-- Posted Tuesday, 17 June 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Tuesday, June 17, 2008
“Phenomenally accurate forecasts”
We haven’t wavered in asserting that the markets had it all wrong about an impending Fed rate hike. We said it simply wasn’t in the cards, despite the fact that bond traders were recently pricing in a 75 percent chance of tightening by November. Our reasoning was that the U.S. economy is much too frail right now to saddle with higher interest rates, and that any move toward tightening could turn an already staggering housing bust into a full-blown disaster. Deflation is still developing at this point, its effects limited mainly to an imploding real estate market and a dramatic downturn in financial speculation. But just one turn of the screw by the central bank would affect a much broader swath of the economy, possibly triggering a collapse that would be unstoppable.
That point of view is still well outside the mainstream, since it is rampant commodity inflation that has been troubling consumers and economists. But is it possible the Fed chairman secretly shares our fear of deflation? Quite possibly, according to a recent report by Washington Post political columnist Robert Novak. “Speculation that the Federal Reserve is about to begin inflation-fighting interest rate increases appears to be dead wrong,” writes Novak. “Fed Chairman Ben S. Bernanke is worried more about runaway oil prices contracting the global economy than inflating it with a wage-cost spiral. According to sources close to him, America's leading central bank has no plans for a raise.”
If Novak’s sources are correct, it would increase our respect for Bernanke. Not that one has to be a genius to see that the commodity inflation now ravaging consumers around the world cannot go much farther without killing the demand for the commodities themselves. Take oil, for one. Some are predicting that the price could continue to rise, reaching $200 a barrel before summer ends. That would equate with $6 gas, but does anyone believe that prices would ever reach that level without throwing the country into severe recession? Our gut feeling is that a sustained price of $4 a gallon is already sufficient to bring on hard times, and soon.
Another economist who sees deflation as a bigger threat than inflation is Merrill Lynch’s David Rosenberg. We posted his thoughts on the subject at Rick’s Picks yesterday, but they bear repeating: “We believe we are near the peak in inflation,” he recently told the firm’s clients. “To be sure, the lagged impact of higher gasoline prices and the depressed base effect from a year ago do risk taking the headline inflation rate to 5% by the end of the third quarter from 4.2% currently. Such an inflation rate was last posted in Feb/91, when most of the bond traders that populate Wall Street were graduating high school – so at least for a few months, they will be treading in uncharted territory.
Open Mouth Committee
“This prospect may also be one reason why the Federal Open Mouth Committee has stepped up the hawkish rhetoric in recent weeks – imagine being in a position as a central banker to have to sit idly by as the inflation rate grips a 5-handle because the economy is flat on its back, a credit crunch is in full swing, the housing market is in disarray and the stock market extremely jittery. But we strongly believe that we are near the peak in this classic lagging indicator called inflation, and once the commodity bubble bursts, the deflationary pressures that are so evident in the labor market, assets and many of the cyclical components of the consumer spending pie will move more forcefully to the front burner. It pays to note that the last time the headline inflation rate was above 5% within 12 month’s time, it was cut in half, the Fed was easing again, and bonds rallying.
"Deleveraging process will be highly deflationary -- This process of deleveraging and “getting small” is going to be a multi-year adjustment. It’s also going to be highly deflationary, and very bullish for the bond market, though that theme has become lost in recent weeks with all the Fed rhetoric over the dollar, oil and industrial commodities. But it is an enduring theme, nonetheless, and nobody ever said the path towards lower yield activity was going to be a straight line."
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 17 June 2008 | Digg This Article | Source: GoldSeek.com
