Natexis Bleichroeder Technician John Roque makes these astute observations about the inflation rate as it relates to sentiment and the market:
"Bullish types deduced quickly that “with GDP soft and oil still high ($73.60) the Fed’ll tell us they’re done raising rates when they meet next.”
Curiously, at the same time, core conusumer prices and employment costs came in ahead of expectations portending higher future inflation, but market participants chose to pooh-pooh this fly-in-the-proverbial-lower-rate-scenario/ointment.
The jolt, in short, was that slower economic growth trumps higher inflation news and that two potential negatives were deemed positive."
He offered up this chart (yes, we have shown it before) as to where inflation is likely to go in the future:
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CPI, Annual Changes, 1957 – 2006
Source: Natexis Bleichroeder
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It should be no surprise that this crowd continually changes their views on inflation — regardless of what is actually happening in reality:
"We get the distinct impression that consensus thought right here is that “inflation is a lagging indicator.”
Funny thing about this sentiment info is that the people who’re telling us that “inflation is a lagging indicator” are the same people who’ve told us all along that “there’s no inflation,” the same people who said gold couldn’t rally, the same people who said oil wasn’t going to stay at high levels, and the same people who said tech would be a leader, the same people who said the “Fed’s done raising rates” for a year, and the same people who said the Yanks were out of the race.
Plainly, these people are dangerous and we think inflation will work higher."
Dangerous, indeed . . .
Barry,
I’ve never seen you comment on the LEADING economic indicators.
What’s your read on the FIG? Let’s disciss the future, since you recently mentioned rear view mirrors.
Thanks!
Mr. Roque is one of the best on the street. His intermediate approach to technical analysis is great. Those who meander through the daily noise should look at this approach. It is to capture the main trend, rather than the daily bread of the swing trader.
Next Team One and Done party scheduled for Friday, August 4th. You’re all cordially invited to buy the close.
I wonder if many analysts aren’t as worried about inflation because they believe there’s no feedback cycle here. In particular, there’s no wage growth. If left alone, will inflation largely cap itself as people simply run out of money to buy crappy imports they don’t need from Wal*Mart?
The bond market doesn’t seemed too concerened about inflation either…fresh lows in yield.
SS: take a look at this chart of the 30Y, then talk to me.
http://tinyurl.com/nn58z
Seems most are expecting a short-lived bond rally into a slowdown and then buh-bye to the secular bull in bonds. The linked chart lends support to such a notion.
Interesting chart….another read might be that the long bond sees a coming Fed pause, which would lead to (further out) inflation fears. The 10 year is more important (imho) as mortgage rates are more aligned there.
Thanks for pointing out the 30 yr break though.
Looking at John’s chart, I’m struck by the “average 4.16”. I’m not sure it’s helpful to include the abberation data of the Volker era….not suggesting to data mine, but it clearly skews the numbers. Double diget inflation won’t happen again….the Fed will send us to the ditch way before that would happen.
Nice save at the close by someone who wanted to preserve Friday’s gains. Barry’s offshore hedge fund? Or was that “ss” buying some “values”?
Birinyi just posted some data that SHOWS that inflation is a lagging indicator.
http://tinyurl.com/zdg4q
and
http://tinyurl.com/ghgxs
“The first chart below shows the number of commodities in short supply on a historical basis. As the series shows, there are relatively few commodities in short supply. The second chart compares the net number of commodities rising in price on a monthly basis with the y/y CPI. As the chart details, changes in trends of the CPI have often BEEN LED by trend changes in the number of commodities rising/falling in price. Presently, the number of commodities rising in price is in a STEADY DOWNTREND implying that the peak y/y CPI reading we saw in September 2005 may have been the peak of this cycle.”
Now let’s look at the FIG….(through the front window!)
All inflation is NOT the same. The inflation showing-up now is STRUCTURAL and is not going away any time soon….unless structural changes are implemented.
But isn’t real inflation much higher than 4%?
FIG — Future Inflation Gauge (a no B.S. inflation guide)
ECRI’s Managing Director Lakshman Achutan:
“Our future inflation gauge peaked in October 2005, and has fallen for four of the five months since then, including March. ”
FIG May 123.3
FIG June 122.6
I do not have the July number….anyone?
«I wonder if many analysts aren’t as worried about inflation because they believe there’s no feedback cycle here. In particular, there’s no wage growth. If left alone, will inflation largely cap itself as people simply run out of money to buy crappy imports they don’t need from Wal*Mart?»
Well, I always ask ”which inflation” when discussing inflation, what you say is the theory that the only ”inflation” that matters is wage inflation.
It seems to be a popular theory, especially among asset holders, but it has a problem: in an open economy it matters a great deal not just the domestic wage inflation rate, but that for foreign wages, and also the inflation of commodities, in other words imported inflation.
For the past several years the USA have been exporting inflation to offshore countries. Now however there are significant resource constraints in those countries, and indian/chinese wages and commodity prices are rising.
To compensate USA wages are being reduced in real value, but this can’t go on forever, in the measure needed to compensate for high imported inflation, and indeed is getting harder and harder.
Then Bernanke’s Dilemma which is a purely political choice: kill the economy and save creditors, or save debtors and let ”inflation” go.
”Easy Al” has been of the ”save debtors” persuasion for a decade, but his job was so much easier because his ”free money” policy has led to high sustained inflation in asset prices and wages and retail prices abroad, as investment and jobs were exported.
Macro long investors today should be scared pantless, because when it is not at all obvious which way Bernanke will go.
I personally think it will be ”save the debtors”, and that all the ”hey look, no inflation” stories and index ”corrections” are deliberate attempts to let ”save the debtors” go unnoticed for as long as possible. Sure, there have been huge rate increases, but watch to real interest rate, not the nominal one…
«But isn’t real inflation much higher than 4%?»
But as always the question is ”inflation of what?”.
When all prices go up or down ”inflation” is much easier to define, because it is an average, and averages are moderately informative summaries of unimodel distributions.
But for the past 10 years different prices have had different trends, as different factors have had very different pricing powers.
However, narrowing it down to the CPI/PCE/… one smart guy whose job is to unravel what indices mean, rather than saying «real inflation much higher than 4%» one could say something like ”if the CPI were computed in the same it was in the 70s, currently it would be growing at around 8%”, which at least is about like-for-like, whatever the CPI measures.
”if the CPI were computed in the same it was in the 70s, currently it would be growing at around 8%”,
Well it’s not the 70’s…it’s a very different economy (thankfully):
-Oil as % of GDP is not even close
-Internet – kills pricing power
-Outsourcing – kills wage inflation
«Double diget inflation won’t happen again….the Fed will send us to the ditch way before that would happen.»
The decision is ultimately taken by Congress and their sponsors. FedRes independency is a gift from Congress that can be taken away. High inflation does not just ”happen”, it is a deliberate political choice to solve otherwise insoluble problems. We are at the point where it has become a very tempting choice.
Where is the big bad crash?
We’re still well above the October lows of last year.
A double bottom has formed.
The selling today was on horribly low volume.
Is the correction over?
I’m listening to the markets and all I hear is “lookout below…!” How we got here, is beyond me. I’m so bearish that some may call it treason. But as my old partner would have said, “It’s unpatriotic and unAmerican not to exploit the markets.” I have a feeling that things are going to get so messy that even the bears are going to suffer depression..
I’m short S&Ps, long Gold and parking reserves in 3 to 6 month treasuries. I should probably sell some Notes or Bonds… Any thoughts….? I have a “strong opinion, weakly held….”
NYSE voloume –higher thanMon or Fri (barely) but not higher than Thurs
Nasdaq was higher than Mon but lower than Fri
I agree – there’s a tremendous downside potential. If you look at the Nikkei, SOX & Naz they all fell below their 23.6% retracement values before bottoming out.
Why shouldn’t the Dow & S&P also do the same?
The Dow (61.8%) & SPX (50%) both bottomed on Fibonacci retracements in Oct of ’02. Breaching those retracements is gonna be painful.
But I gotta admit, the longer I wait, the more bored I get and less likely I think it’ll happen ;-)
Do-it-yourself compute the odds of a Fed funds rate move: http://www.clevelandfed.org/research/policy/fedfunds/Index.cfm
They haven’t updated the chart yet to include today’s changes, but the last I heard on CNBC around noon is that the odds of 5.50% went back up to around 40%.
I’m much too lazy to jumble the numbers in the Excel data myself, but if you’re bored, knock yourselves out. ;-)
«”if the CPI were computed in the same it was in the 70s, currently it would be growing at around 8%”,
Well it’s not the 70’s…it’s a very different economy (thankfully):
-Oil as % of GDP is not even close
-Internet – kills pricing power
-Outsourcing – kills wage inflation»
Oh yes so far, and it is scary indeed that despite all these factors the like-for-like CPI is still 8%.
The problem is that the Internet does not kill pricing power, and that outsourcing does not kill wage inflation, it just delays it.
Traditionally to assess business and worker pricing power one would look at underused capacity.
What has happened in the past 10 years is that in effect the indian and chinese economies have been increasingly integrated in the USA (and Japanese) economies, thus adding considerably spare capacity as to workers. Other factors, including nugatory or negative interest rates in the USA (and Japan) have also added a lot of spare capacity in capital.
Unfortunately little spare capacity has been added as to raw materials, because both India and China haven’t got a lot except land (the only significant addition of capacity in raw materials has come from Russia), and the spare capacity in workers seems to reducing considerably, because indian and chinese wages are rising fast.
Eventually this will result in India and China ceasing to export deflation to the USA (and Japan).
Bernanke has a much tougher environment than Greenspan to deal with. The problem he has is what to do when he detects that international spare capacity is low. Does he kill the economy or does he kill debt?
Blissex:
How exactly does killing the economy save creditors?
A natural consequence of a slowing economy is that defaults increase. As creditors anticipate rising defaults, they demand compensation in the form of wider credit spreads. Wider spreads cause lower prices for fixed income paper. So, not only does the creditor run the risk that an individual borrower will default, but the general price level for his entire fixed income portfolio declines as spreads widen out.
Alternatively, the “save the debtor” proposition (i.e., allow inflation to rise), has a similarly undersirable outcome for fixed income investors. Namely, that when the fixed income investor gets repaid the money he lent the borrower, the purchasing power of the money has weakened.
Sounds like a lose/lose from the creditor’s prespective either way.
I am not an economist nor am I an expert on anything economic but I have a question. Why is there such a debate on inflation and what is high or low. Is it tame or getting out of control ? I would think there should just be clear cut data that says XYZ but it seems that data is all left to interpretation. It seems as though someone made the process a lot more complicated than it has to be ? Yes, No ? Am i just a moron ? lol.
Chris, according to the published numbers inflation is creeping up however as Blissex pointed out if the gov’t computed it the same way it would be substatially higher so prices are up but Uncle Sam (Dubya) is trying to hide it. Check out http://www.joc.com/data/pricesindexes.shtml , not a pretty picture!
christopehrrobin: “I would think there should just be clear cut data that says XYZ but it seems that data is all left to interpretation. ”
Bear With Me: “if the gov’t computed it the same way it would be substantially higher …”
Reminds me of Clinton’s “It depends on what the meaning of the word “is” is.”
Is inflation IS or is it AIN’T?
Back to the house at Pooh corner, please!
if inflation is really running 8%, then why aren’t you guys borrowing all the $ you can, for the longest period you can and investing in hard assets, gold or whatever. seems like a no brainer to me, repay worthless dollars in 30 yrs-
“if inflation is really running 8%, then why aren’t you guys borrowing all the $ you can, for the longest period you can and investing in hard assets, gold or whatever. seems like a no brainer to me, repay worthless dollars in 30 yrs-”
Those who bought homes with 30 yr mort at
5.5 % few years ago, with intention of never
paying off the principle will look like geniuses.
Inflation over 30 yrs will trump any short-term deflation in house prices or the 30 yrs of interest payment of debt.
“Fed will send us to the ditch way before that would happen.”
erhhh……. hate ta bust yer bubble guy…… but a Fed ‘ditch’ will only make inflation worse.
and, for the rest of the lost: inflation is ALWAYS AND ONLY A MONETARY PROBLEM
Any rise in any price, per se, is NOT an indication of inflation.
Spare me!!!!!!
…..don’t really blame most for being part of the ‘great unwashed ignorant’ as everyone has been fed garbage by the mass media, etc for so long.
Another hint: wage increases do NOT create inflation!
(shock)
Price increases do NOT create inflation.
wow
Higher oil prices do NOT create inflation.
swoon
You have all been fed so many lies for so long….. that they seem like the truth.
Fact: inflation is purely a monetary issue.
Fact: the Fed has complete and total control of monetary policy
Fact: today’s inflation is completely and totally the result of poor Fed monetary control policy. period.
…keep on drinking that cool-aid if you want….. its your money…… however, I suggest you spend a lil time to find out how you have been duped.
I used to be duped too……. then I spent some time learning.
….started studying seriously in 97. the rest is history
and, pps: all those lagging inflation indices are gonna keep on keeping on going UP for quite a while.
You have been forewarned.
Phil, ’cause we’re hoping for the grownups to come back into power (Right or Left) long before then…. aren’t you?
Phil,
I think they and a whole lot more are. The demand for the long end of the curve is great. The supply is meeting demand at around 5%. And you see a huge amount of LBO occuring via Private Equity. Once the supply out strips the demand prices will fall rates shoot up and we do it again at 6%. With this Gov’t I doubt demand will outreach supply for a good while. And yes they are buying Gold, Copper, Companies and soon a whole lot of realestate as it comes to market at discounted prices.
dang scary 30 yr bond chart AP
Barry, I have a question of the volume that you are refering to on the Nasdaq and the NYSE. As the market falls, doesn’t the volume decrease because of the exhaustion of the sellers? If this is true wouldn’t you see a decrease of volume of say 30%. When the bottom then hits see an increase of this lower volume giving you the rise that investors look for at the bottom. If volume drops again 30%, then increase 50% of this low, the total volume would be equal to previous volumes with the exception of seller burnout.
Sorry about ECRI’s rotten luck….. but, they are wrong.
Their so-called ‘leading’ indicators are obviously laggers too.
Maybe they just lag a lil less than the CPI…… one of those magnifying rear-view mirrors.
HA!
(hint: there is only ONE really leading indicator)
I’m more greatly impressed by the rising wisdom in most posts. Me dos centavos:
Inflation at 3.5%? Even Ben said in hearings in prior week that they know its higher and use higher rates for some analyses.
I feel like a genius: my 30 yr fixed 5.25% mtg with < 40% LTV will be paid off in 2031 with 20 cent dollars, but... When everyone yabbers 'bout inflation, no one remembers how deflation starts: it's the credit, stupid. Just how much inflation remains after the crash will have to wait to be known. Keep up the fine work, everyone. Love,
Diva,
Sounds like you’re quoting Friedman.
Barry….please share your thoughts on FIG.
Future Inflation Gauge.
New Metric?
I wonder if there is an inverse relationship between the rate of monetary inflation and the rate of human inflation (getting fat).
Food becomes more expensive during an inflationary period, and you lose weight, yes? Maybe frugality also comes into vogue.
How does this factor into the productivity equation?
Technology (with folks behind the keyboard) makes the economy more efficient, driving up productivity, driving down inflation thru lower costs. Again, fatness going up, inflation going down.
Regardless, any indicator derived from such a waistline metric would certainly be a lagging indicator. Losing weight takes time and is difficult.
The price of ice cream in the summer might be correlated with …
“These people are dangerous”
More and more I see the logic of the gold standard.
Interesting that the Gold Standard was created by an alchemist; and today’s current “strong” $ was created by 2 modern day alchemists. (Summers and Rubin).
Inflation – let’s take a look at some trees rather than the forest;
Q3 05 – Gasoline price spike (Katrina I guess)
Q4 05 – General Commodoties price spike
Q1 06 – General Commodoties price spike
Q2 06 – Petroleum price spike (war I guess)
Q3 06 – Power price spike (Get your July Util Bill Yet NJ?)
Q4 06 – Wet crop price spike (Corn & Soy – Drought I guess)
Q1 07 – Water price spike
Q2 07 – Beef price spike
Definetly a big difference btw the 70’s and Today though;
-) How many ARM’s were in exist in 1980
-) What was the notional Value of Derivitives in 1980
-) What was the Net Invest position of the US in 1980
Somehow I don’t see 15% interest rates as an option this time around.
Diva,
Hate to burst your bubble, but your 3 facts below are so FALSE that it’s funny you cite them.
“Fact: inflation is purely a monetary issue.
Fact: the Fed has complete and total control of monetary policy
Fact: today’s inflation is completely and totally the result of poor Fed monetary control policy. period.”
I hate to be duped too, so like you I took it upon myself to do some serious learning on macro issues and the financial markets. Question is, where did you do your learning?
Diva – guess what? You’ve been duped once again!!
Here’s a question I’ve never heard answered adequately:
What’s the difference between increased productivity being passed on to workers and wage inflation?
It just seems to melike people have been moaning about worker pay being flat and not benefiting from increases in productivity, and now when wages start to rise it’s called inflation.
Josh K
it’s called whining and complaining…. misery loves company …. you ever see a silver lining on this site ???
GBr might have a point!
How about some solutions?…..what are you personally doing about it?
How many are over-extended?……in debt maybe?
How many have their vehicles paid off
Loans payed
No mortgage payments.
What would happen if you lost your job today……are you prepared?
How much cash do you have on hand?…and how long will it last under pressure?
The list goes on….
Let’s here some solutions!……anyone?
I don’t understand why Barry will not directly answer my (inflation) question I posted at the very beginning of this thread (and several requests since). It directly deals with the points he raises in this piece.
How does he explain the differences between coincident indicators of inflation (long term trend) and LEADING economic / inflation indicators (long term trend)?
The FIG (Future Inflation Gauge) is clearly showing inflation turning down….while he cherry picks and highlights lagging inflation data….feeding the Cult of the Perma Bear.
Oh…and today he lobbs out “consumer is dead stuff”. (Very original).
This is CLASSIC perma bear propaganda. Where’s the balance Barry?
SS,
Do you pray to God without answers? Does that mean you’ve cornered him with something he doesn’t understand? lol.
Listen, I appreciate your point of view. I’m bullish long term comparatively but you cannot deny the data coming out right now. If you think housing is in for a soft landing, you too need to adopt some balance.
As far as the FIG, please tell me what that has to do with stocks? Historically, it is absolutely meaningless. That is, the limited history it has. Additionally, you must consider another outcome of a tame FIG. If you believe the only outcome to a tame FIG is pax Americana, you are too blinded by your views. A second and very valid outcome to a tame FIG is demand will lessen thus causing a collapse of inflation. Inflation is a ruse. I could say something really arcane like we don’t really have inflation but then I’d have to explain the thought process behind it. Let’s just say we have short term inflation and the jury is out on the long term prognosis. I think the jury has voted there is no inflation and has voted that this entire cycle but I could be wrong. Does a reduction in demand which surely fits in a possible scenario for a tame FIG mean an ebullient economy?
You cannot cheat the cycle. And don’t tell me again there is no such things as cycles or I will have to label you as stupid. Maybe you should go read an economics or business book.
Well, despite your calling me stupid…we might actually be closer in thought than you might guess. We clearly don’t describe what we “see” the same way..fair enough.
I’m not here armwaving that FIG is the be all, end all indicator. But as a PM, when I see lagging indacators being touted as bible…and sentimet as negative as it is on this site, and in general, it gets mt attention. What does FIG have to do with stocks? Man, where to begin? The market has priced in more rate hikes than is both safe and necessary (imho). If the FIG is correct (and the FED “gets it) the market will reward those who swim against the torrent of negative nabobs…and conventional wisdom.
There are pockets of inflation. But the bond market is telling you inflation went — that-a-way. Welcome to the global economy, where there are 10 guys to our 1 willing to do/make whatever cheaper…thus no pricing power. Our advantage is our (temporary) lead in education, innovation, and rewards to the innovative entrepreneur.
I totally agree that the inflationists have their head up their arse. At least, to date they do. I did not call you stupid. I was simply stating your remarks to me were interpreted to mean that cycles were “stupid”.
FIG HAS NOTHING TO DO WITH STOCKS. And, I must say, your position on rewards is not without merit at the right time. But, your position would have been mercilessly punished for three years in 2000 when the FIG was dead and sentiment was awful at the very top and all the way down.
Get off of this inflation bullshit and move onto a broader argument. And, be flexible on your views. To be neutral or short term risk averse doesn’t mean you are a bone headed perma bear.
…ok..not calling you a perma bear….and repect your opinion (actually everyone’s opinion).
But inflation “perception” (or more accurately what the Fed might overdo to quell it) is what’s keeping the lid on this market. That’s why I’m drilling down on this so intently. This is the BASIS for the broader argument, imho.
Good luck BDG. I’ve over cooked my point…sorry.
Peace
Glenn, believe what you like: its your money.
Steve Forbes
08.14.06
Dunce Cap
Fed Chairman Ben Bernanke’s Congressional testimony a few weeks ago was a disappointment. Investors and executives better expect more turbulence and higher interest rates.
The man is still underestimating inflation — despite the sky-high levels of prices for gold and other commodities. More disturbingly, the Fed boss hinted that inflationary pressures would be easing because of a slowing economy. Bernanke and the Federal Reserve bureaucracy still seem to cling to the notion that growth causes inflation. It doesn’t. Excess money creation does, as Milton Friedman conclusively demonstrated decades ago. The destructive idea that there’s a tradeoff between inflation and economic growth has unnecessarily retarded our expansion and capital markets in the past. Experience has shown this idea to be nonsense. Both the 1980s and 1990s saw vigorous growth and declining inflation.
Bad ideas are sometimes harder to kill than obsolete government agencies.
Ben Bernanke’s education in central banking, alas, is going to be a long one. So far this student is proving to be a slow learner.
http://supplysideforum.blogspot.com/