Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

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.


© 2005-2022 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