Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17
Q4 Pivot View for Stocks and Gold - 14th Oct 17
Gold Mining Stocks Q3’17 Preview - 14th Oct 17
U.S. Mint Gold Coin Sales and VIX Point To Increased Market Volatility and Higher Gold - 14th Oct 17
Yuan and Gold - 14th Oct 17
Tips for Avoiding a Debt Meltdown - 14th Oct 17
Bitcoin Hits New All-Time High Above $5,000 As Lagarde Concedes Defeat and Jamie Demon Shuts Up - 13th Oct 17
Golden Age for GOLD, Dark Age for the Stock Market - 13th Oct 17
The Struggle for Bolivia Is About to Begin - 13th Oct 17
3 Reasons to Take Your Invoicing Process Mobile - 13th Oct 17
What Happens When Amey Fells All of a Streets Trees (Sheffield Tree Fellings) - Video - 13th Oct 17
Stock Market Charts Show Smart Money And Dumb Money Are Moving In Opposite Directions—Here’s Why - 12th Oct 17
Your Pension Is a Lie: There’s $210 Trillion of Liabilities Our Government Can’t Fulfill - 12th Oct 17
Two Highly Recommended Books from Bob Prechter - 12th Oct 17
Turning Point Nations On The Stage - 11th Oct 17
The Profoundly Personal Impact Of The National Debt On Our Retirements - 11th Oct 17
Gold and Silver Report – Several Interesting Charts - 10th Oct 17
London House Prices Are Falling – Time to Buckle Up - 10th Oct 17
The S&P Is A Bloated Corpse - 10th Oct 17
Are Gold and the US Dollar Rallying Together? - 10th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Stagflation Becoming an Economic Reality

Economics / Stagflation Aug 27, 2008 - 02:07 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleWilliam Patalon III writes: U.S. Federal Reserve Chairman Ben S. Bernanke didn't use the "S" word - stagflation - but he might as well have.

On Friday, the U.S. central bank chief said that the financial crisis that has hammered the U.S. market is combining with rising inflation to eviscerate American economy. Together, the two forces are making it extremely difficult for the Fed to restore economic stability in the U.S. market.


Bernanke apparently welcomed the recent drop-off in the prices of oil and other key commodities - and says that inflationary pressures will moderate over the next year and a half, but also cautioned that the current inflation outlook remains highly uncertain.

The upshot: The Fed will monitor the economic situation closely and will "act as necessary" to make sure that inflation doesn't get out of hand.
These dueling cross-currents - a sputtering economy and racing prices - is stagflation , the potentially ruinous manifestation that was once thought to be a theory only, meaning it couldn't possibly show up in real life. That changed in the 1970s, when soaring energy costs and a collapsing U.S. global competitiveness combined to send the American economy into a tailspin. When the inflation rate peaked at 13.5% in 1981, then-Fed Chairman Paul A. Volcker had to put short-term interest rates up to more than 20% to finally break inflation's back.

Let's hope that's not happening again.

With the afore-mentioned crosscurrents, most economists believe that Fed policymakers will leave short-term rates unchanged when they next meet Sept. 16 - if not for the rest of the year.

Unfortunately, the latest wholesale prices report is a cause for concern, and certainly didn't put a stop to the recent inflationary fears. In July, the Producer Price Index (PPI) skyrocketed at its fastest rate in nearly 30 years, far exceeding most economists' forecasts.  While some are keeping a "wait-until-next-month" attitude (when the lower energy prices will be reflected in the numbers), others point to the core data (which excludes the volatile food-and-energy component) as proof that inflation is here to stay - regardless of the shift in energy prices.  Core wholesale prices suffered the largest monthly increase since November 2006 as other sectors clearly have been impacted by the rise in commodities.

At week's end, however, Bernanke seemed to be reveal that he is most concerned about the sluggish economy; he made his case for the current level of Fed Funds rate of 2.00% by projecting that inflationary " pressures should ease in the coming months as commodity prices fall and the economy slows."

Despite the recent reprieve from record energy prices (and Bernanke's comments notwithstanding), inflation definitely should remain high on the Fed's radar screen (and Americans will still feel the pinch in their pocketbooks).  While some analysts expect food and energy prices to lead to lower overall inflation gauges (Consumer Price Index, PPI) in the months to come, the recent core numbers reveal that businesses and consumers will continue to be impacted by price pressures.

The upcoming release of the minutes from last month's Fed policymaking (Federal Open Market Committee, or FOMC) meeting will delve a bit into the mindset of the policymakers as they continue to face the dual economic threats of sluggish economy vs. inflation.  On that note, the revised second quarter gross domestic product (GDP) estimate will be released and investors are hoping for an upward revision from the 1.9% reported in July.

Most experts had been counting on those tax rebates contributing more to the domestic economic growth.  Confidence and personal income/spending data will help dictate just how active the consumer will be in the months to come.  Retailers (discounter and luxury stores alike) will surely be watching to learn whether they can expect any positive news in time for the holidays.  Finally, two one-time industry leaders, Dell Inc. ( DELL ) and Sears Holdings Corp. ( SHLD ), report earnings, though such announcements do not carry the luster they once did.

Market Matters

Market/Index

Previous Week
(08/15/08)

Current Week
(08/22/08)

YTD Change

Dow Jones Industrial 11,659.90 11,628.06 -12.34%
NASDAQ 2,452.52 2,414.71 -8.96%
S&P 500 1,298.20 1,292.20 -12.00%
Russell 2000 753.37 737.60 -3.71%
Fed Funds 2.00% 2.00% -225 bps
10 yr Treasury (Yield) 3.85% 3.87% -17 bps

The latest business headlines are coming to us straight from China - the land that exports much of the world's toys and other manufactured products and imports significant oil, natural gas and other commodities (greatly contributing to the prior surges in commodities-related prices). With Michael Phelps becoming an overnight hero at the Beijing Summer Olympics , a new corporate bidding war may soon begin as the record medalist prepares to be transformed into the next global marketing sensation (Whatever happened to just being featured on the cover of a Wheaties cereal box - you know, "the breakfast of champions?").

Phelps currently maintains a contract with swimwear company, Speedo [The Warnaco Group Inc. ( WRC )] , and will collect a cool $1 million bonus for his gold medal accomplishments.  Enter Nike Inc. ( NIKE ) , the sports apparel giant, with a limited swimwear presence.  Analysts project that Phelps could mean $50 million and a huge new market for Nike; the company may come calling with a blank check (Can you say Tiger Woods ?  Michael Jordan ?).

But here's the issue as these companies prepare their bids and potentially increase their ad budgets during a period of economic uncertainty.  While Tiger and "MJ" participate(d) in sports that graced TV screens constantly, Phelps will drift into virtual athletic oblivion until London 2012.  Good luck, Michael.  Thanks for making us forget the global financial crisis - even if only for a couple of short days.

Speaking of the global financial crisis… just when it seemed that investors once again found it safe to hold Freddie Mac ( FRE ) and Fannie Mae ( FNM ) securities, a negative Barron's article spooked shareholders that their stock prices were heading to zero amid an imminent government bailout .  Other analysts believed that full-fledged nationalization of the two government sponsored enterprises remains unlikely, and said that major loans from the U.S. Federal Reserve would seem the more logical path should capital infusions be needed.

Meanwhile, the respective stocks plunged to 18-year lows.  On the "lighter" side of the financial news, Goldman Sachs Group Inc. ( GS ), Merrill Lynch & Co. Inc. ( MER ), and Deutsche Bank AG ( DB ) joined UBS AG ( UBS ) , Citigroup Inc. ( C ), JPMorgan Chase & Co. ( JPM ) , and Morgan Stanley ( MS ) in reaching settlements with New York Attorney General Andrew Cuomo (doing his best pre-scandal Elliot Spitzer imitation) over past sales of risky securities.  On an even more positive note, analysts at JPMorgan stated that the next two years would be more favorable for financial firms than for energy companies  ( Anyone interested in a Lehman Brothers Holdings Inc . ( LEH ) hostile takeover?).  In earnings news, retailers Home Depot Inc. ( HD ) , Target Corp. ( TGT ) , Saks Inc. ( SKS ) , and Staples Inc. ( SPLS ) each posted worse-than-expected quarters, revealing that consumers are steering clear of just about every type of store these days.  Techs, however, got a boost as Hewlett-Packard Co. ( HPQ ) reported surprisingly strong results .   

As the week began, the Dow Jones Industrial Average plummeted more than 300 points in two days as the Freddie/Fannie scare resurfaced.  Fortunately, the eternal optimists pointed to the light volume, which often results in exaggerated price moves (either up or down).  With the summer winding down, traders and investors alike head to the Hamptons for some much-deserved R&R (at least, those who can still afford it).  Oil prices suffered through some excess volatility as traders (over)analyzed the growing tensions between Russia and the United States , the weekly inventory data, and threats of storms in the Gulf that could have disrupted production.  By week's end, the major equity indexes had bounced back, but still ended in negative territory.  Maybe a few more Olympic successes can put the fear and uncertainty on the backburner again.  (Certainly not the 4 X 100 meter relays).

Economically Speaking

As inflation worries continue to escalate, housing continues to struggle, as July construction starts plunged to their lowest pace since March 1991 and new mortgage applications also declined to levels not seen in almost eight years.  On the bright side (if any really exists), residential sales in So-Cal (Southern California) climbed to a 16-month high as homebuyers and real estate investors (more likely, speculators) finally found some value in certain foreclosed properties.  The predictive index, leading economic indictors, fell far more than expected as the continued slump in building permits led the ongoing pessimism about future housing activity.

Well, at least, So-Cal may be on the mend?  Any other regions care to follow?

Weekly Economic Calendar

Date

Release

Comments

August 19 PPI (07/08) Fasting pace of inflation in 27 years
Housing Starts (07/08) Worst showing since March 1991
August 21 Initial Jobless Claims (08/16/08) 2nd straight week of a drop in benefits claims
Leading Eco. Indicators (07/08) Sharper than expected decline in predictive index
The Week Ahead
August 25 Existing Home Sales (07/08)
August 26 Consumer Confidence (08/08)
New Home Sales (07/08)
Fed Policy Meeting minutes
August 28 GDP (2nd qtr)
Initial Jobless Claims (08/23/08)
August 29 Personal Income/Spending (07/08)

 

News and Related Story Links:

By William Patalon III
Executive Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2017 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

Catching a Falling Financial Knife