Amazing, but true:
Inflation was low because oil prices surged
In GDP math, sometimes one plus one equals zero
By Rex Nutting, MarketWatch
Pretty crazy stuff . . .
Headline of the Day
October 31, 2007 4:15pm by Barry Ritholtz
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HALLOWEEN AIEEEEEEEEEEEE
I filled up my car the other day and inflation there was super low! Same thing when I went grocery shopping.
Actually it is a negative times a negative which makes a positive. Right?!
Of course you can multiply it by zero real analysis and THEN you get nothing.
The trick is not change the numbers (you will get caught). Just change the formula.
So what is the actual GDP & Inflation #s then?
If it wasnt 3.9% and 0.8% respectively, what was the realistic #, even if you had to estimate?
My head is spinning. All gov’t data says inflation is moderating, yet everything I buy to live my daily life is getting more expensive. When will this game end?
We’ve now had 75 basis pts of rate cuts by the Fed in order to help the economy as it fights the drag of a housing sector in recession and a financial sector that is experiencing early signs of a credit crunch. Unfortunately, since the Sept 18th cut, the BKX (bank index) and the HGX (housing index) are below their Sept 17th close. The XLB (materials etf) is up 10% since the Sept 17th close. So based on the stock market reaction, the Fed has done nothing to help the areas of the economy that most need it and its lit a fire under inflation.
looks like the drug addicted street has their fix for a another week or two though! Thats worth a little inflation isn’t it?
BUFFETT ISSUES CHALLENGE
Buffett went on to say that he has challenged the rest of the FORBES 400 Richest People, by saying he will donate ONE MILLION DOLLARS to their favorite charity, to anyone that can prove that on average, they pay a higher tax rate than their secretaries pay.
So far, no takers.
.
It is a given that food and energy prices are in the stratosphere and this is definitely inflationary. However, what real control does the Fed have over this?
It is my understanding that yes, if they held rates static nothing meaningful would change (speculators would continue pounding the dollar and buying oil). Lowering them like today marginally inflames the situation.
If they raised rates in the face of economic slowing, wouldn’t this put the economy in a serious recession and prompt an easing cycle anyway?
Given the circumstances facing our economy today, it appears as if Bernanke is between a rock and a hard place.
Anyone with a solution to this please advise.
I think I would far rather see a recession than my dollars continuing to become worthless.
Might as well spend everything, since it will soon be worth nothing.
Oh, and we’ll end up seeing the recession anyway – just in 2009, when they can blame it all on Hillary, of course.
Why would the Fed “need” to move towards an easing cycle? What the Fed needs is another central banker with the stones of Voelker. Greenspan was the worst central banker this country has ever had, and we will soon see 15% inflation for the next decade thanks to him.
Wait, we already do — we’ve just taken everything that does inflate out of the measurements of inflation.
“I think I would far rather see a recession than my dollars continuing to become worthless.”
But wouldn’t a recession entail a lack of purchasing power not only in the incongruity of price disparity of goods vs. dollar equivalency at the onset, but on the the loss of jobs which will come in the form of zero dollars for millions of more potential workers?
What I am saying is the disequilibrium created by a recession would be far more harmful than the dollar devaluing further.
“What the Fed needs is another central banker with the stones of Voelker. ”
What were treasuries trading at at when Carter appointed Volker? I would say alot higher than the yield on the 30yr which today stands around 4.70%.
What would be gained by raising the Fed funds to __________%
Set your rate.
I’ll take the free market’s side on this one and say Fed funds don’t need to be anywhere near 18%.
Lyon – “I’ll take the free market’s side on this one…”
Keep in mind that treasury rates are currently being determined in Beijing, not New York.
The problem with the Fed cutting rates now is that inflation is one of the biggest risks to growth right now. Cutting rates drives up inflation on consumer staples, which reduces spending on everything else. Consumer staples tend to be sold at very low profit margins, which means that cutting rates right now will drive down profits and growth. Letting the dollar fall actually hurts everyone, because people can’t afford their lifestyles as easily but nobody gets an increase in profits (imports are still valued the same in their local currencies).
The housing market is not in trouble because interest rates are rising. The housing market is in trouble because people were stupid and irresponsible when buying houses and banks were stupid and irresponsible when approving loans. People are going to default on those loans regardless of interest rates. Cutting rates right now can’t help growth because everyone is overextended on debt already. We can’t grow this economy on debt anymore.
The FED is putting money into the system while the oil rich nations take it out. One other thing: with lower interest rates we can start building more houses again to get all those laid-off carpenters back to work. Will someone with a better mind than mine, please tell me where we are going from here?
Posted by: jkw | Oct 31, 2007 6:13:06 PM
That’s a good way to look at it.
Don’t you seee that about 30% of the price of oil is due to evil speculation? Traders are bidding up oil futures just trying to make a buck while hurting everyone else! Now go out and bid up GOOG and home prices and help the economy!
Its a new paradigm.
I wonder what would happen if the Fed would just stick to keeping the economic population supplied with money and letting the rest of the problems solve themselves via market action. A radical concept to be sure, because I know coddling the incompetents has worked out swell in the past.
Three influential “greybeards” made the case for higher stock prices on CNBC tonight. None used valuation/fundamentals as a reason.
1) Barton Biggs basically said so many people have been hedged throughout the year, they now will be playing catch-up to try and outperform the benchmarks. So, to paraphrase, “performance chasers” will drive stocks higher.
2) Dennis Gartman said stocks “smell” like they want to go higher. For the past twelve months, every piece of bad news has been dimissed and stocks have only gone higher.
3) Cramer said many stocks are overvalued but they’re going higher so you just have to buy or be left behind. “Just buy Bidu”.
Biggs, Gartman, and Cramer all on the same side of the trade. Even Jeremy Grantham threw in the towel recently.
Anyone left to buy?
One would be a complete moron not to be in stocks here. The Fed, ECB, JGB are now literally printing money.
Beijing and Bangalore support global CPI through 2 billion cheap laborers.
Compared to bonds, which have yields that keep going lower, stocks trade at risk premiums no where else to be found in “risky” asset classes. Plus there isn’t the type of leverage in equity markets as their is in credit.
So long as growth is there, and while we postulate all we want, the fact of the matter is that global growth is still strong, it means that stocks will go up, up, and up.
Cash is trash folks, the Central Bankers have made it their craft to destroy your wealth.
Barry-
“Discomfort guides my tongue And bids me speak of nothing but despair.”
William Shakespeare
I am loseing all hope and faith in this fight against inflation, the Government (Fed) or Uncle Ben does not care, and they don’t care about inflation, what’s the point. They win! I cannot fly.
Eventually, the recession that is due and which is a normal function of economic cycles will occur despite the best efforts of the FED and/or any other governmental agency(s). History shows that cash is king in that environment!
Pat Gorup said:
Eventually, the recession that is due and which is a normal function of economic cycles will occur despite the best efforts of the FED and/or any other governmental agency(s). History shows that cash is king in that environment!
Nothing wrong with being in cash if that is your risk profile. But “eventually” can be a long time and what is going on in the Real World has almost nothing to do with the market from a trading standpoint anyway.
I dodged the head-fake down after the FOMC release this afternoon, then hit the Buy Cheap button and added more QQQQ calls for a nice paper win. That doesn’t mean I am smart, it just means that I learned the hard way in forex trading that the first move when some ‘macro news’ meets expectations is usually wrong, so go smoke a cigar for 20 minutes, then set up the trade and let the market come to you.
But I would have to say that today probably marked a turning point because for the first time in long memory, the broad NASDAQ outperformed $NDX which means that the little guys got a bump. $SPX probably still sucks, but if the shorts couldn’t pull off a win today, I’d guess that we will see some pretty amazing buying by the fund managers until the next Fed meeting in December.
==whipsaw==
I think I would far rather see a recession than my dollars continuing to become worthless.
Might as well spend everything, since it will soon be worth nothing.
Posted by: donna | Oct 31, 2007 5:20:15 PM
??????????????????????????????????????????
WHat about a severe recession with severe
hyperinflation ??
Eventually, the recession that is due and which is a normal function of economic cycles will occur despite the best efforts of the FED and/or any other governmental agency(s). History shows that cash is king in that environment!
Posted by: Pat Gorup | Oct 31, 2007 9:52:41 PM
??????????????????????????????????????????
for how long do you think cash (USD) will be king ??
Why do you think a recession means that the
value of the USD will go up ??
I am not really sure that the people who seem to think a recession is good have ever seen one. Not the end of the world, but not something to cheer on either, despite the preaching of Randinistas who don’t know any more about economics than $cientologists know about religion (Ayn Rand and L. Ron Hubbard share a common achievement, fiction writers who were taken as serious thinkers when they were just trying to sell books. I am sure that they laughed their asses off to the grave).
==whipsaw==
Ok, so let me get this right ==> the PCE is an indicator of DOMESTICALLY-produced inflation, not the actual type of inflation that average Joe Blowinthestreet will encounter. That would mean that if oil prices were to rapidly decline, the PCE would spike, driving DOWN real GDP! How f’d up is that?!?