I just read a commentary by RaJa’s Jeff Saut, that is dead on target with our prior commentary:
"The call for this week: We don’t believe the geometrically weighted,
seasonally adjusted, hedonically priced, owner-equivalent rented, core-CPI
numbers; instead, we use the non-core CPI numbers that do not exclude food and
energy. And last week the non-core CPI was reported to have increased +0.7% for
the month. That is an 8.4% annualized inflation rate, implying that despite all
of the Fed’s rate ratchets we may still be in a negative real interest rate
environment. If true, the Federal Reserve might continue to raise rates higher
than most expect.We don’t think the equity markets are prepared for such a
potential “rate rape” given their 19.3x P/E ratio combined with some of the
highest profit margins in history. Since profit margins are probably
mean-reverting, we think earnings estimates are overly optimistic. Consequently,
we keep hearing the band Chicago Transit Authority echoing down the canyons of
Wall Street and the tune is their 1970 hit “Does Anybody Really Know What Time
It Is?” So far that question has been followed by the next line from that song,
“does anyone really care?!” Clearly we do, which why we remain cautious and
continue to invest/trade accordingly."
To put a picture to that, consider these charts: Do they reveal inflationary pressures or not?
Source:
Higher Energy and Non-energy Prices Lift Overall CPI
Asha Bangalore
Northern Trust Global Economic Research
February 22, 2006
http://tinyurl.com/ecy7u
That is an ugly freaking chart. Higher highs and higher lows. I’d say buy that stock. err…. What’s the chance we’ll see ten year rates drop close to 40% to allow the perma bulls, who correlate 94-95 to 05-06, to run unobstructed as they did eleven years ago?
With a little nudge, ten year rates will break a five year down trendline tested four times before. And do it very soon. Anyone remember the month we peaked on the S&P in 2000? Ugly October? Nope. March. Every March since has been a major top or bottom bar none. Price stability or full employment? Crash the economy or out of control inflation? Succumb to politics or stop inflation? This is a very, very difficult task and there is no easy answer unless the CRB falls off of a cliff. That can likely happen if he trashes the economy which will crater the developing world and potentially create a massive mess in China and tremendous social unrest and instability. Big Ben has been dealt one b*tch of a hand.
I thought this article was pretty interesting (http://www.weedenco.com/welling/liframe.htm). How many people think the CPI numbers have not been tweaked? It seems reasonable to me, which would also explain the disconnect between reality and CPI numbers.
Yes, I said as early as the summer of 2004 that the current environment, both economically and politically reminds me very much of the early 1970s.
I think, yes, inflation must continue bouncing upward – although the energy input into every dollar of GDP is less than it was in the 1970s, it still exists and its’ cost is moving upwards. “Core” inflation will follow in due course.
Jay Walker
The Confused Capitalist
1973
OMG! Gulp! 1973? 1973? Wasn’t that right before…. 1974-75? (Runs screaming from room.)
Long: Gold, treasuries and everything else is hedged to the max.
Try 1928
But I understand the mistake. Generals are always preparing for the last war. The key to the difference is the divergence between productivity and real median income growth.