The One & Done Crowd Strikes Again!

Once again, the portfolio wrecking crew know as "Team One & Done" have suckered investors for the umpteenth time (we have lost count) into believing that there is little inflation, the economy is slowing, and therefore the Fed is done.

Astonishing.

This morning’s core PCE price index, which excludes food and energy, grew 2.4% in June, the fastest monthly growth since September 2002.  On a year-over-year basis, this was the largest gain in 11 years (April 1995). This reflects the costs of commodities (as discussed earlier today in the WSJ) and especially energy pushing its way into the core.

Sarcasm alert:  I guess this mean that the Fed is ready to pause . . .

As we noted on July 21:

"One and Done crowd may have finally gotten their wish. This Ship of
Fools have been behind nearly every failed rally of recent vintage … as
history has shown us more often that not, when the Fed finally stops it
is because growth has slowed to the point where inflation has been
tamed, but at a cost of setting the economy to the point of
contraction."

The silver lining in today’s report is that personal incomes rose 0.6% in June, outpacing the 0.4% increase in consumer spending. Incomes got a boost from higher hourly wages. Compensation of employees increased 0.6% in June, with wages also up 0.6%.

Also of note: the personal savings rate improved to negative 1.5% from negative 1.6%, the 15th consecutive month of negative savings. (negative savings = spending previous savings, or by borrowing or selling assets to support consumption).

Marketwatch noted that "after adjusting for inflation, real consumer spending rose 0.2%, the fourth straight month of tepid spending. After inflation, real take-home pay rose 0.4%, the biggest increase in disposable income since December."

While the Fed looks at that as inflationary, I also see it as allowing consumers to continue their spending.

~~~

Let’s see if the Fed Fund Futures maintains that 30% chance of a 1/4 point hike in the August meeting.


>

Source:
Core inflation rising at 11-year high in June
Real consumer spending tepid for fourth straight month
By Rex Nutting, MarketWatch
Last Update: 8:30 AM ET Aug 1, 2006
http://tinyurl.com/m3u6g

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What's been said:

Discussions found on the web:
  1. Spectator commented on Aug 1

    But does the Fed have the fortitude to do its job? Bernanke does not seem to. Remains to be seen if as a group they can do the right thing.

    If not, we may be looking at signiicant inflation and a dollar rout.

  2. FliteTime commented on Aug 1

    I don’t know about the Fed, they think differently than ‘the rest of us.’ However, I’m interested in the year over year consumer spending declining as a leading indicator. Wages and employment aside, tepid spending is going to keep us in a holding pattern.

    Thanks again to whipsaw for pointing out that guy in the corner, drinking all our whiskey, that no one remembered inviting, as Stagflation.

  3. S commented on Aug 1

    If the bill increasing the minimum wage by 31% passes the Senate, won’t structural wage inflation be assured?

  4. M.Z. Forrest commented on Aug 1

    S,

    It won’t pass. BTW, is the current state we’ve been in for the past 3 years earnings inflation?

    Floors are not inflationary by their nature. Theoretically they affect supply and demand. Even 3 yrs from now when the $7+ minimum would hit, we are talking such a small part of the population affected, that it won’t make much of a difference.

    The more I hear people talk inflation, the less I think people have any idea what it is.

  5. Alaskan Pete commented on Aug 1

    Is increasing wages really a silver lining at this point? Sure, it can help hold off the consumer led slowdown a while longer, but it can also help fan the inflation flames. The lack of strong wage pressures has been a sort of ultimate cap on inflation expectations.

    Fed is really over a barrel, damned if they do, damned if they don’t.

    S. makes a good point on the min wage, and since there is also estate tax “relief” (I’m sure Paris Hilton needs some relief) in that bill, govt tax receipts are likely to fall increasing the deficit (anyone have the numbers of min wage hours worked vs. estate taxes…could be a net positive tax receipt for all I know).

  6. Mark commented on Aug 1

    A/P-

    I’m with you on that one. I think the big fly in the ointment was the wage figure. I think that’s the LAST thing that the Fed wanted to see.

    I wonder if we will see gold bust out of this trading range. If the Fed pauses, it surely will.

  7. blaze commented on Aug 1

    of course wages have to go up. how the hell are we going to pay the rent now the no one is buying houses and just renting them? how the hell are we going to afford the gas to fill up the tanks and drive to work?

    Seriously. There is only one way out of this, and that is put the screws on the economy until we start saving and stop consuming all these rapidly vanishing commodities.

  8. M.Z. Forrest commented on Aug 1

    The CBO doesn’t seem to have an evaluation of the bill yet. Trying to do a back of the hand calculation is difficult except for the estate tax. The minimum wage change would have several effects:
    1) Increase Social Secuirty and Medicare receipts, both individual and employer end. For every person at $5.25 that goes to $6.50 (I believe that is the first year change.) you would be looking at an extra $312 per year.
    2) Reduced EITC payments.
    3) Increased consumption.

    I’m curious if the wage inflation picture isn’t more reflecting the cost shifting taking place in healthcare. Employers have steadily been increasing deductibles, copays, and employee contributions, and this may be reflected in an increased wage demand.

  9. rick commented on Aug 1

    of course wages have to go up. how the hell are we going to pay the rent now the no one is buying houses and just renting them? how the hell are we going to afford the gas to fill up the tanks and drive to work?

    Seriously. There is only one way out of this, and that is put the screws on the economy until we start saving and stop consuming all these rapidly vanishing commodities.

    Posted by: blaze | Aug 1, 2006 11:17:22 AM
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    Any kind of screw put on the indebted consumer will put a screw in the coffin. We are
    talking about a debt / spending induced economy here.

  10. rick commented on Aug 1

    of course wages have to go up. how the hell are we going to pay the rent now the no one is buying houses and just renting them? how the hell are we going to afford the gas to fill up the tanks and drive to work?

    Seriously. There is only one way out of this, and that is put the screws on the economy until we start saving and stop consuming all these rapidly vanishing commodities.

    Posted by: blaze | Aug 1, 2006 11:17:22 AM
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    Any kind of screw put on the indebted consumer will put a screw in the coffin. We are
    talking about a debt / spending induced economy here.

  11. Bynocerus commented on Aug 1

    I stopped caring about the Fed long, long ago. Not trying to be derogatory, but worrying about them seems a little masturbatory, IMHO. If they raise rates ten more times, does it really affect how I’m going to trade? An inverted yield curve tells me quite a bit, but whether or not they raise is inconsequential to whether or not I’m going to go long or short.

    As far as gold goes, Mark, The action looked pretty encouraging until the last few weeks. Volume has really dropped off during this decline, and unless it picks back up, metals could be headed for free fall city. A high volume surge back above $660 would make me a big-time buyer, but a high volume break of $600 gives me a downside target in the $400 area. At this point, I’m inclined to think the downside is the more likely scenario, especially given the resurgence of bullishness amongst the Gold Bugs.

  12. Bynocerus commented on Aug 1

    quick add: meant to say that volume declined during the decline, but it has dropped off even more during this rally.

  13. Craig commented on Aug 1

    I’m sure that’s a big part of it from my own experience.

    i wouldn’t necessarily attribute the increases to employers, as they are really passing through increased co-pays, deductables, premiums, etc. from the insurance/healthcare cos. Definitely a big factor in job searches addressed in other threads.

  14. WhateverMan commented on Aug 1

    I agree with the concern of Spectator above: does the Fed have the strength for another rate hike?

    As we speak, the minions at the Fed are probably rerunning their models with the most recent numbers. What are the models telling them about future inflation and growth? The likely answer is — that the risk to future inflation is now only slightly higher.

    This leads me to think that a Pause is still coming.

    On the other hand, Bernanke is a shrewd political animal and probably doesn’t want to rock the boat before an election. IMHO, this puts policy change at the late October meeting (a few weeks before the election) off the table. This only leaves the August and September meetings for policy changes. What if they pause in August — but then are forced by the data to raise in September — or even worse also in October? This could roil the markets before an election.

    This leads me think that a rate hike is coming in August.

    Now that I’ve contradicted myself in 2 paragraphs, I return you to your regularly scheduled blog.

  15. 23 commented on Aug 1

    Min wage increase might not create inflation if, instead, it creates unemployment. IE, instead of paying workers more, workers get shown the door.

  16. Mark commented on Aug 1

    Byno-

    Thanks for your thoughts on gold. I have been monitoring the “summer doldrums” (volume/price) in gold for a re-entry point. I have a feeling that a bursting base metals bubble could be the catalyst that sends the gold price reeling as you suggest. The macro environment looks tailor made for gold strength though ($USD, war, etc).

  17. Bynocerus commented on Aug 1

    Mark,

    I was starting to wonder if the “old crowd” still posted here. I know I’ve been pretty infrequent in the last month, and I only rarely see your name and BDG. Looks like Pete’s been carrying on without us, though.

    $600 and $660 look like good places to take small positions long or short respectively, with a willingness to take an immediate loss and flip into a much larger position.

    Speaking of good entries, anyone notice that Pimco Total Return is a screaming buy from a TA perspective? Gross has been banging the gong for two years now, and it looks like he might finally be right.

  18. Mark commented on Aug 1

    Byno-

    Who can compete with Pete these days? He’s got a fan club headed by divas and he does Elton John impersonations to boot. .And The Poster Formerly Known as “B” hasn’t been the same since his name change operation. Nary a four letter outburst from him. A shame really.

  19. Alaskan Pete commented on Aug 1

    re: Gold. The miners and physical have been out of synch for much of the summer. To my eyes, the physical is setting up in a symmetrical triangle. I’ll take the breakout of the formation on either side assuming it occurs on decent volume. The volume contraction isn’t too surprising given the summer doldrums and consolidation pattern developing.

  20. Bob A commented on Aug 1

    ‘one and done’… ‘buy and hold’… ‘it’s different this time’… same BS different day

  21. Bob A commented on Aug 1

    minimum wage increase will affect inflation??? I don’t know where you live but where I live illegal mexicans get $15/hour for digging ditches.

  22. ~ Nona commented on Aug 1

    “Min wage increase might not create inflation if, instead, it creates unemployment. IE, instead of paying workers more, workers get shown the door.”

    To your point, 23, I’ve hired people who were super-marginal. I won’t say I did it out of charity, but darned near! The problem is that really marginal people cost considerably more than their (low) minimum wage. They almost always have to be supervised carefully and sometimes I have to redo the work and/or hire someone else to redo it.

    When forced to pay more, I just have to pass. Kills me
    (some of really marginal workers can really use the financial and moral lift of “earning” money) but I can’t spend/donate heavily in the work place.

  23. Alaskan Pete commented on Aug 1

    Dr. Roubini takes the hard landing side:

    “once the signals of this recession build up, the slowing demand, sales, profits, earnings will severely batter the stock market. Expect 10-15% losses on the major equity indexes between now and year end as the bearish reality of a recession sinks in delusional investors still hoping for a soft landing of the economy. There will be no soft landing; it will be as hard a landing as it gets.”

    Treas Sec Paulson says “whaaa?”:
    “Asked if the economy faces a recession in the near term, Paulson declared, “Absolutely not.”

    A bull, a bear…now how about a chart:
    http://photos1.blogger.com/hello/243/2888/640/saving0606.0.jpg

  24. Lois commented on Aug 1

    I wish that food and energy would be included, my grocery bill jumped $20 last night. Things increased not just 10 or 20 cents, but 50 cents to a dollar. Insane if government thinks this can increase and people merely continue to make the same money and aren’t able to save for a rainy day…

    Just like Ayn Rand said in Atlas Shrugged, “these are the people who will sell you food, but leave you to starve in the end.”

  25. diva commented on Aug 1

    The Fed’s raising rates does not do a thing to reduce monetary inflation. (haven’t you guys been watching since they started hiking over a year ago?? Every rate increase has increased inflation…. and continues to do so)
    The best thing the Fed could do now would be to STOP raising rates altogether….. and get out of the way of the economy ….. so economic growth can begin to sop up some of the Fed’s created inflation.
    And, BTW….. today’s PCE is showing what $500 gold was telling us last year. Just wait till the $600 gold message hits the lagging ‘inflation’ stats.
    HA!

  26. drey commented on Aug 1

    Minimum wage hikes are a political exercise more than anything else – a good opportunity for Dems to display their support of the little guy and Reps to do the same for small business. You can’t convince me that minimum wage hikes have more than a negligible impact on inflation or the economy. For one thing you’re talking about a fairly small demographic at the very bottom of the wage scale (by definition) without much disposable income, and for every person actually seeing the raise there’s probably another who DOESN’T get a minimum wage job which is now too expensive for the employer, or another whose below minimum wage job simply goes off the books.

    From an economic standpoint it’s whole lot of handwringing about nothing IMO.

  27. donna commented on Aug 1

    No recession before an election – it’s the law! ;^)

    After November, we’ll see it.

  28. economous commented on Aug 1

    Hi Barry,
    Looks like you have a small error in your post:
    “This morning’s core PCE price index, which excludes food and energy, grew 2.4% in June, the fastest monthly growth since September 2002. On a year-over-year basis, this was the largest gain in 11 years (April 1995).

    The monthly growth in core-PCE was 0.2 percent, it was the year-over-year growth that was 2.4 percent, the largest gain since Sept. 2002. Not sure where the April ’95 reference comes from.

    best

  29. joe commented on Aug 1

    This is next on congress’ agenda, once they finish passing the Increase in Unemployment Act (minimum wage hike)

    Americans With No Abilities Act

    WASHINGTON , DC

    Congress is considering sweeping legislation, which provides new benefits for many Americans.

    The Americans With No Abilities Act (AWNAA) is being hailed as a major legislation by advocates of the millions of Americans who lack any real skills or ambition.

    “Roughly 50 percent of Americans do not possess the competence and drive necessary to carve out a meaningful role for themselves in society,” said Barbara Boxer. “We can no longer stand by and allow People of Inability to be ridiculed and passed over. With this legislation, employers will no longer be able to grant special favors to a small group of workers, simply because they do a better job, or have some idea of what they are doing.”

    The President pointed to the success of the US Postal Service, which has a long-standing policy of providing opportunity without regard to performance. Approximately 74 percent of postal employees lack job skills, making this agency the single largest US employer of Persons of Inability.

    Private sector industries with good records of nondiscrimination against the Inept include retail sales (72%), the airline industry (68%) ,and home improvement “warehouse” stores (65%) The DMV also has a great record of hiring Persons of Inability. (63%).

    Under the Americans With No Abilities Act, more than 25 million “middle man” positions will be created, with important-sounding titles but little real responsibility, thus providing an illusory sense of purpose and performance.

    Mandatory non-performance-based raises and promotions will be given, to guarantee upward mobility for even the most unremarkable employees.

    The legislation provides substantial tax breaks to corporations which maintain a significant level of Persons of Inability in middle positions, and gives a tax credit to small and medium businesses that agree to hire one clueless worker for every two talented hires.

    Finally, the AWNA ACT contains tough new measures to make it more difficult to discriminate against the Non-abled, banning discriminatory interview questions such as “Do you have any goals for the future?” or “Do you have any skills or experience which relate to this job?”

    “As a Non-abled person, I can’t be expected to keep up with people who have something going for them,” said Mary Lou Gertz, who lost her position as a lug-nut twister at the GM plant in Flint, MI due to her lack of notable job skills. “This new law should really help people like me.” With the passage of this bill, Gertz and millions of other untalented citizens can finally see a light at the end of the tunnel.

    Said Senator Ted Kennedy, “It is our duty as lawmakers to provide each and every American citizen, regardless of his or her adequacy, with some sort of space to take up in this great nation.”

  30. scorpio commented on Aug 1

    markets seem to respond to “reported” numbers, like earnings/inflation/unemployment (however manipulated or massaged), rather than real numbers, whatever they are. has anyone tried to determine “real unemployment” over time (here, i’m referring to the discouraged 9.4% not the incumbent Republican 5%). similarly, plot real inflation for the same period (ie since Greenspan took over the definition in the early 70s). would really love to see that

  31. Bob A commented on Aug 1

    Grownups with enough money to be hanging out here should have better things to do than pick on people who make $5.50/hour. Get a life.

  32. Tom in Indy commented on Aug 1

    Thanks joe. You must work in a high AWNA area to have gained such keen insight. Uh Oh, that could be just about anywhere…

  33. rex commented on Aug 1

    It really is the fastest core inflation in 11 years. It matched a 2.4% gain in 2002, but that was just a statistical quirk in that one month. (Did you know that the government treated the insurance payments to 9/11 widows as a CUT IN THEIR INSURANCE PREMIUMS?) Makes sense, in a strange way, because the cost of a dollar’s worth of insurance services plunged.

Read this next.

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