Repeat After Me: There is NO Inflation

Ok, we get it.

But.. Oil prices are not solely determined by the demand in the US anymore. The Fed raising rates will not impact the price of oil, unless they tighten enough to send the world (including China) into recession. Is that what you’re hoping for?

If not, what would you like to see? If the Fed does give the nod to inflation (“yes folks, inflation is really 5%+”), what good will come of that? Ok, the SS benefit outlays will go up (aren’t we the ones who say that benefits should be cut? Well, this is one way…), and the populace will become grumpy, but other than that, nothing else is achieved.

So, I ask.. What would YOU like to see the fed do?

Sorry Barry, but you are being a bit “less than truthful”. When I see you on Kudlow, people are not saying there is “NO” inflation. They are saying inflation is within the Feds’ limits and therefore is not the main bogey to keep our eye on right now. The MAIN bogey. Don’t ignore it, just don’t do something completely insane (i.e. raise the rates) when most indicators on the economy say that it is at least temporarily weakening.

I second the previous question. What would you have them do? Raise rates? Then what will the headline be? “There is NO job growth”? “There is NO employment”? “There is NO gain in the stock market this year”? “There are NO exports”? How about ALL of the above? More power to you!

I for one don’t have a problem with the Fed using an inflation indicator that minimizes the affect of a product whose price is almost totally set by a cartel we apparently have zero influence over. Imagine the kind of whip-sawed policy we’d be coming out with after every Fed meeting if they tried to continuously react to the price of oil! The dollar is weak, commodities priced in dollars are up. Deal with it! Buy the commodity stocks (or the commodities), the exporters, the foreign currency ETFs. Whatever!

~~~

BR: That’s sarcasm.

When I am on the tube, I am arguing against people who claim inflation is moderate, contained, not-too-bad, or “acceptable.”

It’s none of the above.

My usage of the word “NO” in this format is a rhetorical device to emphasize a point I am tired of repeating.

I believe most of the readers here understood that . . . .

Lets not turn this into a heated debate or nat gas may go even higher…

Silly joke aside, I’d prefer the Fed and the White House to come clean (we are in deep shit).

To willfully accept an official lie because it hurts less than the painful reality does not help to solve the problem. It is frightening to read it, really.

Mike G,

Don’t worry you’ll get your inflation – big time! In about 18 months and beyond… The Genie is out of the bottle, and has left the room. Yes, it would have been better if Bernanke and the FOMC would have raised rates and cooled this economy down along with the rest of the world’s economies. Capitalism is about peaks and troughs, not peaks and more peaks, and more peaks. Housing prices will not adjust soon enough in time to quell the inflation surge that is about to hit the system, because owners are reluctant to come off of there asking price, they will just take them off the market instead. IMHO

Justin:

If oil is such a huge inflationary factor to the average household (because they use so much of it? False) then why is the plummeting cost of housing (both homes and rentals due to excess capacity) not equally DEflationary or even more deflationary?

Look, we have a weak dollar (and you can hate Bush all you want but last I checked the Fed was independent. Just ask Papa Bush). In a weak dollar economy, different things have a tail wind than in a strong dollar economy. I’d rather have a strong(ish) economy with a weaker dollar than a weak economy with a strong dollar at least for now.

As for “You’ll get your inflation”, how about we let the Fed see it get out of it’s comfort zone and act accordingly? Last time I checked that was a difficult enough job for them, let’s not ask them to play Amazing Kreskin!

I actually think in the end, the dollar will “strengthen” because the EU etc. will start cutting their rates as well. France and Germany sure as hell want it.

It’s more than oil that’s inflated! Yesterday I went to WFMI. Their house brand whole wheat bread went from $2.49 a loaf to $3.75! That’s $1.26 less in my purse! Yes, there’s always been fluctuations in food and energy costs, but when these costs are *consistently* going in one direction, you cannot continue to ignore it.

The Fed definitely started down the stagflation path when they cut rates. The consequences will come if oil spikes at least 100% in a year’s time. Oil was at $50 in Jan last year. If we see $100 by Jan. history says a recession will follow. Take a look back in 99-2000 and you will see oil spiking 200% in 99. There’s the cause of the recession. Of course it didn’t hurt that many of the tech companies didn’t actually have any earnings.

When the returns on money are negative people will hoard commodities. So yes the FED should raise interest rates even if the economy slows down.

“Bard” David, nice touch!

get over to http://www.theoildrum.com for highly technical, well researched articles by a number of oil industry professionals and statistical modelers. please consider the articles by jeffrey browne on the export land model, which posits declining production coupled with increasing domestic consumption in a number of key oil exporting countries. this analysis was recently also made by jeff rubin of CIBC. we haven’t seen anything yet!

Eddie,

“If the Fed does give the nod to inflation (‘yes folks, inflation is really 5%+’), what good will come of that? Ok, the SS benefit outlays will go up (aren’t we the ones who say that benefits should be cut?”

No.

Social Security is self-financed, and by federal statute, the funds in the Social Security Trust Fund can only be used for Social Security benefits, so if benefits are cut, it would merely result in making the Social Security Trust Fund larger.

Social Security is more financially sound today than it has been throughout most of its 71-year history. So what would be the point of cutting Social Security benefits ?
.

>>Fed Bernanke:Ready To ‘Reverse’ Easing If Inflation Returns-2

Isn’t this the Moral Hazard no Bail Out BS -Public Service Announcement that fore shadowed the initial rate reversal. Plunge Promotion Team at the ready, hows GS playthis for the RAMP after the next cut.

Fool me once, a fool don’t never get fooled again, ya gotta keep repeatin the propaganda, till it becomes the truth
—-The Decider

The argument seems to boil down to Barry’s honesty vs. Wall Street’s insistence that we lie to everybody lest they get freaked out and damage the equities markets.

So now we have millions of Americans approaching the limits of their credit cards because they see Bernanke on TV talking about how great next year is going to be.

If hollow prognostications could offset crappy fundamentals then David Lereah would have prevented the housing mess. Instead we have suffering because people bought at the peak.

What is the symbol of oil on bigcharts? How do I track the price of oil commodity on bigcharts? Thanks.

Justin: I pointed out something to a similar effect, but the portion size was nonetheless borderline sufficient. We were sharing, so there were other “regular (over)size” portions.

Oil- $86
Corn $363
Wheat $833’4
Gold $761

The look on Hank Paulson and Ben Bernankes face when Ron Paul asks about moral hazzard.

Priceless

Is there a way for an individual who is not a commodities trader to invest in oil futures, say for 2011 or 2012?

As for trading commodities FUTURES without being a commodities trader? Well, I haven’t done it but I think you can get a managed futures account or a commodity pool account ( http://www.investopedia.com/university/futures/futures6.asp ). But I’m thinking buying (or shorting) the OIL ETF is possibly a better option for a non-commodities trader. Someone correct me if I’m wrong, I don’t do futures.

As for trading commodities FUTURES without being a commodities trader?

If somebody wants to get into that game, then interactivebrokers.com is one choice- but no hand holding there. Also a very good place for trading options.

But I would say that a very deep in the money put or call with a long expiry date acts exactly like a future, it just keeps you from getting into leverage. Then again, it can go to $0 while a future probably can’t. Or you can do options on futures at IB if your Inner Gambler is truly awakened, but not for me.

==whipsaw==

Just my opinion: leave futures trading for professionals…

That being said, you can trade many futures products via online brokers, for example:
http://optionsxpress.com/welcome/tour/trade/futures_products.aspx

(I use OX for options trading only and have no other interest in the company)

To: Deborah

Whole Foods is not known as Whole Paycheck for nothing. Keep your soul pure by buying that overpriced bread knowing you are saving Mother Earth in the process. They charge what the market will bear.

To: BR

I don’t know about others but NO means none to me. But I guess some come from the land of, “It all depends what the meaning of ‘is’ is”. Words, Schmerds. Make them what you want now adays.

Everyone who is blogging about inflation being under-reported by tons can make a killing. Short the long bond and buy the like-maturity TIP and leverage yourself up the you know what. The spread now indicates 2.50% inflation. Just think of all the money you’ll make when it goes to 5%-8%. Put your money down, folks.

As for me, I think inflation is 2.50% just as the deep, deep markets are showing.

But its good for me to see all of the inflation hawks out there.

~~~

BR: Norman,

Distinguish between different forums and formats of communication. A blog headline adapts a very different tone than lets say congressional testimony under oath. Sarcasm is appropriate in one venue but not the other.

(I cannot believe I am even explaining this . . . )

Con Ed?

“Just my opinion: leave futures trading for professionals…Much safer to just buy or short things like DBA, DBC, etc.”

Good advice. Note however that DBC, as well as it has done, has not kept pace with EFA or EWC.

Here’s a simple formula (and watch what the hedge hogs & quants’ are doing with it); The days [decades really] of HIGH DEMAND vs HIGHER SUPPLY are over/have reversed. Expect an American lead consumer slow down to change things? We’re already there…I know it’s not p/c to yell “FIRE!” in a crowded theater, but [see chart at top] some smell the smoke.

When the returns on money are negative people will hoard commodities. So yes the FED should raise interest rates even if the economy slows down.

Posted by: Fullcarry | Oct 15, 2007 7:51:57 PM
??????????????????????????????????????????
During hyperinflation, the market will raise the interest rates, not the FED.
All the FED can do is to pump more paper.

rick,

In the US the FED targets short term interest rates or specifically the overnight funds rate between banks.

It is very important that when inflation is accelerating (I definitely wouldn’t characterize it as hyperinflation) the FED raise short term interest rates high enough to get ahead of the inflation curve.

Negative real rates are unsustainable in the current environment.

“Mises warned, ‘The credit expansion boom is built on the sands of banknotes and deposits. It must collapse.’ He stated that, ‘If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”

Mises was right on the money about that one.

“With the securitization industry off-loading debt from the banking system, haven’t we in essence been operating with a zero-fractional reserve banking system?
Hasn’t this unlimited debt expansion led us to this point?”

See what Mervyn King, Bank of England Governor said in a 20th of June 2007 speech about the risks associated with this situation:

“”Securitisation is transforming banking from the traditional model in which banks originate and retain credit risk on their balance sheets into a new model in which credit risk is distributed around a much wider range of investors. As a result, risks are no longer so concentrated in a small number of regulated institutions but are spread across the financial system. That is a positive development because it has reduced the market failure associated with traditional banking.

“But the historical model is only a partial description of banking today. New and ever more complex financial instruments create different risks. Exotic instruments are now issued for which the distribution of returns is considerably more complicated than that on the basic loans underlying them. A standard collateralised debt obligation divides the risk and return of a portfolio of bonds, or credit default swaps, into tranches. But what is known as a CDO-squared instrument invests in tranches of CDOs. It has a distribution of returns which is highly sensitive to small changes in the correlations of underlying returns which we do not understand with any great precision. The risk of the entire return being wiped out can be much greater than on simpler instruments. Higher returns come at the expense of higher risk.

“The development of complex financial instruments and the spate of loan arrangements without traditional covenants suggest another maxim: be cautious about how much you lend, especially when you know rather little about the activities of the borrower. It may say champagne – AAA – on the label of an increasing number of structured credit instruments. But by the time investors get to what’s left in the bottle, it could taste rather flat. Assessing the effective degree of leverage in an ever-changing financial system is far from straightforward, and the liquidity of the markets in complex instruments, especially in conditions when many players would be trying to reduce the leverage of their portfolios at the same time, is unpredictable. Excessive leverage is the common theme of many financial crises of the past. Are we really so much cleverer than the financiers of the past?”

In other words, it is highly doubtful that we even KNOW how to properly assess risks of this kind. Talk about a sound financial system!

“Hard assets rising. Bank runs. Super SIVs.

The last step…the whole monetary system founders. Is that really in our future?”

History does not repeat itself but it rhymes. Monetary systems have floundered in the past, since the Roman Empire in fact. I can’t see any indication that human nature have changed for the better since those bygone days.

It boils down to simple mass psychology: fiat money is entirely dependent on confidence (faith). Tinkering with the money system for the sake of unfettered greed and political expediency is a sure recipe for self destruction.

Claiming that inflation is one thing while proving to be another is one of the many things that will eventually breaching the confidence essential to the functioning of the monetary system.

Keep at it and ugly things will happen.

Francois

BR: You haven’t ‘explained’ it and I don’t need you to explain it to me.

The people who think that inflation is not a problem hardly ever say, “There is no inflation”. They’ll say that inflation is subdued or not a problem. If they don’t say there is ‘no inflation’ why do you?

I’ll tell you why, it is a device to put the other side on the defensive and to avoid talking about real numbers. Its just a debating ploy which is beneath serious discussions and doesn’t help me one whit.

Let’s think of the entire world as a global economic system, which, in fact, is what is has become (or is quickly becoming) due to globalization. Next, let’s look at the expansion of the money supply (M3) on a
worldwide basis – The UK: 15%. The EU: 11%. The US: 14%.

Now, let’s assume that the old rule of thumb that M3 growth – GDP growth = inflation, although very simplistic, is essentially correct. How fast are those three economic systems growing? Nowhere near as fast as their money supply. Averaged together, somewhere between 2-3%. How much of world GDP do those three systems comprise? According to the IMF, 64%…

Some would say that China and India are soaking up that liquidity, but China and India have inflation problems of their own due, in part, to excessive money supply growth – And many are worried that they are actually exporting inflation, which they probably are.

So, if the world is one giant economic system, where does all that extra liquidity go? A: Stocks, commodities, and housing, which have all had incredible rallies in the last 5-10 years.

Why wouldn’t it show up in the bond market instead? A: Why buy bonds when demand for commodities in a growing world is expected, at the very least, to increase moderately for the foreseeable future – And when investors are, at the very least, suspicious of the US’s continued economic hegemony? Why buy bonds when stock markets and commodities are strong?

Of course, demand from China, India, and various other countries provides the visible catalyst for higher prices, but the tremendous (and growing) pool of extra liquidity floating around, I believe, provides support for rising prices and, as long as it is growing, provides a basically unlimited invisible catalyst for higher prices across the board. Over the last ten years, not once in the US has M3 growth been below GDP growth – And, as Barry pointed out to us on seekingalpha yesterday, it currently stands at an annualized 24% – And as Ben revealed last night, he stands at the ready to use “all available tools” to mitigate economic damage from the housing market, which he expects to be a “drag on the economy” into 2008.

The question I ask myself is: Where will this new money flow to? I think oil is approaching party status, and will head higher, along with, to a lesser extent, nearly all other commodities. Gold and silver still have a ways yet to go until they reach party status, but when they do, gold will skyrocket past $1.5k, and will likely see $2.5k or more. That extra liquidity will also be silently making it’s way into the housing market, and may actually stem a total collapse back to 1997 REAL values. After all, the primary vehicle for monetary injection into the US economy is through loans from banks to consumers and corporations. Much of it will also go into stocks, creating a very large (and very artificial) global rally, as the housing collapse will seem ‘contained.’ Meanwhile, the US consumer will sink lower into debt, worries about “moral hazards” will be put on the back burner, and the US will climb yet another few steps higher on the mountain of artificially induced bubble style economics, and will stand there deliriously until a heretofore invisible catalyst knocks it off.

Doomsdayish? Yes, it is – But that’s how I see things. Am I worried about it? No, but I will bet my money on this happening, and I will continue to “grow” my investments as much as possible until this scenario plays itself out. If I’m wrong, I’m wrong – But I believe that anyone who thinks M3 growth has no discernible effect on the economy or can be ignored is either mad, a delusional economist, or is more interested in facilitating economic cycles than a stable economy.

Just my two cents – Take them with a grain of salt, just like everything else you read on the internet…