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Gwenn,
I think the fear is that inflation would reign in the stock market because
the Fed would aggressively hike rates. Since the US savings rate is
negative, a downturn in stocks would drastically reduce spending. Couple
this with the leveraged purchases with respect to stocks and you do not have
a pretty picture.
Other implications of inflation in the US are less certain, thus more
worrisome. As the US moves to a service economy, even more so than in the
past, what are the implications to downturns? We have been through many
manufacturing shakeouts, but very few, if any, service economy shakeouts.
Bonds sure look like the markets are expecting higher inflation, but if you
consider the supply constraint's on the long end, the Treasuries attempt to
promote liquidity with a buy back program and the Fed's stabbing in the dark
at the pulse of the US economy, the curve is not a good indicator of the
markets pricing in inflation.
So where is inflation going? Does it really matter? Could the Fed have a
great window of opportunity over the next couple of months? If they should
hike rates fairly aggressively, that would put a cap on stocks, and then
they could rely on election year politics to help boost the economy. This
would help the bonds come out of the doldrums and give the Fed apparent
credibility which it is currently lacking.
This is the first bit of optimism that I have had in a year, which probably
is a fade, but the high volatility seems to be more a function of
uncertainty than inflation. Worry is volatility is opportunity. Now to
capitalize on it. Please excuse the obvious, overstated and on occasion
muddled points, but in posting these ideas to others, I help to clarify my
own vision of the markets. Although I am new to trading and to this forum,
I never cease to be amazed by what I take away from it. Thanks to everyone
and good trading.
Mike Knapp
Just a plain stupid question: everybody here seems to dread inflation like
hell. Is there anything bad to it? I mean why would a 4% inflation be
bearish...? It has been there before, and it didn't prevent markets from
rising. BTW, in Ben's numbers, I am sorry, but really I am not impressed by
any inflation except for oil. But then who cares about oil in our
economies.
In Europe Oil is 4 times more expensive than in the US, Does it make a
difference? NO.
What is dangerous for markets, is lack of confidence. If people are scared
of losing their wealth, they'll pull liquidity, but if not, they'll keep
adding, with or without moderate inflation.
IMHO
Gwenn
swp wrote:
> Ben -
>
> 1) It is Poser, not Posner.
>
> 2) I am a technical analyst who happens to have a degree in economics.
>
> With that out of the way, I can give you lots of on the one hand and on
> the other hand.
>
> First of all, before I get into all of my equivocating, be aware that I
> do believe that inflation is likely to pick up. I would not be at all
> surprised to see US CPI inflation reach 3.5% (core could only reach 3.0%
> or so). Currently total is at 2.7% and core is around 1.9%. I doubt that
> we can get as high as 4.0% total and 3.5% core. Given that the long bond
> is at a real rate of 4.0%, which is relatively high historically, I
> suspect that we could see a pinch sooner or later.
>
> As far as the CRB goes, it does not have a sterling record as far as I
> can tell predicting inflation. Studies have been done on it, and that is
> what it has shown. Much of the CRB itself focuses on the non-core food
> and energy sectors. The remainder is manufacturing based commodities.
> The US is no longer a commodity based or manufacturing based economy. If
> I remember correctly, US GDP is more than 60% services. Of course,
> services by heat and electric and that is affected by energy inputs.
> But, did your electric bill go down when oil fell? I do not think that
> regulators will allow utilities to raise rates, and competition will
> keep electric prices better in check. Heating oil and nat. gas are a
> different story, but at least a correction, and a deep one, is due from
> $30-$32 per barrel in oil.
>
> Going quickly back to the CRB, there is a possible wave count that says
> the bottom from last year was not the final bottom. It is not my
> preferred count, but we only last week retraced even 38% of that fall.
> The CRB is barely above where it was when the Russian debt crisis began
> and caused a deflationary scare.
>
> Of course, much of the inflation in the USA is wealth effect related.
> But, if the stock market crumbles at some point this year, that will be
> largely ameliorated. If it happens quickly enough, the psyche of the
> consumer will not become inflation oriented and prices will stabilize. I
> do not think we need a crash in equities for that, just a nice 30% or so
> drop over a year or so to remind people that it is not a one way bet
> (and enough to clobber some of the nasty equity borrowing habits going
> on out there).
>
> Note that it is not just the Fed. Yes, the US economy is stronger than
> just about anywhere else, but rates are near nil in Japan and extremely
> low in Europe (except the UK). We shifted from deflation scare to
> inflation pretty quickly. But, much of what caused the disinflation of
> the 1990s still exists:
>
> Productivity gains, which are probably still under reported.
>
> Competition from emerging markets.
>
> Free trade.
>
> The internet.
>
> Overall, I am concerned and do expect that inflation has higher to go. I
> do not believe that commodity prices are a fair measure. Also, look at
> producer prices. You will see lots of time with deflation (falling
> prices), but consumer prices did not fall. So, you have a situation of
> lower raw materials and better productivity, but stable to slightly
> higher prices. That means margins increased. Companies will likely be
> able to hold prices steady a while longer before margins are
> significantly pressured.
>
> So, yes, inflation has bottomed for now. Yes, inflation is likely to
> increase. Yes, the Fed has messed up. It never should have cut in
> November 1998 and should have started raising rates sooner. But, no we
> are not likely to get an inflation spiral, and a crash is possible in
> equities, but unless you consider 30% a crash, my opinion is that it is
> not super likely.
>
> Steve
>
> ---
> Steven W. Poser, President
> Poser Global Market Strategies Inc.
>
> url: http://www.poserglobal.com
> email: swp@xxxxxxxxxxxxxxx
>
> Tel: 201-995-0845
> Fax: 201-995-0846
> ----- Original Message -----
> From: <Proffittak@xxxxxxx>
> To: OnWingsOfEagles@xxxxxxxxxxxxx <realtraders@xxxxxxxxxxxxxxx>
> Sent: Saturday, January 22, 2000 2:56 PM
> Subject: [RT] inflation/implication on bonds
>
> > Hello
> >
> > This is now the 9Th week in which inflation is showing in full
> force
> >
> > Where?
> >
> > here are the Prof
> >
> > Baron's page MW 15 this weekend
> >
> > year ago last week today
> > crb 190.50 208.01 211.51
> >
> > industrial 183.90 202.19 205.21
> >
> > grains/oils 172.7 169.78 171.69
> >
> > livestock 208.90 248.19 249.94
> >
> > energy 132.5 233.39 243.45
> >
> > precious metals234.7 243.88 250.15
> >
> >
> > Steve posner and all other economist feedback welcome
> >
> > have a great weekend
> > Ben
> >
> >
> >
> >
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