Lakshman Achuthan, a managing director at Economic Cycle Research Institute, talks with Bloomberg’s Carol Massar in New York about the outlook for the U.S. economy, inflation and consumer prices. The consumer price index increased 0.6 percent in May, the Labor Department said today. So-called core prices, which exclude food and energy, rose 0.2 percent. (Source: Bloomberg)
click for windows video
00:00 Recession as "primary concern" over inflation
01:03 "We do not have strong signs of a recovery."
02:50 Reasons why inflation not "out of control"
Source:
Achuthan: Recession a Bigger Concern Than Inflation: Video
Bloomberg,June 13 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=az8dsAnExK9c
He is right, and Ben, et al, know the same thing. They are just panicking about oil prices and the prospect of higher EU rates.
Inflationary expectations are pushing up interest rates. Take a look at the sterling 12 month libor rate – up around 120 basis points since the beginning of the year. Central banks control short term rates, the market determines everything else:
Nice picture of UK rates here….
http://tinyurl.com/5gyz2a
The Commodities bubble will be the last bubble to pop, and it will. SOON. My question to you,Barry, how do you think equities will perform when the commodities collapse. Will they RALLY significantly due to expectations of a consumer rebound? OR will equities FALL
b/c this market run up has been led by energy, alt energy, and financials (financials may lose lots more money if commodities collapse).
A case frequently made for commodities as an alternative asset is that they are uncorrelated to equities. In one study, the correlation coefficient was -0.11, which may not have been significantly different than zero.
If that’s the case, then a drop in commodities, in itself, would not have any particular implications for equities. The question would be, WHY are commodities dropping?
Currently, with negative real interest rates and (despite recent gains) a generally weak dollar, the financial backdrop for commodities is favorable. Presumably, a sustained drop in commodities (beyond just working off an overbought condition) would require dramatic economic weakness. And that certainly would be a reason for equities to fall, along with commodities.
‘No correlation’ doesn’t mean they can’t fall together for a little while. Over short-term periods, correlations bounce around and even invert. ‘Correlation’ is not a static value, as one might infer from some studies.
Well, lets all be concerned.
SO WHAT ??
Two Hypothesis:
1. Oil & Commodities rose together and will fall together.
2. Commodities will fall and reduce the PPI that comapanies pay, thus increasing earnings. Thus equities will rise in expected earnings growth. The X-Factor here is credit growth…. lower prices will help the consumer, but will it be enough if there is no credit growth. The consumer spending of the last decade was due mostly to MEWs (mort equity withdrawals)which no longer exist…MEWs accounted for 50% of GDP the past 8 yrs.
Jim makes a great point that everyone seems to forget. commodity prices have nothing to do with the economy or stock prices. (the CRB collapsed during the 80’s & 90’s when the economy & stocks did well)
achuthan is a complete HACK, btw. if you look up some of his previous interviews on bloomberg, he comes across as a real ass. he’s still talking about core inflation in this interview!
Another view of commodities: It will be the deepening recession in the USA and signs of significant global slowing that will cause oil and other commodities to fall. Thus, the equity markets worldwide will fall as commodities fall. Commodities will takes their cues from equities and the economy, not the other way around.
However it is possible, in fact likely, that there will be days when the market rallies as oil falls, and people will attribute it to the oil price decline; but as we know determining the exact cause of a stock market move is often just guess work.
Further, cheaper commodities will help the economy, but will not be an engine of growth like housing was. Therefore, the recovery will be slow and GDP growth lower than prior to this recession.
IMO.
m3 is completely correct. This guy has been all over Kudlow & Bloomberg for the last year stating how great the economy was and how no way we are heading for a recession….he is in the Bowyer/Luskin mold….arrogant with his head up his ass. Not quite to the extent of those two, but not far behind.
the dolllar is what the fed is worried about right now as it impacts the price of oil, and thus, impacts the real economy in many many ways. If we have a severe and/or prolonged recession I cant see the dollar getting stronger-in fact I see it getting weaker. Gold may be the brightest prospect as the global economy turns down.
Only for PCs ? Bloomberg does not have a Mac?
Recessions kill inflation heh? And this is touted as a truism… how does this man account for inflationary recessions ?
How do people like this get airtime when they make such easily refuted comments.
Acuthan has been right more often than not if you take into account the leads of ECRI indexes. They did catch the last recession, and they did NOT call recession in 2005-07 when many did. From earlier Bloomberg interviews I see they switched to a recession call in March of 08. We’ll have to wait and see if they’re early, late or wrong this time.
And didn’t the recessions of 73-57 and 80-82 “kill” the inflation of the time?
“And didn’t the recessions of 73-57 and 80-82 “kill” the inflation of the time?’
Hmmmm…no.
The 80-82 recession was a result of Volcker’s policy to kill inflation by raising interest rates until everyone cry Uncle.
I don’t have all the numbers at my fingertips, but I believe CPI inflation peaked in ’74, after the ’73-’75 recession began, at around 12%, and then fell to around 5% in ’75. Perhaps the word “killed” is a bit dramatic, but in this case inflation was more than cut in half.
In the early ’80s the story is similar, but complicated by the back-to-back recessions. Still I think inflation peaked out around 15%, and then fell below 4% or so.
Are you saying that because Volcker played a role in the early ’80s recessions the statement that recession kills inflation is invalid?