Everyone Catches on to Inflation

Apparently, the world is catching on to the inflation problem that has been coming about for the past 2 years.  The Fed is finally starting to speak about inflation pressures and about hiking rates to curb inflation, with a bit of denial about the effects of almost a year of rate cuts, including a short term of very rapid and deep rate cuts. 

The G8, discussed the threat to global growth that inflation is representing.  This means you can expect a coordinated action from central banks to fight on inflation.  You might recall that the G8 made reference to the falling dollar around 4 months ago or so, and look what happened shortly thereafter. 

This is a clear hint that you can expect aggressive holds for countries that have neutral or high interest rates and you can expect rate rising campaigns for countries that currently have low rates. 

Inflation is a problem that is now going to have to be addressed by all the major countries as food and energy prices are now out of control.  While you can blame some of that on speculation, you can also put a share of the blame on the Fed letting the dollar go into the toilet while they “defended the banks”.  The rest of the world is catching on now, that as the value of the dollar was pounded, the problems of the United States were exported around the world as things that are normally priced in dollars exploded in cost. 

I don’t think that the Fed will be able to continue to drive the dollar into the ground while defending lending institutions that made unsound lending decisions.  The manipulation of the free market is going to be greatly interfeared with now that the rest of the world is awake to the fact that they are paying the price for the stupidity of US Banks.

I honestly think the Fed is wising up not because they want to, but because they have to.  There is a great risk to the stability of the USD if the Fed continues to turn its back on the USD and sacrafices it as the first choice by tinkering with rates to solve problems.  If our rates are really only decided based on economic data that is contained in reports, couldn’t we replace them with a super computer that adjusted rates frequently as data came in?  Wouldn’t that idea support a truly free market, as rates would only be set at the appropriate level for current economic data.  The machine would be able to adjust in real time as data came in.  Just a thought. 

I hope that we are heading back into a phase where the Fed does its untimate job of protecting the value of the US currency at all cost.  I do believe the days of the US Dollar being the reserve currency of the world are coming to an end.  However, that doesn’t mean that it should be thrown away (in favor of the Amero).  Hopefully, we can see some of our American purchasing power return and at least a HINT of free markets.  If not, there is always Canada!

Bernanke: Inflation could be a problem

Now that all the damage has been done.  Bernanke is starting to talk about inflation. 

The key points are:

– More thought needed on the Feds approach to asset bubbles
– Dollar has had a modest impact on commodity prices
– There is little indication of 70s style wage-price spiral
– Inflation expectations are a ‘significant concern’ for the fed

Comment: It is just a little on the late side to start talking about it now.  The Fed knows better than anyone else that once inflation is in, it is very tough to shake it out.  While I respect the fact that the Fed was eager to act in the face of crisis, it seems like they would have been more forward thinking about the implications of their actions.  The dollar took a major hit as they were transmitting a message of panic and insecurity, and drastic rate cuts with no end in sight.  It’s great that he wants to now telegraph the signal for no further rate cuts, but it is a little late isn’t it?

After all this time, Bernanke is going to think about defending the dollar?  The mistake in not defending the dollar from being sold to no end, by being more firm about rates, is going to be costly over the medium term.  We will now be waiting to see if the commodity bubbles deflate and to see if energy is ever going to come back down to earth.  While I am not blaming Bernanke for all the problems out there, he certainly had the power to promote more stability.  I have been somewhat disappointed in the Fed and its seesaw movement of rates, and drastic measures taken after the fact because of a lack of forward thinking. 

The subprime thing was obviously going to be a disaster and there should have been more oversight being pushed into those markets far earlier.  Since there wasn’t, why would our federal monetary system aim to bail out a bunch of lenders that shouldn’t be trusted to tie their shoes without supervision?  To the same token, why would we write legislation and put together public “stimulus packages” to comfort homeowners that bought houses that they couldn’t afford?  Why would we spend billions of dollars to keep them in that house that they can’t afford?  You really have to wonder if ANYONE in the goverment ever took an economics class!

The markets are designed to balance out these inefficiencies.  When the time came for the balance to be returned, the fed tipped the scales by giving banks a sweetheart deal of borrowing at ultra low rates and continuing to lend at the same rates.  So basically, those of us that made sound financial decisions, should be getting a break right now, but instead, we are footing the bill for the “dumb money”.

I honestly hope that the Fed takes a step back and gets LESS involved with holding the hands of banks.  It really isn’t fair for the rest of us.

Where Have I Been?

Some of my readers might be thinking that I dropped off the face of the earth lately.  I have been so busy, it has been hard to get a post in edgewise. 

To boot the markets have been interesting lately, but not exciting. 

For anyone interested in knowing where I have been, I will tell you.  I have been hired by the New York Times to write about forex trading on About.com. 

I will continue to write here and on Forexhound.com, but will now also be writing on about.com.  The content there will mostly be forex tutorials and the like.  There wil be blogs, but they will be more tightly related to forex than many of my economic post that I like to make here.

Since I am still in the process of organizing my information on about.com and putting the site together.  I would like to invite any that is interested to join my forex forum over there.  I have not had a chance to write many post, but I would love to build a community of great thinkers that love forex trading and the currency markets.

And that’s it!  I have been busy getting things organized, but it’s back to the grindstone for me now.  I am back in the zone and ready to pick the pace back up and write again!

Magic PPI Numbers

Last week the PPI numbers came out for April 2008 for the US.  The overall PPI was +0.2 percent which was lower than expectations of +0.4 percent.  However, the core number was higher than expectations with +0.4 percent vs +0.2 percent expected.

The number was digested by the market as confusing.  The report showed no change in the price of food and a decrease in the price of energy.  My question is…

What planet do these numbers come from?  Any business person that I have spoken with has brought up the same concerns.  Slowing income and higher energy prices.  How is the government showing us that they see energy prices dropping while the price of oil is pushing past $130 and threatening to go higher?  They must be getting a much better deal than the rest of us.  The US Department of Labor needs a new slogan for the PPI Report.  “PPI, it’s magically delicious” (and not grounded in reality by a long shot).

Paul Volcker Again

Paul Volcker the head of The Federal Reserve in the 70s was on the newswires again today speaking about the current fed and financial policies

Volcker:

– Financial innovations failed the test of stability
– Investment banks should be regulated like commercial banks
– Fed will need to reorganize to expand financial regulation
– No reason to be complacent about the US economy, it is unbalanced
– Volcker understands why the fed felt they needed to act on Bear Sterns
– Volcker sees no other way the Bear Sterns situation could have been handled
– Volcker questions whether the supervision would have prevented the crisis
– Current economy shows some resemblance to 1970s economy


Comment: Volcker dealt with all of these problems the last time they happened.  It ended with the severe hiking of interest rates.  What do you think will happen this time?

US April CPI 2008

April CPI came in under expectations at +0.2 percent vs expectation of a slightly higher number of +0.3 percent.  12 month CPI for April showing a 3.9 percent increase, the slowest annual number since october. 

The core CPI number, which excludes food and energy was 0.1 percent vs -0.2 percent expected.  Food CPI was up +0.9 percent, which is the largest monthly gain since 1990.  Energy CPI was unchanged.

Comment: There isn’t much to say about these numbers except it’s encouraging that they look lower, but overall the picture remains bleak.  Articles have appeared on CNN today bringing up the idea of the Fed planning to start hiking rates in just 6 months time.  It is a positive idea that the trouble is over and the US can look towards a normalization of the fed funds rate, but the real question is, how much economic damage will occur to the average family in the next 6 months?  With the economy slowing, foreclosures affecting so many markets, and inflation being persistant, a 6 month wait could be too long.

Central Bank Jawboning

Bernanke:

– Fed liquidity measures helped improve market conditions
– Financial market conditions still far from normal
– Moral hazard should be managed with more supervision
– Liquidity mangement should limit future financial crisis

Comment: I wish I was that good at patting myself on the back, but then again, I would probably have two broken arms.  The effects of the fed throwing money at any problem that cropped up, still remain to be seen.  I suppose saying that the measures have improved conditions is not exactly a lie.  It improves my home condition when I give my screaming 2 year old candy, but I regret it when I am paying the dentist bill, which is far more expensive than tolerating the drama and just saying no.  Within 6 months or so, we should have an idea whether the right thing was done or not.  The side I lean towards is obvious, but if they happen to pull off enough trickery to keep the veil up for another 5 years, more power to them.

Yellen:

– Sluggish performance for 2008
– Credit crunch and commodity prices putting pressure on spending
– Unemployment rising, but inflation should ease, no stagflation
– Construction and home prices likely to fall well into 2008
– Fed should have seen “warning signs” and acted faster

Comment:  Who spiked her coffee??  Was this really Janet Yellen?  She has been a strong advocate of proactive policy against the threat of inflation and suddenly she has changed her tune overnight.  Her track record shows that she consistantly votes against rate cuts, and now suddenly out of thin air she says that rate policy is appropriate.  It’s no wonder that markets are confused.  Their policy makers can’t even keep their own opinions straight!

Juncker of the ECB:

– IMF growth forecast are overly pessimistic
– Euro zone inflation is a concern
– No risk of recession
– Forex developments are pointing in a better direction
– Wage moderation is important, but some rises permissable
– ECB does not like excessive exchange rate volatility

Comment: Nothing much new here, except a firm commitment on no recession troubles in Europe.  It looks like the ECB is relieved to see some dollar strength showing itself.  Although, at this point, can we really call it strengh?  It is more like, a lapse in weakness.  Basically Juncker is saying that everything is fine, no rate cuts coming, and the ECB is breathing now that the Eur is coming down off it’s perch.

US Retail Sales April 2008

Retail sales in the US for April 2008 fell by 0.2 percent, surpassing expectations of a fall of only 0.1 percent.  Excluding auto sales, retail sales showed a half percent gain.  The numbers for February and March were both revised slightly downward.

Import prices on food in April showed a gain of 12 percent over the past 12 months.  Petrolium import prices in April showed a gain of 4.4 percent and a gain of 57 percent in the last 12 months. 

Comment:  Now I see why The Federal Reserve ignores energy and food prices when calculating inflation.  If they included it, the doors would be blown off the system.  One quick point, I think it’s interesting that they don’t calculate inflation using food and energy when trying to set the proper monitary policy for Americans to abide by, but we have to pay those prices, they are very much a part of our personal economics.  I would love a clear explanation on how that logic works!

Interest Rate Roundup

The ECB held Euro rates steady at 4 percent for the month of May and the BOE also left rates steady on the british pound at 5 percent. 

Trichet made the following statements about the rate decision for Europe:

– Medium term inflation risk still to the upside
– Inflation will likely remain high for a protracted period
– Current rate policy will help control inflation
– Growth outlook subject to downside risk
– Inflation will likely remain above 2 percent in the coming months
– Rate decision was unanimous

Comment: Strong moves by both the ECB and BOE.  The BOE is again being careful and pragmatic about their rate policy and not making any rash decisions.  The ECB on the other hand is considering their own stance as a more proactive stance.  They are choosing to take a stand against inflation even while growth risk remain.  This stance has given then trouble with the ascent of the Euro against nearly everything else.  The excessive volatility has alarmed the ECB, but they stand firm, refusing to budge while things seem to be still under control, if at least slightly uncomfortable.  Hopefully The Federal Reserve will take note.  You do not always have to serve or be afraid of the market to keep things functioning. 

 

 

Payrolls Support the Dollar

The US nonfarm payroll report showed job contraction by 20,000 jobs(-20k) for the month of April 2008.  Unemployment dropped to 5.0 percent.

The dollar was strangely supported by these figures because the market expected a much bigger negative number and higher unemployment.  The dollar has continued it’s journey back to the north after living in the oversold level for months on end.  It is still too early to tell if this is an actual dollar rebound, or rather a retrace to a more normal level of decline.

The decision of the fed to make themselves appear neutral has helped the dollar continue to stabilize.  If there are any hints towards rate cuts, you can expect an immediate plummet. 

Despite what seems to be obviously still coming in the financial markets, the rebound in the dollar and the stance of the federal reserve has encouraged risk taking to re-enter the markets.  With the exception of the nervousness of the pound pairs, most of the carry currencies have made a roaring comeback and are heading north along with risk taking.

The market seems to be becoming complacent again about surprises.  Talk has turned back to a shallow recession in the US and even Warren Buffet is calling a bottom to the credit crisis.  Normally, I would side with that, but I personally can’t shake the feeling that a final thrust is left that will surprise everyone.  Putting that aside, we are just traders and we follow the market and that is what I intend to do.