1/2% Fed Funds rate might get us up to a neutral level. However, it has become clear over the last couple of months that the Fed has a different idea. Now, analysts are wondering if the Fed will stop at 4%. Over the last month, I would say that most analysts are now wondering if 4 1/2% is the stopping point.

There are three more FOMC policy meetings this year: September 20; November 1; and December 13. Based on all the analysis and reports I read, I would say that the current loose consensus is that the Fed will raise rates a quarter-point at each of the next three FOMC meetings, which would put short rates at 4 1/4% by December 13. The interest rate markets are currently pricing in that theory.

My thought, not that guesses matter (and we are all guessing, to be sure), is that the Fed hikes on September 20 and again on November 1, but then gives us a Christmas present by not hiking yet another time on December 13.

As I have discussed recently, my bet is that the Fed will not take the Fed Funds rate up to a level that creates an "inverted yield curve" where short rates are above intermediate rates (the 10-year Note, for example, which is now at 4.2%). This will also depend, of course, on what the economy is doing over the next 3-4 months, what the inflation numbers look like, and other considerations. Time will tell.

My point here is, the latest CPI and PPI numbers for July (+0.5% and +1.0% respectively) have given the Fed political "cover" for raising short-term rates at least two more times. As a man who makes market bets for a living, I would put some odds on that forecast.

The big question now is whether or not the Fed takes a breather and does not raise rates at the December 13 meeting. I will revisit this issue between now and then and handicap the odds further.

Stocks -- Major Breakout Or Fizzle Out?

Stocks have gone essentially nowhere over the last year and a half, right? We're still just in a broad trading range, right? Maybe, maybe not. As you will recall, I have predicted that the major stock indices would break out of the recent trading range to the upside. I have not predicted that the upside breakout would be spectacular, but I have maintained that it would be a move worth participating in.

Well, at this point, some of the market indices have broken out to new highs, but others haven't. The bell weather S&P 500 Index has recently broken out of the long trading range to a new four-year high. A few other indices have as well, including the Nasdaq which recently hit a new four-year high. But the Dow has not.

As I have suggested in recent weeks, the response to several indices breaking out to new four-year highs has not been particularly exciting. But I still believe there will be additional gains in the markets over the months ahead, especially if the economic news remains as favorable as I expect. I would also not be at all surprised to see a pretty impressive move up if all the major indices finally do breakout to new interim highs, and if the 3Q GDP is above 4%.

There is still a mountain of cash sitting on the sidelines, parked in money market funds, earning very little, and some or most of that money will come back into the equity markets if we get a clear signal that all the indices have broken out to the upside. If and when that happens, the ensuing move should be quite impressive.

If I'm correct, and you miss it, you will be kicking yourself if you read this E-Letter regularly. This is why I recommend -- over and over -- that you use professional money managers, with time-tested systems, to make these emotional decisions for you. They don't get in at the bottom or out at the top -- nobody does. But the good ones will at least get you in for most of the trend. And that's better than 99% of us do on our own.

Finally, I do take my own advice. I've been in the investment business for almost 30 years. I've tried hundreds of approaches and strategies, including several of my own. Yet for the last decade, at least, I have not directly managed any client money, or any of my own money -- save for a couple of passive real estate holdings.

With the exception of my real estate holdings, all of my investment portfolio is directed by the professional money managers I recommend. While I make economic and market predictions in these E-Letters and my monthly newsletters and elsewhere, based on the information from my best sources, you should know that my personal investment portfolio is managed by the professionals I recommend. I have no idea if they agree with my predictions or not. I trust them to follow their time-tested systems, regardless whether they agree with me or not, and I wouldn't have it any other way.

I'll stop there. I get criticized for promoting my own portfolio of recommended Investment Advisors in this E-Letter too much. But I do sincerely believe that most of you reading this E-Letter would be better off with professional managers running your money than you do on your own. Think about it.

'Able Danger' Revisited -- Jamie Gorelick.

Last week's E-Letter on the 'Able Danger' story drew an enormous response -- quadruple the number of e-mails responding to any article I have written in over a year. The responses were lopsidedly positive, with only a few out of the hundreds of responses being critical or non-believing. Most applauded me for bringing them this story that the media and the 9/11 Commission have tried so hard to suppress.

So what have we learned since last week? First, let me tell you that I had gathered most of the research information for last week's August 16 E-Letter on 'Able Danger' in the week before. But by Friday, August 12, I was convinced that the mainstream media was going to do everything in its power to cover this story up and bury it. By Sunday, August 15, I knew I was right. No coverage.

I debated whether to write about Able Danger to my audience of 1.5+ million readers. I did not want to sound like a crackpot. But I believed the story, despite the blackout in the media. So, I went with it last Tuesday. And you know the rest. Thanks to thousands of Internet bloggers, the story literally exploded last week.

The media at last could not ignore it. As usual, FOX News was the first network to concentrate on it. The others finally followed. It was a hoot to see liberal CNN finally get onboard, trying to position itself as the expert that knew more than anyone else (a lame excuse for why they waited so long). Ditto for The New York Times that finally weighed in.

A couple of days after my article came to you, we learned of Lt. Col. Anthony Shaffer who was the Able Danger member who tried to get the information on Mohamed Atta and the other 9/11 terrorists to the FBI prior to September 11, 2001. He has told his story all over the media for the last week.

As I reported last week, the 9/11 Commission has been in a conniption in an effort to explain how and why Shaffer's Able Danger intelligence was scuttled, why it supposedly never reached any of the 9/11 panel members, and why it never made it into the 9/11 Commission's final report. They have changed their story so many times now that even a bleeding-heart liberal couldn't believe them!

Add to that the fact that in the last 24 hours, two additional individuals have come forward to support Lt. Col. Shaffer's story. Navy Capt. Scott Phillpott told FOX News in a statement Monday evening that Mohamed Atta, the lead hijacker in the 9/11 terror attacks, was located and identified as someone with ties to known terrorists. Capt. Phillpott, a 22-year active duty serviceman, would not provide more detail, except to say that he is going through the proper channels at the Department of Defense. In his statement to FOX, he said:

"I will not discuss this outside of my chain of command. I have briefed the Department of the Army, the Special Operations Command and the office of (Undersecretary of Defense for Intelligence) Dr. Cambone as well as the 9/11 Commission. My story has remained consistent. Atta was identified by Able Danger in January/February 2000."

Phillpott is a decorated officer who briefed the 9/11 Commission in July 2004 before its final report was issued.

The second new individual to come forward, according to FOX, is a man named J. D. Smith, a former defense contractor who worked with Able Danger. Smith told FOX News that he coordinated Able Danger's information sources, reported to the government on the project's spending and generated some of the charts, including the "Al Qaeda Global Map" that had Atta's name on it. He added that he saw Atta's photo during the unit's investigation.

Smith said one way the unit came to know Atta was through Omar Abdul Rahman, part of the first World Trade Center bomb plot in 1993. Smith said Able Danger used data-mining techniques -- publicly available information -- to look at mosques and religious ties and it was, in part, through the investigation of Rahman that Atta's name surfaced.

So, we now have three individuals with the same story (see the first link below in SPECIAL ARTICLES). They all maintain that the Able Danger information on Mohamed Atta and the three other would-be hijackers was provided to 9/11 Commission staff members in 2004 before the Commission released its final report. They also maintain that they were blocked from sharing that information with the FBI.

The question is why. While the answers are far from clear, it increasingly looks like my analysis last week may be right on target. If you recall, I pointed out how it was clear that Able Danger's information did find its way to the 9/11 Commission staffers. I further speculated that 9/11 Commissioner Jamie Gorelick's staffers may have shared the information with her, and she may have ordered them to suppress it.

Why? Because Jamie Gorelick was the Deputy Attorney General (under AG Janet Reno) in the Clinton administration who strengthened the intelligence "wall" that prevented our security agencies (FBI, CIA, etc.) from sharing information. As I wrote last week, and earlier this year, Ms. Gorelick should have never been on the 9/11 Commission.

The information is far from clear at this point, but there is increasing evidence that it was Jamie Gorelick, while Deputy Attorney General under Clinton, who blocked Able Danger from going directly to the FBI. Lt. Col. Shaffer has claimed repeatedly in the last week that Able Danger had three separate meetings scheduled with the FBI to turn over information on Mohamed Atta and the other would-be hijackers, so they could be rounded up. But for some reason, each of those three scheduled meetings was cancelled at the last minute.

The suggestion is that it was Jamie Gorelick who told the FBI to cancel the meetings. Whether it was Ms. Gorelick, or someone else, this is a travesty, and the person responsible should be prosecuted and put in jail.

Unless Lt. Col. Shaffer, Capt. Phillpott and J. D. Smith are all lying, and that is subsequently and definitively proven, there is definitely the chance that the 9/11 tragedy could have been avoided. My hope is that the investigation into the Able Danger story will continue and intensify. But the media is once again trying to bury it. They may be successful. Let's don't let them. Let the real truth come out!

Finally, as I noted last week, if this information is true, it looks really bad for the Clinton administration and the former president's legacy. If all the information comes out, and it is true that someone high in the Clinton administration blocked Able Danger from going to the FBI, it could even hurt Hillary's chances in 2008. Maybe that explains why the media is trying so hard to bury this story and even discredit Lt. Col. Shaffer. Stay tuned!

Very best regards,

Gary D. Halbert

Gary Halbert is the president and CEO of the ProFutures companies, a diversified investment advisory firm located in Austin, Texas. ProFutures offers professional financial planning services to a nationwide base of clients. Mr. Halbert's firm specializes in tactical investing, and its recommended investment programs include mutual funds, managed accounts with professional Investment Advisors and alternative investments. For more information about the programs offered, call 800-348-3601 or visit the website at www.profutures.com.

SPECIAL ARTICLES:

Navy Captain & Another Individual Back Able Danger's Claims.
http://www.foxnews.com/printer_friendly_story/0,3566,166504,00.html

All hail, the "new economy."
http://www.usnews.com/usnews/opinion/articles/050829/29edit.htm

U.S. economy is strong, even if under-appreciated.
http://realclearpolitics.com/Commentary/com-8_22_05_JK.html

Copyright © 2005 ProFutures Capital Management, Inc. All Rights Reserved.

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