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8:30 AM Wednesday, May 4, 2005: The Fed raised short-term rates again yesterday.

The Fed doe not raise long-term rates because they're affected by the supply and demand for money and right now, there's more money chasing few opportunities. So long-term rates are staying low. This means it remains a good time to borrow money -- e.g. for real estate investments.

There are two schools of thought on the economy.

+ First, growth is slowing. Confidence is ebbing. This school is talking about the "R" word -- recession.
+ Second, the economy is growing, but inflation is rearing its ugly head.

The first view is containing the stockmarket.
The second view is obsessing the Fed.

What the Fed thinks and says obsesses the stockmarket. When the Fed reduces rates, that signals it's prodding the economy to expand and the stockmarket to rise. When the Fed cuts rates, that signals it's prodding the economy to contract.

You can see the Fed's impact on the market from this two-minute chart from yesterday of the Dow:

What caused the gyration is that the Fed screwed up. T
he Wall Street Journal explained,

"The Fed repeated a line from its March 22 statement that "pressures on inflation have picked up in recent months and pricing power is more evident." But it omitted a sentence from March 22 that said higher energy prices had yet to feed through to consumers.

As it did after its four prior meetings, the Fed said inflation expectations are "well contained." But in an unusual error, the statement first issued at 2:15 p.m. EDT didn't include that sentence. Wall Street analysts at first pounced on the omission as evidence of even greater inflation worries, noting a recent University of Michigan consumer survey found higher expected inflation.

"Any time a central bank removes a phrase that long-term inflation expectations remain well contained from a statement, we should take notice," J.P. Morgan Chase initially said in a note to clients.

The Fed corrected the statement at around 4 p.m. A Fed spokeswoman said the sentence was in the actual draft statement that FOMC members discussed in their meeting. The omission occurred inadvertently when Fed staff were preparing it for public release, she said. The omission was noticed by a Fed staffer and corrected immediately, she said."

The Wall Street Journal addressed the issue of longer-term rates:

"Fed officials have puzzled over why the yield on the 10-year Treasury bond is lower now than it was when the Fed started raising rates last June. Yields, which reflect in part expectations for where the federal-funds rate will be, normally rise when the Fed tightens. Fed Chairman Alan Greenspan in February called low yields a "conundrum," suggesting that he thinks the federal-funds rate would go higher this year than the 3.75% the futures market now expects. His remarks helped send the Treasury yield from below 4.2% to above 4.6% during the winter, but it has since returned to below 4.2%.

"The markets are always a little ahead of the Fed," said Peter McTeague, interest-rate strategist at RBS Greenwich Capital. "It's less of a conundrum why rates are here because the trajectory of the economy is different from what it was a few weeks ago."

"The bond market is telling us the risk of recession is higher than the Fed thinks," Kevin Hassett, economist at the American Enterprise Institute, told a panel discussion hosted by the institute. Inflation isn't the risk that the Fed seems to think it is, Mr. Hassett said, because it reflects global, not U.S., demand for oil and other commodities.

Data in the next eight weeks, including Friday's jobs report, will help determine whether the Fed or the bond market is right. Continued softness could force the Fed to reconsider its hawkish stance and its "measured" pace.

The use of "measured" has been a source of growing debate inside the central bank. Some officials believe the phrase limits their flexibility, and gives investors a false sense of certainty about the Fed's actions. Most officials feel it gives the markets useful information but acknowledge that as inflation pressures mount and the federal-funds rate approaches a more normal level, the sentence will have to go.

But the word survives in part out of worries that dropping it would elevate expectations of an imminent shift to bigger rate increases. The Federal Reserve Bank of New York's trading desk asked bond dealers last week if they expected "measured" to change, and how they would interpret such a change.

Bank of America chief economist Mickey Levy said that rather than scrap "measured," the Fed can "just use more and more descriptive language to describe economic and inflation conditions and let that more colorful language supersede the importance of the term measured."

Mr. McTeague said minutes of the Fed's March 22 meeting "suggest measured could mean anything. ...They watered down the meaning of it, but the fact they left it in there probably comforts some people in the markets."

Time is the most precious investment: When you have a job, your priorities are clear. When you ease back (my dilemma), your priorities are less clear. Example: If I buy two apartments for rent, how much time will they take from tennis and afternoon naps? I'm looking at a real estate syndicate investment. Yesterday 30 megs of exhibits arrives. That's a lot of reading. My erstwhile partner leaves his investments to the "professionals" and aggressively pursues "fun."

Every morning when I worked at a real job (managing my company) I'd draw up the five most important things I had to do that day and concetrate on doing them. Now my priorities are less clear -- the family, the new house, capital preservation, exercise, freedom from aggravation.

This subject requires more thought. Any ideas?

The world's worst investment: I remain fascinated by RV buses. These come from the Marathon Coach site. Click here. Marathon takes Prevost buses and makes them into high-end RV buses, costing between $1 million and $2 million. This business is booming. Last year, Marathon's sales rose $20% to $126 million, which is a lot of money (but not a lot of pricey buses).

On the outside, all the buses look the same. But on the inside...

Yesterday I wrote that RV buses were the absolute worst investment. My friend Frank Derfler corrected me.

"Harry, I see that you never bought a big new boat! (Forty or fifty feet or beyond) I have. It makes your RV look like T-Bills. Particularly because the "holding costs" on the RV are minuscule compared to the boat. The expenses eat you alive from the moment you buy a boat and then again when you sell it. Corrosion, slip fees, cleaning, cleaning, cleaning. The support costs never end and then you get nothing for it. At least you can park the damn RV for a reasonable cost (okay, not in Manhattan) and it doesn't deteriorate as fast as a boat. The RV might get five miles per gallon, but the boat gets two gallons per mile!"

The Intelligence of the Man
An elderly man in Florida had owned a large farm for several years. He had a large pond in the back, fixed up nice; picnic tables, horseshoe courts, and some apple and peach trees. The pond was properly shaped and fixed up for swimming when it was built.

One evening the old farmer decided to go down to the pond, as he hadn't been there for a while, and look it over. He grabbed a five gallon bucket to bring back some fruit. As he neared the pond, he heard voices shouting and laughing with glee.

As he came closer he saw it was a bunch of young women skinny-dipping in his pond. He made the women aware of his presence and they all went to the deep end. One of the women shouted to him, "We're not coming out until you leave!"

The old man frowned, "I didn't come down here to watch you ladies swim naked or make you get out of the pond naked."

Holding the bucket up he said, "I'm here to feed the alligator."

The Intelligence of the Woman
A woman and a man are involved in a car accident on a snowy, cold Monday morning; it's a bad one.

Both of their cars are totally demolished but amazingly neither of them are hurt. God works in Mysterious ways.

After they crawl out of their cars, the woman says, "So you're a man. That's interesting. I'm a woman. Wow, just look at our cars!

There's nothing left, but we're unhurt.

This must be a sign from God that we should meet and be friends and live together in peace for the rest of our days".

Flattered, the man replies, "Oh yes, I agree with you completely, this must be a sign from God!"

The woman continues, "And look at this, here's another miracle.

My car is completely demolished but this bottle of wine didn't break.

Surely God wants us to drink this wine and celebrate our good fortune."

Then she hands the bottle to the man.

The man nods his head in agreement, opens it and drinks half the bottle and then hands it back to the woman.

The woman takes the bottle and immediately puts the cap back on, and hands it back to the man.

The man asks, "Aren't you having any?"

The woman replies, "No. I think I'll just wait for the police...."

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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