Inflation? What Inflation?

A tale of two headlines:

Inflation Fears Hit Eurozone

          and

Goldman Sees Funds Rate Cut to 3%

Won’t someone please explain this to me?

How is it possible that the regions of the world with strong currencies — like Europe, U.K., Australia, and Canada — are having inflation problems. And yet at the same time, the nation having a record low currency — i.e., the United States and our Dollar — doesn’t seem to either inflationary pressures (At least according to official CPI data). And we seem to have little concern about further currency induced price increases.

Am I the only person who finds this incongruent?

If Goldman Sachs is correct, and the Fed does eventually cut rates to 3% — what might that mean for various dollar priced commodities like Oil & Gold?

Probably very little — if (and this is a big IF) we are in the throes of a recession. But what if the Bulls are right, and this is merely a mild mid cycle correction?

A 3% Fed rate could mean Oil at $150 and Gold at $1200.

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Excerpts after the jump . . .


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Sources:

Inflation fears hit eurozone

By Ralph Atkins in Frankfurt and Krishna Guha in Washington
FT, November 27 2007 18:02
http://www.ft.com/cms/s/0/55ff8ca6-9d10-11dc-af03-0000779fd2ac.html

Goldman Sees Funds Rate Cut to 3%
Greg Ip
WSJ, November 27, 2007, 9:26 am
http://blogs.wsj.com/economics/2007/11/27/goldman-sees-funds-rate-cut-to-3/

>

>

WSJ

Goldman Sachs says the Fed will cut the federal funds rate
target to 3% by the second quarter of next year from 4.5% now to
“forestall recession.”
 

That’s down from its previous forecast of 4%. The worsening
housing slumped has upped the odds of recession to between 40% and 45%,
the firm says in a note to clients today, from 30%. The firm sees the
economy growing an annualized 1.5% this quarter and just 1% in each of
the first two quarters of next year but to avoid recession thanks to
this more aggressive response from the Fed.
"
 

FT:

"Energy and food prices pushed inflation in Germany this month to the
highest level since at least 1995, leading economists to forecast the
annual eurozone figure, released today, would reach 3 per cent or above
for the first time in more than six years. That would pose a serious
challenge to the ECB, which pledges to keep inflation "below but close"
to 2 per cent.

Soaring eurozone inflation is threatening fresh difficulties for the
European Central Bank as it fights to calm tensions in financial
markets that are casting a shadow over economic growth in the
13-country region

The Federal Reserve faces a similar dilemma in the US, where
consumer price inflation hit an annual rate of 3.5 per cent last month,
and could approach 4 per cent in the coming months, in spite of sharply
slowing growth.

The Fed does not have a formal inflation target, and puts more store
than the ECB on the lower underlying rate of inflation excluding food
and energy. But it is concerned that high overall inflation could
unsettle inflation expectations.

Moreover, unlike the ECB, the Fed has to worry about the effects of
currency weakness on prices. The Federal Open Market Committee is torn
between these inflation dangers and pressure for further rate cuts to
deal with mounting risks to growth from the financial markets.

Two hawkish regional Fed presidents on Tuesday underscored their
reluctance to cut interest rates at the next policy meeting in
December. Charles Evans, Chicago Fed president, said the Fed judged the
risks to growth and inflation as roughly balanced at its last meeting
and added "my reading of the data since then continues to support this
risk assessment". Charles Plosser, Philadelphia Fed president, said the
US economy would bounce back and warned that providing insurance on
growth through rate cuts "creates its own set of additional risks".

However, analysts close to the Fed believe vice-chairman Don Kohn
will use a speech today to pull the US central bank back from its
confrontation with the markets over the outlook for the economy and
interest rates.

Mr Kohn is expected to acknowledge that the risks to growth have
increased due to the relapse in financial markets since the Fed’s last
meeting, while reiterating that it still takes inflation risks
seriously.
US consumer confidence in early November fell to its
lowest level since the aftermath of Hurricane Katrina, the Conference
Board said on Tuesday, while the S&P Case-Shiller index indicated
house prices fell at their fastest rate in more than two decades in the
third quarter.

US investors brushed aside this data and pushed the
S&P 500 up 1.5 per cent as oil prices fell 3.4 per cent and banks
were boosted by a $7.5bn investment in Citigroup by the Abu Dhabi
Investment Authority. Bond prices fell, pushing yields higher, after a brisk bond market rally on Monday.

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What's been said:

Discussions found on the web:
  1. Lloyd commented on Nov 29

    Maybe the Euros actually include things that matter in their inflation calculation. Since I don’t believe the US gov’t inflation stats, I surely don’t believe the real GDP figures.

  2. Sammy20 commented on Nov 29

    Ugh, I can’t stand Dennis Kneal!!!….Can’t someone keep this idiot off television. It is like analysts have to explain right & wrong to a 2 year old.

  3. justin commented on Nov 29

    I think they have him on ther precisely for the reason you mention. Most investors who listen to CNBC are at the two year old level and want to spoon feed everything.

    To get back to the question at hand: The Bulls are not right because, they believe that this market can keep going up, up and up without a consumer. Real household cashflows have fallen to zero. It doesn’t matter that the FED is going to cut…cut away FED, cut, cut, cut!

  4. ken h commented on Nov 29

    Barry,

    Appreciate your blog.

    I think the relevance of the Fed is nil. He could cut to zero and I think it will make little difference. I know CNBC is a joke but Rick S. had a great point yesterday. “what is the point of greasing the gears if the motor ain’t running.”

    I think he maybe already pushing on a string?

    Funny story, yesterday in my practice a patient was eyeing the rate cuts as he would like to buy a home. He is well known to us as he often talks about CC companies hassling him over his bad debt and failure to pay. Fact is,…they could cut to zero and this guy will never qualify. Regardless of what politicians say…everybody does not deserve a home!

    A far as oil,…I just don’t think it’s possible. Just like homes, the market will not support it and OPEC knows this. There is just going to be point that they over shoot a lose money because consumption will decrease,…period.

  5. W.Edwards commented on Nov 29

    Stagflation. Nothing else need to be said.

  6. Philippe commented on Nov 29

    May be the title says it all! Europe and Canada etc do not have Goldman Sacks

  7. ken h commented on Nov 29

    “A far as oil,…I just don’t think it’s possible.”

    Spoke too soon!

    http://www.cnbc.com/id/22012408

    Spoken in my best James T. Kirk voice.

    “Got to keep this oil bubble going Scotty, Gimme all you got!”

    To all the oil pigmen, didn’t go to family get together over Thanksgiving and told them to stay home for Christmas. Hey just doing my part? This FINGER’S for YOU!

  8. Dale commented on Nov 29

    Dollar Rises Against Euro, Pound on Outlook for U.S. Growth

    By Gavin Finch and Stanley White
    Nov. 29 (Bloomberg) — The dollar rose against the euro and pound after Goldman Sachs Group Inc. said the U.S. currency’s decline is coming to an end.

    The dollar also gained after China Investment Corp., the $200 billion sovereign wealth fund, signaled it may invest in finance companies hurt by loan defaults. Economists forecast a report today will show U.S. third-quarter economic growth was faster than the Commerce Department forecast.

    “There is too much pessimism priced into the U.S.,” said Jeremy Stretch, a senior market strategist at Rabobank Groep in London. “We’re not seeing anything that points to the U.S. heading for a recession. Equities are doing well and that’s spurred some renewed appetite for the dollar.”

    The U.S. currency, which has fallen 11 percent on a trade- weighted basis this year, climbed to $1.4737 per euro at 8:16 a.m. in New York, from $1.4841 yesterday. It also gained to $2.0626 versus the pound, from $2.0823. Against the yen, the dollar traded at 110.06 from 110.03.

    Goldman advised investors to sell dollar-denominated gold because of expectations the risk premium on bank credit will ease and the dollar will stabilize.

    “We would now use a short exposure in gold, expressed in U.S. dollars, to capitalize on a gradual relaxation of credit concerns in the financial sector over the coming months,” Goldman analysts led by Jim O’Neill in London wrote in a report yesterday. Selling gold will also provide “an avenue to benefit from the prospect of a stabilization in the dollar.”

    So we get lower rates AND a stronger dollar.
    How can they actually believe this stuff…

  9. slrnrg commented on Nov 29

    C’mon. The role of government and the corporate elite is to feed you the same excrement from the cradle to the grave. Your job is to figure out same and start thinking for yourself. Here are the REAL problems facing the US and its very survival over the next 5 years:

    1. Peak oil
    2. Peak oil
    3. Obesity

    Anyone who believes that our government has any kind of plan to deal with these three problems has been playing with too many recreational pharmaceuticals.

    Luckily, the first two problems will take care of the last.

  10. a5 commented on Nov 29

    The U.S. has been altering the truth via bogus data for a long time now…

    We have no inflation, we’re winning the war, Americans are better off than they’ve ever been, GDP is strong, everyone has a job, kids are getting a great education.

    Turn on the big TV, man, just watch a show and be happy.

  11. 22365633 commented on Nov 29

    Bernanke can’t control either the credit crunch or inflation to any great extent. He sees deflation as his biggest threat. He will cut until he sees that threat dissipated or he is out of ammo. The mortgage mess is here and isn’t going anywhere. He can’t prop up house prices, because he can’t raise wages.

    The aspect he needs to get right this time is knowing when to raise the rates back up.

  12. zao commented on Nov 29

    When Goldman Sachs tells their DC office (known popularly as the Fed) to lower interest rates, they do not question the wisdom. It is bonus season after all.

  13. Saviano commented on Nov 29

    You point to gold and oil … but if the fed is inflating (it seems so) – what about stocks? Inflation will favor nominal stock prices as well. Why – correct me if am wrong – the bearish view?

  14. justin commented on Nov 29

    Dale, how much of what Goldman says is a red herring, wanting the individual investor to buy while they and their cronies sell? I’ve been watching the volume second by second in several stocks lately, and it appears that there is strong selling into upticks and they seem to be spaced just enough to optimize their basis.

  15. D. commented on Nov 29

    Peak oil people…

    Humans have never been able to price commodities properly. Go read up on Easter Island. Someone actually cut down the last tree! Don’t tell me they didn’t see it coming.

    If the wheat harvest is extra crap next year, do you really think that fact is going to be in the price this year?

    Even if our oil wells are to dry up in a decade or 3, oil prices won’t represent that fact until the very end. Too many people out there with rosy glasses and too many evil doers looking for a short term gains.

    For example, even if peak oil is true and wells are to dry up, it didn’t stop it from going to 10$ in 99.

    When the world economy slows, the liquidity crunch will get speculators out and industrial demand will drop. Oil will drop to its break even cash cost of 40-45$

    Commodities always end up tanking below their break even cash costs. Until the world is convinced of a slowdown, and excess liquidity is sucked out, it could keep on creeping up and that has nothing to do with peak oil.

    Although, peak oil believers will think it’s because of scarcity.

  16. Neal commented on Nov 29

    3rd quarter GDP up 4.9%, deflator 0.9%.

    As valid as tractor ptoduction statistics from the peoples glorious republic of the Soviet Union.

  17. ferd mertz commented on Nov 29

    “it’s our currency, but it’s your problem” so we’ll let the chinese, saudi’s , et. al., decide when enough is enough and when inflation is a problem.

  18. Rich_Lather commented on Nov 29

    1. Peak oil
    2. Peak oil
    3. Obesity

    With liposuction, the 3rd can take care of the first 2.

    It would be interesting to read an in-depth analysis of the Japanese recession, since it appears to be one of the possible scenarios for our economy. We’ve already had the RE boom, and now, we seem to be moving into the Central Bank liquidity trap era.

  19. Stuart commented on Nov 29

    Barry, wrote “If Goldman Sachs is correct, and the Fed does eventually cut rates to 3% — what might that mean for various dollar priced commodities like Oil & Gold?”

    Now upon considering the above, it was reported on BNN (Canada’s CNBC equivalent) that Goldman recently advised shorting gold. Go figure.

  20. D. commented on Nov 29

    We’re headed for a slowdown. There will be a loss of confidence in corporations, spreads will go up. Government will be needed to prop up the economy… lower rates will be like pushing on a string for the corporate world but will help the government pick up the broken pieces.

    Welcome to American style socialism. The gains are for the elite and the losses for the masses!

    That’s what happens when you denounce socialism yet introduce social policies through the back door. America is a package of screwed up socialism labeled as free market capitalism.

  21. Boom2Bust.com commented on Nov 29

    “…the United States and our Dollar — doesn’t seem to either inflationary pressures (At least according to official CPI data).

    See John Williams’ “Shadow Government Statistics”
    http://www.shadowstats.com/cgi-bin/sgs

  22. hal commented on Nov 29

    The Fed is like a doctor dealing with a terminal patient–keep giving drugs so the patient checks out happy.

    And CNBC is the nurse adminsitering the drug.

    The fed members get more face time (spinning) on tv than the President.

    Wait till the public learns the asset backs cover more than mortgages.

    Does anybody know by how much this winters sales are done by credit card versus cash–I am assuming its more and more.

    Given madison steet ads–where its embarrassing to pay with cash, it has to be up and that means come January there wil be a lot of long faces when the monthly stmts come rolling in.

    BTW-if the fed home loan bank gave countrywide 51 billion, how much is that for every tax paying US citizen?

  23. Philippe commented on Nov 29

    Amazing to read so often this sentence « privatisation of profits and socialisation of losses » it belongs to Jules Moch French socialist deputy whom through several books was vilipending the capitalist system and the trusts (Confrontations) Galimard 1952 among others.

  24. doug commented on Nov 29

    Greater marginal supply of dollars does not create generalized domestic inflation because only a fraction of that new supply chases the usual basket of domestic goods. More than a trillion of it is held by foreign central banks, hundreds of billions is held by individuals residing overseas, hundreds of billions of it went into housing, hundreds of billions is used to chase commodities trading on the global market and tens of billions got skewed into the top 1% of the U.S. who even though they have 10 times as much money, do not buy 10 times the number of televisions.

  25. s commented on Nov 29

    There is a fantastic article on Minyanville titles “Socialism for Wall Street” [http://www.minyanville.com/articles/socialism-banks-DJIA-Bernanke/index/a/15035]

    that is spot on in its analysis of what is transpiring. I thought it was curious this morning thast the Gov’t annouced it would open the SOR to accomidate for any disrpution to the refiners. The gov’t is so desperate to to avoid a headline and is doing everything barring outright fraud to meets its ends. This as the article attached states, being executed by unelected and unaccountable officials.

    To the point on Goldman on gold, I suspect this is yet a continuation of the corruption theme. The entire Bretton Woods II system is in such disequilibrium that the rate cutting by the fed will have to be met with global coordination to protect the dollar and that is what Paulsen spends his days working through. You can bet that he is trading away some future compeitive advanatge for a near term fix in typical pax americana tradition. Expect the gov’t to keep a lid on gold as best they can via open market operations (globally coordinated) if only to thwart the signaling effect.

    This strategy is so emblamatic of how totally bankrupt our system is.

    I would add that the only caveat to this article is that inflation in wages is what we need but is not going to happen anytime soon. Therefore inflating assets and using the banks ti intermediate that welath in a multiplier fashion will not work.

  26. slrnrg commented on Nov 29

    “For example, even if peak oil is true and wells are to dry up, it didn’t stop it from going to 10$ in 99.”

    1. Peak oil was not a problem in 1999 (I think you’re referring to late 1997). Supply still outstripped demand.

    2. Oil went to $10 because of a fabricated supply glut. The oil was never there. Google “paper barrels”.

    “Even if our oil wells are to dry up in a decade or 3, oil prices won’t represent that fact until the very end.”

    3. Peak oil is not about wells drying up.

    4. Your logic wrt commodity pricing does not take into account a permanent scarcity of supply.

    5. If you truly believe that oil prices will remain moderate until we are down to worldwide production of 1mm barrels/day, then I need to get my hands on whatever you’re smoking.

  27. michael schumacher commented on Nov 29

    >>I thought it was curious this morning thast the Gov’t annouced it would open the SOR to accomidate for any disrpution to the refiners>>

    No points for spelling but I digress…

    Bush opening up the SPR just means that he has a chance to have his buddies sell oil to the gov’t at over $90 a barrel…..you don’t think he would miss an opp. to enrich more of his friends would ya??

    Ciao
    MS

  28. Alfred commented on Nov 29

    I am understanding the confusion. I am using common sense to explain it. The FED is between a rock and a hard place. They do not want to cut rates because inflation is of course as hot here as it is in Europe. They donot have a choice, so they think, in the current market crisis. The price would be to high to let Wall Street go where she did not go for a long time (revisit Great Depression). The question is not, “will the FED cut rates”. The real .question is, “Will the BoE and the EZB keep rates steady or give in to the pressure.” My guess at some point they will follow the FED.

  29. Jordan commented on Nov 29

    Barry,

    Gold does best during recessions and credit crunches. If rates are cut to 3% gold will outperform everything, as it is doing now. Recession or not….doesnt matter, golds going much higher.

  30. Christian Gross commented on Nov 29

    I don’t trust Goldman-Sachs further than I drop a stone….

    Now about inflation not existing in the US, but it does everywhere else is something that surprises the heck out of me as well.

    There is a saying, if it looks too good then it is…

  31. Contrarian Investors’ Journal commented on Nov 29

    Well, price inflation is measured by the CPI. But the problem is, the CPI is just a statistical measurement that is susceptible to hacks and arbitrary methodology as well. In other words, you can torture the numbers anyway you want to produce the result you want to see. The Austrian School of economic thought has serious reservation on the validity of the CPI (or any price index):
    See “How much can we trust the price indices (e.g. CPI)?” @ http://cij.inspiriting.com/?p=305

    Therefore, if you measure the CPI in US the way it was done 20 years ago, the price inflation figure will be way much higher.

    The whole thing seems contradictory, but if you understand the economic theories from Austrian School of economics, it makes sense. In my article, “Inflation or deflation first?” @ http://cij.inspiriting.com/?p=126, I wrote,

    “If you have been with us long enough, you may have heard us mulling over both the threats of inflation and deflation on the global economy. You may be wondering whether we are contradicting ourselves. How can both threats exist simultaneously? Since one is a general rising of prices and the other is the opposite, are they not mutually exclusive?”

    More details on that post.

  32. Pat Gorup commented on Nov 29

    “Therefore, if you measure the CPI in US the way it was done 20 years ago, the price inflation figure will be way much higher.”

    You’re right, it is around 12%. The FED will continue to cut rates, give “ninja” loans to companies like CFC and perform repos, inflating our currency & therefore exporting inflation to other countries who in one form or another do business in U.S. dollars. Also oil’s price around the world is based in U.S. dollars which creates more inflation. There is a huge short position in gold and silver bullion and that is why neither of those commodities have moved up as much as they are going to. (This is fact not a conspiracy theory).

  33. BDG123 commented on Nov 29

    It’s easy to explain. You just need to think about it. You have the answer and you don’t even know it. This is a deflationary world.

  34. Bodz commented on Nov 29

    The 10 year bond is yielding 4% and falling. If you don’t believe the cpi then you have to believe the bond market. The foreclosure wave is pulverizing all those $$$ out there. The economy is now deflating. Who knows, maybe the disinflationary trend that started in 1982 has not ebbed during the last recession ? Anyway, I see a recession in 2008, and with the Fed lowering rates thru 2008, an inflation problem in 2009 onwards.

  35. Alice Cook commented on Dec 4

    It is as if all the lessons that 1970s taught us about monetary policy have been forgotten. Here, I am talking of the simple lessons like if a central bank prints more money, it will get more inflation.

    The whole idea that a cut in interest rates will stimulate growth as decisively rejected 20 years ago. Perhaps, a better way of reformulating your question is to ask “why does the Fed think that an interest rate cut will boost output?”

    Alice

    http://ukhousebubble.blogspot.com

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