Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20
Facebook (FB) AI Mega-trend Tech Stocks Investing 2020 - 10th Feb 20
The US Constitution IS the Crisis - 10th Feb 20
Stock Market Correction Continues - 10th Feb 20
Useful Tips for Becoming a Better Man - 10th Feb 20
Will CoronaVirus Pandemic Trigger a Stocks Bear Market 2020? Part1 - 9th Feb 20
Could Silver Break-out like it did in 2011? - 9th Feb 20
The End of the Global Economy - 9th Feb 20
Fed to Stimulate in Any Crisis; Don’t Let Short-Term Events Bother You - 9th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

America's Greatest Export - Inflation in Spades

Economics / Inflation Nov 02, 2007 - 12:17 PM GMT

By: Greg_Silberman

Economics Best Financial Markets Analysis ArticleOh the absurdity of it all!

The last round of Fed rate hikes began early 2004 and ended in the middle of 2006. One of the primary justifications for a number of mini-rate hikes was the ominous threat of an outbreak in price inflation.



Now remember, inflation numbers as measured by CPI and PPI continued to be very benign at the time, especially after removing volatile food and energy prices (what lse is there really?)

So what magic genie was the Fed trying to keep the lid on? If the numbers were really as benign as they seemed where was the risk of an inflation epidemic coming from?

The answer was an incessantly rising CRB index. Commodities were advertising for all and sundry that new money was increasingly flowing into raw materials and ultimately consumer prices. So the actual inflation gauge used by the Fed to justify rate increases was commodity price inflation -- and rightly so.

So where's the irony you ask?

Fast forward to today and we have even hotter commodity prices – Oil in the $90s – and yet the Fed is cutting interest rates. Say what??

In fact and in spite of $90+ Crude Oil, Inflation expectations as measured by the spread between Treasuries and Inflation Protected Treasuries are at their lowest in at least 3 years.


Chart 1: Spread between Treasuries and Inflation Protected Treasuries (TIPS) has been narrowing – chart rising – indicating inflation is not considered a problem.

On the face of it all this monetary stimulus has had very little inflationary effect on US consumer prices. Thus we ask the question, where has all the money gone?

If energy is the focus then the large Oil producers should be making out like bandits right?


Chart 2: Crude Oil vs the Oil Stock Index

The answer is that Oil Producers are making money hand over fist but based on the above ratio of Crude to Oil Stocks, investors prefer buying Crude directly -- a move above 0.07 would really accelerate that trend. Put another way, the increased margins from higher Oil prices are being eroded by higher production costs. Read as wage and raw material inflation.

Another major punch bowl recipient is foreign markets:


Chart 3: Non US Markets handsomely outperforming the Dow

World Markets ex USA have handsomely outperformed the Dow for over 5 years but not without repercussions. Consumer prices in foreign lands – from personal experience Australia and South Africa – are growing out of control. Financial centers such as London or Sydney are now virtually unaffordable due to the high property: income ratios.
The answer then to this inflation conundrum ie. the fact that the Fed can reduce rates in the face of scorching commodity prices is that the price inflation immediately runs abroad where it generates growth but also causes havoc on consumer prices. Whilst in the US increased monetary stimulus is going toward keeping an over-valued Real Estate market afloat and not contributing in any material way to the cost of living.
The net result for foreign contrarians is that the US assets are probably way to cheap relative to the local market and won't be for much longer. We're buying US small caps.

More commentary and stock picks follow for subscribers…

By Greg Silberman CFA, CA(SA)
Profession: Portfolio Manager and Research Analyst
Company: Ritterband Investment Management LLC
e-Mail: greg@goldandoilstocks.com
Website: blog.goldandoilstocks.com

I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.  

Greg Silberman Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules