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You and I have been on the same inflation wave-length for some years now and
we share a disdain for the gimmickry inherent in the new and "improved" CPI
which is nothing less than a thinly disguised attempt to reduce the costs of
inflation indexed government programs. That said, lets look at the prospects
for inflation:
1) if the Fed succeeds in reinflating the bubble, even for just another year
or two before an even bigger economic decline, we will very likely see a big
burst in inflation, especially if Europe and Japan are able to prop up their
economies.
2) if the economy remains mired in problems, which I believe it will, then I
think we are faced with a different picture:
a) the US economy is largely driven by the services sector, however many of
these services are discretionary and I believe a service economy is far more
prone to deflation and very severe recession than is a manufacturing economy
b) most of the manufactured goods consumed in the US are manufactured
elsewhere and the ability of countries in Asia (especially China) and South
America to continue to deliver cheap goods in the face of adverse currency
moves (i.e. declining dollar) and declining demand should not be under
estimated ... one need only look to the recent China/Japan trade conflicts
for confirmation of this (one should note that the US has never experienced
a deep economic recession/depression without a strong domestic manufacturing
base so any such decline will embark on uncharted waters)
c) the US$ has risen almost as parabolicly as the NASDAQ so one should
expect a major reversal ... this is certainly a major wild card. On the one
hand, the costs of imports could begin rising dramatically, however one
should consider that the costs of many imported manufactured goods may not
rise (see item b above). I think that costs of basic imported goods could
actually continue to decline until the world economy begins to recover at
which time, inflation might really kick in here. Aside from energy, the US
imports relatively small amounts of commodities and once again reduced
world-wide demand might just keep imported commodity costs, particularly
energy, at modest levels until world-wide demand picks up. In short, I
suspect that the inflation genie will come out of the bottle when we see a
combination of weak US$ and strong world-wide demand for energy and
manufactured goods.
d) US consumers and corporations have about tapped out their borrowing
capabilities and it is going to be difficult to stimulate demand which would
drive inflation. For years, the economic expansion has borrowed from the
future by leveraging credit card debt, home equity debt, and auto leases ...
any significant economic contraction is going to see an increase in defaults
and a severe contraction in credit availability ... this is generally
deflationary.
e) historically, there have been few periods where corporate earnings have
grown at recent rates and much of that growth has been accomplished with
gimmicks and much of the rest by exporting the US industrial base. I'm not
at all convinced that business is going to be able to raise prices (or keep
cutting package sizes while maintaining price) in the face of a weak economy
and hunkered down consumers. I suspect that we will see cost cutting in some
areas which have grown fat over recent years including executive
compensation and marketing costs. Just one example ... when consumers buy
cereal they are not paying farmers, they are paying huge bucks for all those
multi-billion dollar sports entertainment and endorsement contracts. When it
is no longer possible to business to drive constantly increasing demand,
they will take an ax to those costs.
... a few thoughts for a Sunday.
Earl
----- Original Message -----
From: "Ira Tunik" <irat@xxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Sunday, July 08, 2001 8:16 AM
Subject: Re: [RT] S&P Moment of Truth
> Don't overlook inflation. It is the lurking factor that will kill this
market
> once it is recognized and acknowledged by the market. Corporations have
two
> courses of action, raise prices to increase profits, or take their losses
to
> bankruptcy court. You can only cut costs so much and reduce labor so much
then
> it starts to impact you at the bottom line also. There has been a
distinction
> made by the government that the cost of living and inflation are two
different
> animals. I believe that if it costs me more to live every year then that
is
> inflation. Wheat is low but bread costs more. Cattle prices a down or in
the
> mid range yet meat costs are up. Where are lumber prices and the cost of
> homes? Health care costs are out of control and if you need medications
or
> prescription drugs you might need to take out a home equity loan, if you
can
> afford one. Hurrah, gas prices are dropping, but from where? Here they
are
> dropping from $2.50 a gallon. What happened to the screams that occurred
when
> gas jumped to a dollar? Those in the east who use either heating oil or
natural
> gas, look out this winter, you could really understand about the
difference
> between the cost of living and the inflation rate if consumer prices don't
drop
> commensurate with the futures prices. They haven't in the gas market.
The real
> impact will hit when the dollar starts to fall. Take a good look at our
balance
> of payments to get a general idea of where we could be heading. No matter
what
> the economic condition there are stocks that will rally because of it and
those
> that will crash because of it. So I always look both ways before I enter
the
> markets. have a good week end.
>
> Earl Adamy wrote:
>
> > Norman, I think you have it pretty well covered. Only addition I would
make
> > is that the daily wave structure from the April low suggests the
possibility
> > that the rally into the May high was a w.1 and this decline is a w.2,
> > setting up the bullish case for a strong rally i.e. w.3. I am rather
dubious
> > regarding this scenario and will believe it if and when we take out the
May
> > high. Still I do think we could get a pop here ... AGet is showing
strong
> > time clustering for a possible high in late July so I doubt that any
rally
> > is sustainable ... more likely an ABC correction and resumption of trend
> > down.
> >
> > Overall, things are a bit murky regarding the price structure in the
> > equities market but on the whole the economic picture looks negative
when
> > one attempts to peer beyond the latest economic release:
> >
> > Positive
> > Low short term interest rates
> > Expansion of money supply
> > Ingenuity and creativity
> > Negative
> > Corporate earnings fattened by pension and option gimmicks
> > Dividends remain very low
> > High levels of corporate debt
> > High levels of consumer debt
> > Extreme high valuations of US stock indexes relative to earnings
> > Extreme high valuation of US$
> > Extreme reliance on service sector
> > Extreme reliance on imports for manufactured goods
> >
> > Under the circumstances, investors will likely find reward by remaining
> > defensive with a good measure of bonds. Unfortunately, the wave
structure in
> > bonds, looks rather weak suggesting the bull market in bonds is over and
> > higher rates lie ahead ... major economic recovery or strong inflation.
> > Since I don't see a major economic recovery in the immediate future and
> > don't see further significant rise in inflation, I am assuming that this
is
> > one of those times when the wave structure is providing bad information.
> >
> > Earl
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