The Fed recklessly abandons their price stability mandate, and this is what it has wrought: Dollar at record lows, oil and gold near all time highs.
It is the first rule of economics, yet so many idiots pundits cannot seem to to remember it: THERE IS NO FREE LUNCH.
In physics, the corollary is that "every action has an equal and opposite reaction." Why this is too complex for their little frontal lobes is beyond me. It is simple. It is basic. It is easily understood by even supply siders.
Think about all of the brainiacs who have been begging for rate cuts — and from historically moderate rates — over the past 2 years. Be sure to thank them for the reckless disregard for your wallet.
Hey, how’s your core inflation doin’ these days?
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Crude (December contract):
Gold (December contract):
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UPDATE: November 7, 2007 9:21am
Maybe there’s some hope for the dollar:
Within the Fed, Resistance to Further Rate Cuts http://www.nytimes.com/2007/11/07/business/07fed.html
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Sources:
Oil Rises Above $98 to a Record on Forecasts U.S. Supplies Fell
Grant Smith and Nesa Subrahmaniyan
Bloomberg, Nov. 7 2007c
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOhoSjcKJhcY&
Dollar Slumps to Record on China’s Plans to Diversify Reserves
Agnes Lovasz and Stanley White
Bloomberg, Nov. 7 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aMPLuto8wxK4&
Crack spread starting to widen again. Just watch that $GASO rise. WHOOOHOO, this’ll be fun.
Watchagonnado, Bennie?
Raise interest rates – the economy weakens and the dollar goes down.
Lower interest rates – inflation concerns return and the dollar goes down.
After literally decades of spending beyond our means (first Japan and then China plus others kept the dollar extraordinarily strong), now we have to pay the piper.
What is your choice Mr. Hobson?????
Barry,
Excellent commentary…only thing that could have made it better is if you addressed it “Dear idiot Kudlow:”
Can anyone explain how in the hell the 10-year yield is still down in the 4.3’s? Whoever is selling all these $$’s sure isn’t dumping treasuries. Either that or somebody is quietly sopping up the supply. Has the For Sale sign gone up on the national forests yet?
Barry – you cite the article but no infoporn on the $ rate, at this Wiley E. moment ?
Since you’re missing a $ chart courtesy of the STL Fed and FRED here we go:
http://tinyurl.com/2lmslr
Krugman has a couple of nice posts on his blog as well which you can have in the 30pp flavor or the Giselle flavor.
As always, thanks Barry.
The call for rate cuts still is a call to create liquidity in the paper market, as even Cramer figured out yesterday, Dollar be Damned. The other shoe of that trade is that from now on foreign governments and banks may only loan us money in Euros
I’m running out today to convince my local gas station to sell me some gift certificates for gas. 5 gallons of gas is going to be my big Xmas present.
and look at how massively gold, silver, oil have rallied immediately subsequent to stocks bouncing off key levels the past week. (1500, then 1491 S&P). the need for “somebodies” to continually “save” stocks at critical junctures sure has the whiff of desperation and hyperinflation to it
Barry, the most recent “memo” from Stan Greenberg of democracycorps shows some interesting and relevant focus group observations. And yes, Greenberg is without question a Democratic pollster, but as the Liscio Report, which pointed me to the memo, notes, Republican strategist Frank Luntz has remarked of Greenberg that he does not simply have his finger on the pulse of America, he’s got an IV jammed into the vein. In any event, here’s a quote from the memo, and the not-so-positive effects of the weak dollar are pretty apparent.
In the focus groups, we handed people a page of positive facts about the economy – and we nearly had to rescue the moderator from the disbelieving and angry participants. In fact, before this exercise, we asked people to write down two important things happening with the economy and none of the 40 participants said anything positive, with their negative notations centered on the high “cost of living.” …
Indeed, the very invisibility of their issues is for them evidence that this economy works for the big economic actors, not for average Americans: “this applies to a bigger business and the wealthy”; “it’s about big business, not the little guy”; “CEOs at the top of corporations worrying more about themselves instead of their companies”; “yes, thank you”; “It is not for the average family”; “this is probably true but not for us.”
The potential for a populist backlash would seem pretty strong here I’d say, and the implications of that for the stock market do not seem overwhelmingly positive.
Rgds.
Quote: “CHICAGO (AP) — Food maker Sara Lee Corp. said Wednesday its fiscal first-quarter profit fell 40 percent due to higher commodity costs and an increase in marketing and advertising spending.”
Looks like inflation, too, is “contained”.
With the stories about home heating oil – and gas – prices, I’ll bet those folks that were so concerned about “flag burning” – and “gay marriage” – in 2004 will be looking to burn anything to keep warm and drive their pick up.
They may even stop thinking about “licenses for illegals” and start thinking about the administration’s strong dollar policy.
Looks like the weak dollar is not shoring up stocks anymore. say what? maybe B-52 Ben will cure a sinking dollar with another rate cut. He is good at making up theory, er, I mean stories (savings glut). If we are the recipient of a huge savings glut, then why is the dollar tanking, Ben?
When rates start rising because of falling dollar, watch out.
Moin from Germany,
here are some inflation news from the UK
UK BRC Shop prices index posts large increase in October on food prices
FXstreet.com (Barcelona) – Inflation at consumer level has posted the biggest increase of 2007 so far in October in the United Kingdom pushed by the rising costs of fresh food which filtered to overall prices index, according to the latest shop prices report published by the British Retail Consortium.
Prices have increased 1.1% in October compared to the same month last year, this is the highest year-on –year increase seen so far in 2007, sharply larger than the 0.4% rise seen in September. Food prices, the major contributor for the increase, have risen 3.7% on the year.
On the month, shop prices have increased 0.5% after the 0.2% increase posted in September, caused mainly for the 1.4% monthly rise in food prices the highest increase in food since records were collected in December 2005. Excluding food prices, prices of all other products remained unchanged on the month.
The sobering fact is that Oil is effectively being priced in EUR even though _still_ quoted in USD. Still, but for how long?
MHM writes:
The sobering fact is that Oil is effectively being priced in EUR even though _still_ quoted in USD. Still, but for how long?
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This is an interesting obervation. Canadians are taking notice of the strength of the looney, which is ridiculous–the looney isn’t strong, the dollar’s weak.
If you took the individual stock prices of the S&P 500 (or any index) from six months ago and multiplied them by outstanding shares, then expressed them in euros, and compared the same figure for today’s prices (again in Euros), I wonder if the stock market has really entered a meltdown.
“Think about all of the brainiacs who have been begging for rate cuts — and from historically moderate rates — over the past 2 years. Be sure to thank them for the reckless disregard for your wallet.”
Yet, Wall Street wants even more interest rate cuts.
“Wall Street Is Pressing Fed For More Rate Cuts” http://www.cnbc.com/id/21656342/site/14081545
Inflation is coming from emerging countries increased demand for resources.
For a long time the US benefitted from surprisingly low inflation by outsourcing to these countries with their vast, cheap supply of labour.
Now that chicken has come home to roost. These labourers are starting to consume hence the pressure on all sorts of commodities.
In other words, I think we are witnessing demand pushing inflation higher. The Fed is not to blame for this.
Admittedly the impact on the US may be exacerbated by the surplus of USD held by foreigners. But this surplus has existed for a long, long time. It is only now with the increased global demand that the USD has come under attack.
Any commments?
And Wall Street may just get more cuts…
“Fed chief caves in to Wall Street” http://articles.moneycentral.msn.com/Investing/JubaksJournal/TheFedsNewestChiefIsAWuss.aspx
The proper diagnosis for this stock market is Bipolar Disorder, defined according to Wikipedia “as recurrent episodes of significant disturbance in mood.” Today the worry shifts back to the deteriorating US$ as the $ index is having its biggest one day drop since April 17th ’06, falling to another record low after a top Chinese official said with respect to diversifying their reserves, “we will favor stronger currencies over weaker ones, and will readjust accordingly.” The $ is “losing its status as the world currency.” The implied inflation rate in the 10 yr TIPS is now up to 2.45%, the highest since mid June. Bernake’s attempt to put out one fire has fanned a fire somewhere else. ABC confidence was unch at -15. Mortgage apps were mixed with refi’s down 3.2% and purchases flat. Q3 Productivity and Wholesale Inventories out today. 5 Fed members speak today.
For those who are seeking a bit more regarding oil
“Supplies at the much-watched Nymex delivery terminal in Cushing, Okla., fell by 1.7 million barrels last week.”
Take that into contrast against the amount of canceled contracts in the front month of crude oil.
Ciao
MS
Pundits essentially live in a free lunch world. They make their living by giving their opinion, which everyone else does for free. Of course, they have to have the “right” opinions by their paymasters’ criteria…
Barry,
Dick Green from Briefing.com usually writes well-balanced pieces about the economy at large.
My big surprise was to read is latest blurb
“The Credit Crunch and Other Market Myths”
where one can read priceless tidbits like:
http://tinyurl.com/ys43xl
1) “Another myth that needs debunking is that a weak dollar is bad for U.S. stocks.
The facts are that a lower exchange rate for the dollar: 1) increases U.S. exports, and 2) increases the dollar value of overseas profits of U.S. multinational firms. These facts are indisputable. Both are unquestionably bullish for U.S. companies that export or have overseas operations.
The argument that a lower exchange rate is bad for U.S. stocks seems to be based on the general arguments that it will lead to higher U.S. inflation, might lead to lower demand for U.S. stocks from overseas investors, or that it somehow mystically reflects unknown weakness in the U.S. economy.
There is no data to support any of these arguments. In fact, the hard data of the past five years refutes these arguments.
Over the past five years, the exchange rate of the dollar has fallen 30 percent against the euro. During the same time, the S&P is up 87%, the U.S. economy has grown at a 2.8% compound annual rate, inflation rates have fallen, (GUESS HE’S TALKING ABOUT INFLATION EX-INFLATION) and overseas demand for U.S. stocks has not wavered.”
2) “The Myth of the Large U.S. Budget Deficit
Here are the facts: 1) The U.S. budget deficit is low, and shrinking. 2) The total debt burden of the U.S. is declining.
The U.S. budget deficit for the fiscal year ended September was 1.2% of GDP. That is about half the average of the past forty years.
It has been shrinking steadily since fiscal 2004 when it hit 3.5% of GDP. It was 2.6% in fiscal 2005, 1.9% in fiscal 2006, and is now down to 1.2%. That undeniable downtrend is good news that has garnered virtually no press attention.
A surge in tax revenues the past few years accounts for the decline in the deficit. Revenues were up 6.7% in fiscal 2007. Expenditures rose at the slowest pace in 10 years and were up just 2.8%. (Yes, this includes all defense expenditures including those related to Iraq).”
3) “The Myth of the Credit Crunch
Companies holding these assets (CDOs and the like) must take charges to earnings to reflect the decrease in value. This is what is happening at Citigroup, which is going to take a huge hit to earnings as they write-down the value of their collateralized debt obligations (CDOs).
But, the revaluing of these assets downwards is NOT A CREDIT CRUNCH. A credit crunch occurs when banks are restricting lending to borrowers that would normally receive credit.
To date, there has been no restriction in the availability of credit outside the subprime mortgage area (where it should have been restricted a long time ago).
In fact, there has been a surge in credit in recent months. The chart below shows that total bank credit has exploded at a 12% annual rate the past seven months.
This means that the write-down of CDO assets is a problem almost entirely isolated to the financial sector and companies holding those assets. This will not drag the economy into recession.
Of course, the financial sector is very important to the overall stock market. We remain very concerned about the profit outlook at these firms for the fourth quarter. Lackluster or poor performance in this sector, which makes up 20% of the S&P 500, will be a major drag on the overall index.
However, the problems in the financial sector are not a reason for panic to spread to other sectors.”
I feel so much better now!
Francois
MS, does it strike you as at least interesting that so many seem unaware of how price formation takes place in the oil markets but, instead, continue to believe in efficient market type models?
I see that Clown Kudlow on whose show you appear from time time, well we all have to make a living somehow, is now running around screaming about the decline of the dollar. A month ago he was screaming for Fed cuts, well he got em and see what happened. This guy is a total joke.
I wonder if that self-serving, loud-mouth bastard Cramer read this.
I don’t even know who Dick Green is but I know he’s not too bright. He acknowledges that the dollar has lost 30% of its value in the last 5 yrs. (and that’s before the current slide) but says that doesn’t matter.
Well Dick, if you think the fact that $100,000 in 2002 is now less than $70,000 (ceteris paribus) then you might as well go watch football.