Screaming Hot Producer Prices

Jan_08_ppi
chart via brian jacobs

>

After too many months of inflation data telling anyone with a barely functioning cerebral cortex that significant price inflation was at hand, this month seems to have jarred the denialists into a very belated recognition of reality.

As the delightful chart porn above shows, the costs of materials for food, energy and finished goods is up significantly.

Bloomberg notes:

"Prices paid to U.S. producers rose
more than twice as much as forecast in January, pushed up by
higher fuel, food and drug costs, signaling inflation may keep
accelerating even as growth slows.

The 1 percent increase followed a 0.3 percent drop in
December, the Labor Department said in Washington. The median
forecast in a Bloomberg News survey of economists was for a 0.4
percent gain. Excluding food and energy, so-called core
wholesale prices climbed 0.4 percent, the most in almost a year."

Here’s the money quote from BLS:

"From January 2007 to January 2008, the index for finished goods moved up 7.4 percent.  Over the same period, prices for finished energy goods climbed 22.6 percent, the index for finished consumer foods rose 8.3 percent, and prices for finished goods other than foods and energy advanced 2.3 percent. For the 12 months ended January 2008, the index for intermediate goods increased 8.8 percent, and prices for crude goods jumped 31.3 percent."

Jeebus! Finished energy products, +22.6%! Finshed consumer goods, +8.3%

Lag this . . .

>

Sources:

Producer Price Indexes – January 2008
http://www.bls.gov/news.release/ppi.nr0.htm

Producer Prices in U.S. Increase More Than Forecast
Bob Willis
Bloomberg, Feb. 26 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOQJ_vlxPtvE&

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Lloyd commented on Feb 26

    Well I live in a world where I don’t need to consumer oil/gas and I don’t eat, so I’m fine. Obviously, margins can also stay at record levels since inflation isn’t a concern for corporations.

  2. Mike M commented on Feb 26

    This can only end badly for the economy if prices for needed goods such as food and energy continue to rise. As consumers continue to tighten their belts, many other companies will struggle to sell their goods/services.

  3. Trackerman commented on Feb 26

    Inflation! What inflation??

  4. Northern Observer commented on Feb 26

    Mr Ritholtz,
    Can you comment on this? I saw an analyst from JP Morgan on Bloomberg this morning (an irish guy) and he said “without wage inflation, there can be no inflation”

    My thought was that at some point this is not true. Or if the wages do stay flat you get impoverishment and recession.

    What say you?

  5. Marcus Aurelius commented on Feb 26

    Posted by: Northern Observer | Feb 26, 2008 11:48:34 AM

    ____

    You get stagflation.

  6. Karl Smith commented on Feb 26

    There is still some possibility that this will feed through more as collapsing profit margins than higher consumer prices but the spillover looks almost impossible at this point.

    The Fed should now begin to talk about paradigm shifts in commodity prices. That is, how does the Fed see the possibility that we are shifting to a new higher equlibrium, if such a shift is underway when do they expect it to be complete and lastly what do they feel is appropriate monetary policy in the face of such a shift.

    For the US perspective the problem is not so much that money supply and hence nominal demand are growing rapidly but that commoditity supplies are effectively shrinking.

    Should monetary policy exacerbate the growth effects by not loosening. Or, should we accept this shift. At the core of this argument is the question of “Why not Inflation?”

    Is inflation bad in and of itself or because it is asssociated with sub-optimal growth and distortions in financial markets.

    If its the latter, we continue to ease. If its the former, the we have to consider battening down all the hatches and suffering money that is tighter than we hoped in an environment of weakening credit.

  7. Marcus Aurelius commented on Feb 26

    I think I’ll coin a word:

    Snagflation

    Think ‘rusty nail’.

  8. michael schumacher commented on Feb 26

    And in the face of all this discussion the market gets hijacked (again) to the tune of a hundred points.

    When are people going to get “hip” to this???
    This is what is really causing problems, not the lying or deceptive numbers….it’s what is done to the market in the face of the news.

    The damage being done will be monumental if it is not stopped.

    Caveat Emptor should not be a strategy but it is rapidly replacing any rationale thought process. Look at today’s headlines……we’ve got another bottom (the second in less than 24 hours)

    The blatant juicing of the futures overnight or on any “bad news” is what needs to stop….

    Ciao
    MS

  9. Mr. Obvious commented on Feb 26

    Helicopter Ben is getting squeezed between that rock and that hard place, for sure.

    Mr. Market is rallying before his next statement. Mr. Market has already priced in a .50 cut. But the inflation numbers are getting ugly.

    Buy the hope sell the news?

  10. Vermont Trader.. commented on Feb 26

    A lagging indicator is an indicator that tends to respond to an economic slowdown AFTER the slowdown has already started.

    It has nothing to do with when the data is released vs. the measurement period.

    In every recession in the last 45 years, the year over year change in CPI peaked after the reccession has already started.

    You still haven’t convinced me that it will be different this time.

    SO what is it going to be? Global reccesion or accelerating prices?

  11. mw commented on Feb 26

    Larry Kudlow was seen recently wheeling the visibly lifeless body of a young blond girl in an office chair in downtown New York When asked by a nyc cop “WTF was going on” he replied ” This is Goldilocks and I am taking her to pick up her $600 Stimulis Package check… I know this has very little to do with Stagflation, Just thought a good laugh might help..

  12. Al Czervik commented on Feb 26

    So anyone know what the all time record is for consecutive up bars on a 10 minute SPY Chart? Right now we’re at 10 and counting. Shameless, LOL.

  13. michael schumacher commented on Feb 26

    Anyone know what “happy news” just hit the tape???

    Another bailout we are supposed to be celebrating?????? for the 10th time now??

    let’s push the market up right before the piggies report the latest “surprises”

    all too easy to see..

    Ciao
    MS

  14. Mike M commented on Feb 26

    Vermont Trader, you are correct. We are currently experiencing a transition from stagflation to deflation. As debt destruction continues, the money supply will contract, and a HARD recession will happen. This will be deflationary. If the high consumption American becomes a serious saver (highly likely), look out!

  15. Prophet of Profit commented on Feb 26

    As of 12:20pm, the Dow is up 143 points on good news that:

    1) Home prices plunge at record rate in 2007
    2) Producer prices up sharply in January
    3) Feb consumer confidence slumps to 5-year low
    4) January foreclosures up 57 percent in year

    Thank you Plunge Protection Team! You’re so damn predictable you helped me hit a home run today with bases loaded! Keep up the good work!

  16. Francois commented on Feb 26

    Hmmm! Such an “abnormal” inflation reading can’t be good for assets prices. Something’ll have be done about that.

    Somehow, I get the weird feeling we’ll need to dig even deeper into the BLS hedonic adjustments footnotes pretty soon.

    Or maybe more stuff will be transfered from the in-inflation to the ex-inflation section.

    As we had CDO and CDO-squared, we may end up with ex-ex-inflation, or outright exflation.

    Sux2bBen right now.

  17. michael schumacher commented on Feb 26

    al-

    Just glad to see that I’m not the only person who sees that today, yesterday, friday….
    It IS shameless and needs to stop…..all too easy to connect the dots back to the order flow. But they wouldn’t want to do that….

    Ciao
    MS

  18. N commented on Feb 26

    This is all awesome!

    Fake-CPI above fed’s comfort zone!
    PPI at 26 year highs!!
    Consummer Confidence at 75!
    Property prices going down!
    Most World economies slowing!
    Oil hitting $101 today!
    T-Yields risings again
    Gold getting closer to $1000

    …and yet! equity markets rally just because it is quarter-end for a few big boys/brokers?! Hail free markets!!

  19. Joe Klein’s conscience commented on Feb 26

    Prophet:
    Yahoo News says it is because IBM annoucned a $15 billion share buy back plan. At those prices?

  20. Stuart commented on Feb 26

    Go gold! ya.

  21. wally commented on Feb 26

    This is a really tough spot for the Fed, as I suppose has been obvious for quite some time. They have no selective powers – they can pick ‘forward’ or ‘reverse’. They picked ‘forward’ to bail out a selected part of the economy – which they really cannot effectively do. To control inflation they need to pick ‘reverse’.
    They can’t win.

  22. Donaldo Rodrigues commented on Feb 26

    Barry,
    Is your spam filter looking for specific words? It wouldn’t let me post my comment.

    Donaldo

  23. Andrew commented on Feb 26

    The fed cannot do much here, since the economy went global, raising rates is unlikely to have any real effect on the inflation in commodities, yet it would kill housing/the consumer. The fed is cutting in an effort (and who knows if it will be successful) to keep the US economy somewhat afloat and out of an asset deflation spiral.

  24. Mr. Obvious commented on Feb 26

    Look’s like there really is another cut coming:

    A top Federal Reserve official said Tuesday that the danger the U.S. economy will weaken further is a bigger worry than higher inflation, and the central bank has tools and is ready to do what it needs to respond to “difficult times.”

    “I do not expect the recent elevated inflation rates to persist,” Fed Vice Chairman Donald Kohn said in a speech at the University of North Carolina at Wilmington.

    “In my view, the adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States.”

    The recovery in shaky financial markets is likely to take time, and the correction in the beleaguered housing sector has further to go, Kohn said.

    Although he expects recovery after a sluggish period, policy-makers must take into account the possibility of “very unfavorable developments,” he added.

    “We have the tools,” Kohn said. “As Chairman Bernanke often emphasizes: We will do what is needed.”

  25. Ben commented on Feb 26

    Dennis wins. I need a 70’s”WIN” badge. I love Dennis as always!

  26. Steve Barry commented on Feb 26

    Despite the staggering economic and housing stats of today, Dow is up 160…but wait…I predict it will close deep in the red. Dow 10,000 within weeks.

  27. Al Czervik commented on Feb 26

    fwiw, the last two rallies terminated when the VIX hit the (rising) 200 day. We’re almost there now. Will be interesting to see if the boyz give it up there again or, if not, what the new floor will be; 20?, 18?, all the way back to 16?

  28. BDG123 commented on Feb 26

    The only way to get sustainable inflation is through wages. Period. Of course, unless we see the Feds debase the currency through unrelenting monetary expansion. That is NOT happening. And, I wish those citing M3 would go take a nap. What we are seeing is not sustainable. And, inflation is indeed lagging. Very lagging. Verrrrry lagging.

    What we are seeing is Wall Street ramming commodity prices on the global inflation trade. The U.S. is experiencing deflation which it is going to soon be exporting to the rest of the world. What we are witnessing now is likely the last hurrah before the commodities collapse. Laaagggiinggg.

    So, indeed, Barry is right. We are seeing inflation. But, it is not long for this world.

  29. donna commented on Feb 26

    Yahoo sez it’s the IBM stock buyback.

    Not sure why stock buybacks are good news, but whatever.

  30. Vermont Trader.. commented on Feb 26

    From Kohn’s speech just a few minutes ago….

    “I expect the run-up in headline inflation to be reversed and core inflation to edge lower over the next few years. This projection assumes that energy and other commodity prices will level out, as suggested by the futures markets. Moreover, greater slack in the economy should reduce pressure on prices and wages. Despite high resource utilization over the past couple of years and periods of elevated headline inflation, labor cost increases have remained quite moderate, and inflation expectations remain reasonably well anchored.”

  31. michael schumacher commented on Feb 26

    “The major averages started lower, but recovered after tech heavyweight IBM set plans to buy back up to $15 billion in stock, a move that could tack 5 cents a share on to this year’s profits.”

    Inventing profit by removing shares….

    Calling GE??? GE???

    Just like AMZN…..”we plan to……”

    Show me the shelf reg. and ONLY then it might be true…..

    That is the market we are left with…..complete and total financial engineering.

    Shameful and shameless…..

    Ciao
    MS

  32. cinefoz commented on Feb 26

    Mr Ritholtz said …

    After too many months of inflation data telling anyone with a barely functioning cerebral cortex that significant price inflation was at hand, this month seems to have jarred the denialists into a very belated recognition of reality.

    Comment. Duh? Nobody anywhere said prices aren’t rising. The debate is whether or not the Fed can control rising prices that are not a function of the money supply. Haven’t you been paying attention?

    Another debate might be how to raise productivity so that wages could grow without making the Fed fuss over monetary inflation. This would be a really meaty one if it got into the real world.

    On another note, Look at how Goldilocks is doing today. What a babe. You can’t slow her down. I don’t think the bears even register with her anymore. No wonder they’re grumpy. She ate their lunch and took off for the party. It looks like the conga line is getting pretty long and still growing.

  33. Mr. Obvious commented on Feb 26

    Look at how Goldilocks is doing today. What a babe.

    Posted by: cinefoz | Feb 26, 2008 1:21:24 PM
    ———-

    It become quite obvious that not only is Goldilocks deaf, but she is also dumb and blind.

    And even though she is a looker, I heard she doesn’t put out…..

  34. Lloyd commented on Feb 26

    With all of the bad news hitting my headlines page, I could understand why the market was up….IF….IF the market had already been pounded for months (years?) and stocks were cheap. The news isn’t all bad at the bottom of a bear market but for crying out loud the US is only off 10% from its all-time highs. This is unreal and frustrating.

  35. Steve Barry commented on Feb 26

    By the close of the market today, Goldilocks will look like this:

    Goldilocks

  36. Stuart commented on Feb 26

    Bankrate is reporting current 30-yr. fixed rate of 6.08%. A year ago rate was 5.75%.

  37. Vermont Trader.. commented on Feb 26

    according to a report by MasterCard Advisors LLC, a division of MasterCard Inc (MA).

    Gasoline demand in the last week was reported at 3.8% below a year ago, the fifth consecutive year-to-year decline.

    In the latest four weeks, demand was down 3.2% from a year earlier, following a 2.7% drop a week earlier.

    The latest four-week decline is the biggest compared with the year-earlier period for any four weeks since the period ended Sept. 22, 2006. In the latest four weeks, gasoline demand averaged 63.238 million barrels per week, the lowest four-week average since the four weeks ended Jan. 26, 2007. Michael McNamara, the report’s chief author, said that with gasoline inventories reported high nationwide and demand lagging, prices at the pump seem to be reflecting record high crude oil prices above $100 a barrel than gasoline fundamentals.

    What’s it going to be? Global recession or accerating prices?

  38. Shane commented on Feb 26

    I swear, you deflation fanatics are just as bad as the housing bulls ’05. Housings at a permanent high . . . then as housing goes down . . . “it’s a minor correction” . . . “it will be over soon” . . . etc.

    So now it’s “inflation is a lagging indicator” . . . “inflation peaks after recession starts”. . . “inflation won’t be here for long”, “you have to have wage increases for inflation”

    Hello!! As they say . . . the trend is your friend and the trend of CPI/PPI/ price inflation is UP and with interest rates low and the Fed trying to hold up banks/markets it’s not going to go down soon.

    As far as income increases . . . look 30+ years ago the average american spent 15% of their income on food . . . today <10%. And 50 years ago 20%. Increasing wages doesn't cause inflation just like it can't prevent it either. Increasing wages is the last thing to rise in an inflating economy.

    Let's break it down real simple . . . 1) inflation pure and simple is an INCREASE in the money supply and/or credit. 2) Inflation is not uniform!, inflation can happen in stocks, housings, bonds, commodities. 3) Rising prices is the RESULT of inflation not the cause. 4) When the Fed/Government injects money in the system either by a) Fractional Reserve Banking b)lower interest rates c)more debt or d)liquidity injections the 1st users of the money (normally banks) will deposit/invest/use/loan that money in the best way to make more profits. 5) This type of system causes a mis-allocation of resources which will allow one asset to deflation as another one inflates even if the money supply drops or increases-this is b/c the money supply is manipulated and not free.

    A couple of examples. In '01 w/ the stock market tanking Feds inject liquidity in the system (people talked about fears of deflation then too!!), banks wanting to make money look for the best investment vehicle to make money. Banks seeing housing growing fairly rapidly at the time (it started in '98) started chunking their money after housing making more and more money.

    Example 2) '07 Housing market tanks, credit collapses, Feds seeing this and wanting to prevent another "depression" open the gates again putting a floor on the market at ~11500 peak ~14000 (. . .a floor at only 18% off. . . ROTFLMAO . . . they want a floor when it's only down 18% . . .)
    Banks seeing this new money now look to do one of two things a) get rid of debt b) make money. So where do they put their money . . .commodities already in a 5 year boom get the money. Now in the next 5 years commodities will go gangbusters . . . leading to an increase in the "CPI".

    As a side note . . . .where the !$@#$ was the increase in the CPI from '01 to '05 . . . by my calculation my cost of living went up over 150% did the CPI calculate that . . . nope. Just like 99-01 we had inflation in stocks we had inflation in housing 02-05 and now inflation in commodities. Unfortunately commodities get a bad rap . . . when it's inflation in housing/stocks its very good and everyone is a cheerleading. . . inflation in commodities is bad. . . WTF.

    Another thing . . . we can have price deflation in one asset and price inflation in another. We are experiencing price "biflation"

    I personally believe that the natural tendency of most things is to price deflate and that price deflation is a great thing. Anything on a technology trend will almost certainly price deflate over time if the gov. gets out of the way. In general things should get less expensive as time goes on not more!

  39. Prophet of Profit commented on Feb 26

    Kohn expects inflation to reverse because of a slowdown? Perhaps on your future purchase of non-essential goods like a new T-shirt made in China, but don’t count on your milk or bread getting any cheaper; any slow down in the US economy will not stop the hungry hordes in Asia from eating more or driving more!!

  40. Camille commented on Feb 26

    I thought this was interesting regarding Moody’s ratings for Pfizer and MBIA:

    (from Mike “Mish” Shedlock at Mish’s Global Economic Trend Analysis)

    http://tinyurl.com/2waftf

    Highlights (MBI vs PFE)

    * Profit margin -61.76% vs. +17.07%
    * Return on Equity -35.54% vs. +12.13%
    * Revenue $3.12 Billion vs. $48.61 Billion
    * Earnings Per Share -$15.22 vs. +$1.20
    * Total Cash $5.73 Billion vs. $20.30 Billion
    * Total Debt $17.44 Billion vs. $8.69 Billion

    Guess which one was downgraded?

  41. wally commented on Feb 26

    “I do not expect the recent elevated inflation rates to persist,” Fed Vice Chairman Donald Kohn said in a speech at the University of North Carolina at Wilmington.

    Translation: we’re going down and we’re taking everybody with us.

  42. Peter Boockvar commented on Feb 26

    These Fed members are smarter than me but in my opinion there is a big flaw in their thinking that inflation will recede due to the slowing economy under current circumstances. Intuitively their argument makes perfect sense that slower demand for goods will lead to a drop in prices assuming supply remains steady. BUT, the fed is slashing rates in order to jumpstart growth which hasn’t worked yet but commodity prices are still at record highs and when at some point the rate cuts do start to work and economic growth starts again, commodity prices will explode again on the upside thus providing no respite from inflation pressures. If somehow the Fed threads the needle and global growth slows so much that inflation pressures lessen, the huge rate cuts will eventually offset that as the slowdown would be limited and inflation grows again. Do I make any sense?

  43. Pool Shark commented on Feb 26

    Don’t look now, but the USD$ Index has dropped to:

    74.71

    And falling….

  44. Ben commented on Feb 26

    Hey, the market did priced in for a mild-recession, unless there is more evidence come out, I don’t think the market will re-test the lows again, goodbye the lows. ;)

    By the way, I’m expecting more buying (volume) during the last hour before the closing bell. As always, the bull wins.

  45. Don commented on Feb 26

    Inflation, [like cinefoz] is everywhere and always a monetary phenomenon.

    It’s always a matter of increasing the money supply more than the quantity of real goods and services increase. Simple as that. If you need an equation, MV=PT, where money times velocity equals price times transactions. Increase the money and keep transactions and velocity the same, and prices are all that’s left to change.

    Increased inflation rates do not have to accompany economic expansions any more than decreased inflation rates have to accompany economic contractions. Stagflation in the seventies (increased inflation rates accompanying economic contraction) gave way to a long period in the 80’s and 90’s of economic expansion accompanied by declining rates of inflation.

    That the fed bankers still talk as if inflation and economic contraction are mutually exclusive just reveals how little they think of our intellect.

  46. Stuart commented on Feb 26

    :Don’t look now, but the USD$ Index has dropped to:

    74.71

    And falling….:

    Too much debt and we’re about to get buried in treasuries as the borrowing needs go through the roof… a falling dollar, it’s inevitable IMO.

  47. JustinTheSkeptic commented on Feb 26

    You don’t need rising wages in order to have rising inflation, all you need is declining productivity.

  48. Ben commented on Feb 26

    I think 74.71 means US business is more attractive to the rest of the world. The value is cheap, with 74.71, it is even cheaper. WOW!

  49. Steve Barry commented on Feb 26

    VIX must rise 71% to hit Jan and Aug highs

  50. Shane commented on Feb 26

    Don’t look now . . . silver@$18.70 . . . 20+ here we come!

    I do think commodities, and metals in particular will get a nice smackdown within 3 months.

  51. ac commented on Feb 26

    You have to remember, the monetary base is deflating. Hence, deflation.

    But “prices” are not always in line intially and that “intially” can take years to go top to bottom. I suspect Commodities and its ilk will “collapse”, but it may be to 2010 before that begins.

    If Bernanke had any balls, he would lift rates and try to get some life under the dollar as IMO it is the reason why price increases are happening so fast. To continue to let the dollar slide will IMO, further damage the US economy while deflation picks up speed with debt destruction.

    Next will be Bonds, when the wedge blows above 40, IMO a blowup will take place and Mortgage rates will go the highest since beginning and end of the Clinton Admin.

    Bernanke should be fired. His inability to handle the situation is embarrasing.

  52. Pat G. commented on Feb 26

    “I do think commodities, and metals in particular will get a nice smackdown within 3 months.”

    CBs keep cutting, emerging economies keep buying and the dollar keeps falling which most commodities are denominated in. Explain to me why you expect metals to “get a nice smackdown within 3 months” as investment demand is just picking up.

  53. Portland Refugee commented on Feb 26

    And investors are ‘perplexed’ people are walking away from their mortgages……!?

    You aren’t seeing the half of it! I can count easily 17 friends / family with strong incomes (100K-250K), strong credit scores, who made 20% down payments are now seriousy considering walking from their house if things get worse.

    They just can’t keep up with food, gas, college savings, medical expenses, etc.

    And they don’t give a rats ass what happens to their credit score, their standing in the community, having to rent, etc.

  54. Neal commented on Feb 26

    Asian steel makers settle on a 69% increase in ore prices. Monday, Japan announced 30% increase in rolled steel products beginning April 1. US corrugated steel decking manufacturers announced 20% immediate increase Thursday last week. China announced 11% more steel imports and 27% less steel exports (net inflow to China). Just one edge of the happy steel industry.

    No inflation, nosiree.

  55. ac commented on Feb 26

    Looks like 2009-10 will mark the global collapse. Makes sense as early parts of decades are usually not very good.

    Looks like the US may get a double dipper, I thought 2 months ago, the economy would avoid recession to 2010, but if the consumer has already blown the wad, they may force a modest contraction against the typical supply/growth pattern, rising inflation and interest rates cripple global growth sending us to global recession by 2010(slowdown starting in 09 in ernest).

    Ah the lags. They a pain aren’t they?

  56. rickrude commented on Feb 26

    for those of us holding gold and oil stocks, there is
    no joy greater than watching all the geniuses dribble about inflation, deflation, US recession, mortgage mess, etc, etc.
    as my portfolio goes up.

  57. ken h commented on Feb 26

    Rick,

    you buy gas, energy, and food right? With dollars?

    Don’t get me wrong, No doubt gold has doubled since I bought in at ~$480, oil stocks too. But…so has everything I need for my family every day. The dollar took another shit today.

    Get ready for the Amero. How much will your gold be worth in those?

    This is a clusterfuck, period. Nobody wins.

  58. Max commented on Feb 26

    I think 74.71 means US business is more attractive to the rest of the world. The value is cheap, with 74.71, it is even cheaper. WOW!

    Falling currency results in an outflow of capital, not inflow. As the currency erodes so does the value of the capital, so it flees.

    To become attractive, the US has to correct its account balance.

  59. rickrude commented on Feb 26

    Ken, yo, too pessimistic.
    Oil stocks, the exploration , production
    companies are trading at terrific valuations,
    Gold stocks somewhat more expensive, but you gotta buy. Inflation in energy > food.
    Energy is a big factor in the cost of food.
    Gold stocks have done well last few years if you had the stomach and belief.
    Foods like wheat , etc, are another way to play the inflation game, I just can’;t cover all the commodities.

    You either are enjoying the bull market, or you crying about the cost of everything and going on long philisophical debates about
    crap that only Kudlow can understand.

  60. Max commented on Feb 26

    I have a feeling this commoditties price inflation will not last. Vermont Trader gave an example, that many can corroborate – record crude oil price do not translate to significantly higher prices at the pump. If the inflation was broad, prices at the pump would have been 30-40% higher than we have now. The same about bread – grain prices quadrupled, but the increase has not been passed on to the retail. Input prices, instead, are eating into the margins, which are not good for employment, which in turn are not good for the incomes and prices.

  61. Pool Shark commented on Feb 26

    Update:

    US$ Index down to 74.67 and falling…

    Euro over $1.50 for first time in history…

  62. Shane commented on Feb 26

    Pat,
    I’m extremely bullish on commodities . . . however the CRB was ~402 back in August, it now stands at 550 only 6 months later . . .a ~37% increase in 6 months.

    Tack on a few more items . . . precious metals (especially silver and gold) traditionally have sell-offs in April-May time frame. In the commodity bull since ’01 there have been 2 (this spring being three) big run-ups. Each of the preceding run-ups were followed (at least in metals) by a severe correction (~15-30%). The time frame-you guessed in April-May. In several of the grains you’ve got traditional season turn-over around this time-frame. Oil is pretty much got a triple top going on at ~100. But it may have broken out today . . . I would like to see more confirmation of that however. It also has triple bottom at ~90. Oil is intriguing.

    My SWAG is Gold 1000, Silver +20 (I originally thought 20 but after looking at the charts I would not be surprised to see 25), Oil (maybe 110). Then we have a nice correction to shake out the weak hands. Gold down to ~800 silver down to 16, oil down to 90 (but I would be surprised to see 70). And the CRB to take a nice 10-15% shave.

    I watch silver more than anything else . . . and it’s not too terribly overbought just yet, but I do expect a spike shortly.

    If the needed correction does not take place . . . Katie bar the doors, it’s gonna get wild-especially with metals. I personally hope the correction comes, swift and hard . . . I still want to back up the truck. Plus I would like some more time to learn the markets before the rocket takes off. But with trading you have to separate your desires from what you see . . . you have to be an emotionless machine. What follows below is not emotionless :-).

    Oh by the way any of you deflation yahoos, you, take a blasted look at the CRB chart. Take a look at 2001 on (hmm let me remember what happened in ’01 oh yeah feds started dropping interest rates down to 1%).

    CRB 2001 185
    CRB 2008 550
    increase in 7 years 197%
    annualized YOY ~17%

    You look at that chart and you tell me where you see deflation! The really freaking scary thing is plotted on a log chart there is no spike (well only just recently, hence my correction time for commodities).

    Oh and that inflation is a lagging indicator bs . . . again take a look at the CRB chart, note when it really started going was 2001-late Oct . . . pretty soon after the Fed stepped in with emergency cuts after 911. It may lag. .. but not by much.

    The CPI . . well that’s a different story . . . its been piecemeal and broken up so much its not worth much.

    The CPI of the 70s would have us at ~7-8% inflation! Deflation my !@#.

    The CRB is rising at fairly constant rate.
    And before you scream we’ve deflated the money supply recently . . . okay yeah lets see if the money supply grows 200% over 8 years and then 1 year it drops 10% is that deflation??? I’ve said it before and I’ll say it again, the problem in the country is not deflation it’s inflation. Whatever (if any) money supply contraction we have now is the result of excess inflation! Eventually there is only 1 one three ways out. 1) USG defaults on debt (a la Argentina) 2) USG inflates its debt (a la Weimer Republic 3) USG actually realizes we’re in a load of crap and cuts the deficit, stops a war, stops massive programs, stops trying to prop up companies that are “too big to fail” (what a load of crap that one is), and lets the free market do it’s job (unfortunately that can only happen if the fed is abolished and interest are allowed to float on the market). Going down #3 will probably cause a severe recession-possibly depression b/c we are in so deep, however if the free market is left alone it will be a deep but short recession as everything gets repriced.

  63. Shane commented on Feb 26

    rick,
    Yes playing the market is a great way to offset . . . however, the best way to play inflation is in the futures market . . . unfortunately that requires a good deal of money, time, experience, etc. I have the money, but don’t have the time nor the experience so I’m just learning my way through . . . hopefully I’ll get time and experience before the bull is over. Stock are alright . . . but if you know how to play the game you’ll make boatloads more directly on futures contracts vs. stocks and stock funds.

  64. Mises commented on Feb 26

    This obsession with current changes in the money supply seems absurd to me. The US currency was massively inflated for many years in the past. This should be obvious to anyone paying attention. Note the massive trade deficits every year.

    What has changed is that the demand for dollars has collapsed. With the FED actively reducing the returns on holding money why in the world would anyone swap tangible commodities for dollars.

    Those who think commods are going up simply because of supply and demand specific to those commodities are missing the big picture. Its the supply and demand for dollars that is out of whack. Rising commoditites are purely a symptom.

  65. David commented on Feb 26

    Inflation is to be feared. Why not? No one respects the dollar anymore. One can now imagine what inflation will be when the Fed rate is 0% or 1% by the end of the year.
    Berry, you are witnessing is a once-in-lifetime event, the fast dismantling and dissolution of the our money system.

    In time we hate that which we often fear.
    William Shakespeare

  66. Pat G. commented on Feb 26

    Shane..

    Thanks for the explanation. Based on many historical stats I calculate that we are in 1976 with respect to inflation and metals. In 1979 silver hit its peak followed by gold in 1980. I figure silver will peak in 2010 followed by gold in 2011 albeit with corrections along the way. What do you think?

  67. Shane commented on Feb 27

    Pat,
    It very well might be . . . for me anyways it’s really tough to tell exactly where we are at. I also think that history rhymes rather than repeats . . . so I believe this time around it will be similar but different. I personally think we are way earlier in the game than people think . . try late 69. Attitudes are just starting to change about inflation being high-whereas in the mid-70s it was WIN.

    People in general remember (not that I was around) the 70s as being bad, but the seeds of the 70s were in the late 60s. The CPI grew almost 25% over five years from 65-70 compare that to only a 5% increase from 60-70. Hmm let us think about what was happening in the late 60s . . . guns and butter.

    So I can’t really tell where we are but I can pay attention to the warning signs of when it’s time to get out, and that’s when things go parabolic. Amazingly enough . . . it’s not happening yet in commodities. It might have started the last month or so, but when you look at silver/gold charts (on a log chart) it skyrocketed up in 1980 . . . hasn’t really happened yet in commodities. I believe we’ve prob. got another 5 year run on this train.

    As far as trading it . . . unfortunately I know that I know enough right now to be dangerous . . . very dangerous . . . but not enough to do well.

    It’s really amazing sometimes that people don’t see things when it’s right in front of their face take a look at the following:
    http://woodrow.mpls.frb.fed.us/research/data/us/calc/hist1800.cfm

    CPI since 1800. Absolutely amazing that for 100 years we had a stable and mildly deflating money supply, almost constant at around 27. The only times it rose was when banks introduced “bills of credit” i.e. paper money. The only time it inflated horribly was during the Civil War-b/c of greenbacks.

    Now look at what has happened since 1913. A steady almost unrelenting (except for 1921 and a few of the great depression years) increase. At 1913 it stood at ~29 . . almost 100 years later 645. 22.24x higher. a 2100% increase!!! Let me see 100+ years no Federal Reserve gets me a 45% decline, 100 years with the Fed gets me a 2100% increase. Fed=stable money supply my rear.

    That is why in my view deflationists are just out of their mind. I honestly wish it would happen, it would set a lot of things right.

    And that is why the Fed is so evil . . . it completely destroys wealth, or I should say transfers wealth. Why do you think so many people are in the “rat-race”, b/c with a Fed it is darn near impossible to store wealth over a lifetime.

    So you end up getting an entire system set up to help people “invest” in stocks to beat inflation. So who are these people that help, hedge fund managers, and bankers. So the bankers end up getting more wealth b/c J6P can’t just save his money to hopefully buy a house in 5 years . . . nope if he wants to beat inflation he has to “invest” it.

    One thing I’ve learned in life is that in order to make money you’ve got to have money. But how do you get money if you can’t save it b/c of inflation, either don’t make money or you borrow it.

    Ever wonder about the “wealth” gap, middle class getting wiped out, its real, and it has all to do with our monetary system. It’s extremely difficult for the poor to move up b/c they can’t save b/c anything they save will be worthless over 5-10 years, b/c they don’t have money they don’t have access to methods to make money.

    Sorry for the diatribe but to me it’s just sickening to see that 1 dollar today is worth < $.08 of 1913. I remember thinking when I graduated "if I make 100,000" I'll be doing great. It's so sickening to realize that when my unborn son graduates he'll think "if I make 1,000,000" I'll have it made. There used to be a lot of difference b/w the US and the rest of the world, its still the greatest place to live, but unfortunately if things don't change we will be no different than France, Germany, or even Argentina.

  68. bugly commented on Feb 27

    what we need is a new set of inflation metrics:
    water- 0% rise
    air- 0% rise
    staring into space (entertainment)- negative 7%
    (this is because, now that I’m unemployed the opportunity cost of my wasted time has gone down, so the measured inflation rate can now be stated by the fed as Negative! )

  69. rickrude commented on Feb 27

    ‘Those who think commods are going up simply because of supply and demand specific to those commodities are missing the big picture. Its the supply and demand for dollars that is out of whack. Rising commoditites are purely a symptom.

    Posted by: Mises | Feb 26, 2008 8:58:56 PM’

    Have you ever heard of the peak oil theory,
    the reason commodities are going up are two fold. USD inflation and the increasing expense of diggin commodities like oil out of the ground. not purely a monetary phenomena….. laws of physics.
    If you have to dig where you dug last year for the same commodity, you would have to dig deeper,,,, supply is getting expensive.

  70. Mises commented on Feb 27

    Peak oil should affect relative prices not general prices.

    Oil is going up because non US countries have more foreign reserve than they used to have so they can afford more Oil. The reason they have more reserves is because of the inflationary policy of the US. It is always a monetary phenomenon. You are deluding yourself.

  71. Pat G. commented on Feb 27

    Shane, thanks for sharing your insights.

  72. rickrude commented on Feb 28

    Oil is going up because non US countries have more foreign reserve than they used to have so they can afford more Oil. The reason they have more reserves is because of the inflationary policy of the US. It is always a monetary phenomenon. You are deluding yourself.

    Posted by: Mises | Feb 27, 2008 7:54:50 AM
    ???????????????????????????????????????

    you seem unable to understand my previous post. I stated 2 reasons, USD devaluation and increase in the cost of bringing supply on line. Consider this for a moment. Purely from a non-monetary, but Newtonian Physics point of view. Suppose you are an oil company and instead of analysing cost in $$, you do accounting based on actual energy,
    like Joules, Calories, etc.
    Each year, you dig deeper in the north sea or you process heavier crude like from the oil sands . You end up expending more energy to bring the new production on line.

    There is a supply problem here, and I fail to understand why you do not get the concept of peak oil ??
    Its not like we are mining for water or dirt or something like that where the input costs remain the same each year

  73. Mises commented on Feb 28

    Peak Oil affects relative prices. I am neither agreeing with it or disputing it. It isn’t a monetary phenomonon and would only affect the price of Oil relative to other prices. IE price of Oil goes up other prices go down.

    What is happening is the price of everything is going up. It is general and that points to it being driven by the supply and demand for dollars.

    I realize it is hard to think of dollars as just another good that is affected by supply and demand, but that is what you need to do to understand what is happening here.

  74. PFT commented on Feb 28

    USD 73.81 now. Making a comeback.

    Seriously, if Ben told the truth about the Federal Reserve System and our financial institutions, and if people could understand it, overnight bankers on Wall Street would be hanging from lamp posts and people would be marching on Washington the next day.

    For Congress, it’s a matter of self-preservation to pretend ignorance and make sure we are too. Ignorance is bliss afterall.

    IMF has plans to sell some of their gold holdings. Makes you wonder if they are preparing to bail us out?

Read this next.

Posted Under