Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Timing the Market: Predicting When the FED Will Act Next (Feb 12)

Stock-Markets / Inflation Feb 07, 2012 - 12:34 PM GMT

By: Chris_Riley

Stock-Markets

Best Financial Markets Analysis ArticleSadly, we have reached the point where markets are largely driven by government & central bank action. Their principle policy tool is monetary easing, which is used to shoot-up markets, against a market driven backdrop of de-levering. So in order to predict what the actors are likely to do, we need to understand the political constraints & incentives that they find themselves under: the principle actors being the central bankers and their politician friends.


In trying to assess these political constraints, it seems fairly obvious that the high levels of unemployment and bankruptcy that are necessary to clear out the system, are deemed unacceptable to this governing class. It would be unpopular politically and a toxic environment for the banks. But on the other hand, we have seen the impact of high inflation in terms of the civil disorder it can cause around the world. It is certainly not in the interest of the central bank or politicians to have anarchy on the street either, leading to the loss of their power. It thus follows that the incentive structure currently in place is to inflate to the maximum possible extent to relieve short-term economic pressure, subject to the CPI not breaching a certain level: the CPI is the central banker's chosen inflation measure and as a statistical construct, it is easily subject to manipulation (see my article: CPI - A Standard of Living Problem).

So now we have the basic construct in place, we can examine the current market using the FED’s new preferred CPI measure:


In terms of expectations (MICH) it would seem that the FED is quite content to pursue easing at these levels. This rate has recently come down from around the 4.6% level that may have been deemed dangerous by the FED. However, it is a different story when we look at the CPI level. At 2.4% it is higher than during previous easing episodes. It peaked recently at around 3% and is now in a downward trajectory. It is possible that the FED may be less CPI sensitive this time around and could begin QE3 at a higher level than contemplated previously, of say 2%. There are some big monthly increases to drop out of the annualised CPI calculation from Q1 2011 (around 1.2%), at which point the annualised CPI number could drop significantly and prove to be the magic bullet for more easing. This is looking highly likely since the seasonally adjusted Q4 2011 came in at just 0.1%!

As a final point, it is worth noting that if the US government begins to have trouble financing its huge deficit, then the political incentive structure changes radically for the actors involved: If the government is likely to fall anyway, then the actors may as well inflate to the amount necessary to finance the deficit and stay in power, regardless of current CPI levels. Such an incentive structure would lead to inflationary action beyond that currently deemed politically acceptable. We should be aware of this, but for now at least, hyperinflation is not in the interests of the central bankers or the politicians.

Conclusion

There is likely to be more easing this year, probably in late Q1/early Q2 2012 as the officially acknowledged CPI figure drops below that deemed politically acceptable. I expect that commodity prices will continue to be the biggest beneficiaries from the easing and will move in advance of the easing. This will itself present problems further down the road as the commodity price increases feed through into the official CPI measure, at which point “inflation” will become the major political concern again and policy will have to become more restrictive. This will spell danger for the future.

By Chris Riley

For more articles and charts, check-out my new website: www.goldbugz.co.uk

© 2012 Copyright Chris Riley - All Rights Reserved

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Neptune Global Holdings LLC (Neptune). The author has made every effort to ensure accuracy of information provided; however, neither Neptune Global Holdings LLC nor the author can guarantee such accuracy. This article is strictly for informational purposes only and a sampling of diverse editorial opinion.  It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Neptune Global Holdings LLC and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  Neptune does not act as, nor offer the services of, an investment advisor. Individuals should conduct their own due diligence before making any investment choices.


© 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