Inflation: Hit or Myth?
A Silicon Investor Highlight
By David Zgodzinski
May 15, 2001
Inflation, like sex, is mostly in the mind. In fact, you can’t have sex without some inflation, but that’s not the inflation the Fed is worried about. Actually the Fed doesn’t seem to be worried about inflation of any kind lately. And when central bankers aren’t worried about it, you know it’s a problem. furrfu wrote to Trader J's Inner Circle on May 9. . .
The Fed hit us with rate hikes on inflation fears, yes? The Fed has taken an axe to interest rates on fears of a slowing economy, or to soothe the savage Wall Street beast (take your pick), yes? So on Tuesday we find out that productivity is down, but wages are up 5.2%, and the market (OK, the Naz) goes up.
Inflation is the perception that prices will go up and keep going up. Buy it today because tomorrow it’ll cost more. Prices for some of the most important stuff in our lives have already been moving up steadily. But it still hasn’t felt like inflation. There hasn’t been a sense of urgency about rising prices, they are just kind of creeping up. Some of this lack of distress may be attributable to the way the government chooses to portray the statistics. patron_anejo_por_favor wrote to the CLOWN-FREE ZONE... sorry, no clowns allowed thread on May 10. . .
The problem is, the CPI and PPI will continue to measure prices of non-essential garbage (where prices are dropping) like TV's, PC's, appliances, etc. Basically, the crap you'd find in a Best Buy. At the same time, prices of stuff absolutely essential to staying alive (food, shelter, clothing, heath care, drugs, gasoline and energy) are skyrocketing. So when measured in the aggregate, the Bureau of Labor Statistics can declare victory over inflation. Meantime people in the low-income and fixed income groups get squeezed tighter and tighter.
It sneaks up on you. It stays in the background. Higher prices here and there are an annoyance, an inconvenience. But then there is the mind-altering vision of power brownouts. Californians realize that electricity is being rationed. It begins to feel like wartime, when prices go through the roof and sometimes you can’t get some of the things you really need at any price. Softechie wrote to the Sharck Soup thread on May 9. . .
Inflation is coming. Allan Greeenspan has fueled it good with lower interest rates. I don't believe he saw the energy crisis coming.
Just as it did thirty years ago, the sharp spike in energy prices was the first domino to fall. Just as thirty years ago, the real costs of energy have been ignored for a long time. sammaster wrote on May 9. . .
inflation rearing its ugly head... gold up
gas stocks up
wages up
new economy dont need no oil does it?
The recalibration of the cost of oil and gas puts the cost of everything else into question, because the economy still floats on oil. Fuel prices may have plateaued for the time being, but the realization that the days of really cheap gas for cars and electricity for air conditioners are behind us is the foundation of the mind-set of anticipating higher prices all around. Jim McMannis drew a line in the sand on May 9. . .
If and when gas heads upwards of $3, and I think it will, screams of inflation will begin. Somewhat stagflationary as people struggle to maintain their lifestyle by shelling out more and more of their paycheck to fill ole betsy up and less on other things. Allan Greenspan won't be able to hike. OPEC has us right where it wants us with no extra supply in sight...driving gas guzzling SUVs into the sunset while either heading long distances for work or vacation.
Why does it matter? Inflation won’t be such a big issue if everybody just gets higher wages and catches up so they can pay the higher prices. That should take care of it. But once people begin to believe that they have to run faster on the treadmill just to stay in the same place it seems to change everything. Tom Michaud wrote to the CLOWN-FREE ZONE... sorry, no clowns allowed thread on May 12. . .
Just saw a piece on the local news this AM that's actually admitting there's inflation (first time I've seen). The first did a tour of local gas pump prices, then interviewed a housewife coming out of the super market, going over the grocery receipt with a reporter mentioning the price rises she's been seeing for quite some time. Also Cnnfn was mentioning "people are starting to see signs of inflation out there" this week - sure hadn't heard them mentioning it when housing and rents were doubling.
Once it takes hold, it can change the way people shop, and the way they invest. kvkkc1 wrote on May 10. . .
The reason boomers won't move to conservative investments. Inflation will eat them up as they live longer, and there aren't enough payers into the current Social Security system to keep offering the meager benefits the politicians want to protect so badly. If folks want to retire comfortably, they need to maintain some growth. Contrary to popular opinion, there really aren't that many super wealthy who can live high off of income derived from pension + interest + SS.
If inflation becomes a reality in the minds of the soon-to-be-retired baby boomers, the markets may become speculative spectacles as folks scramble and jump from one floating log to another in an effort to stay ahead of accelerating prices.
As we’ve seen in the abrupt turnaround over the past couple of years in the oil and gas markets, the investments of choice can change sharply. Scarcities and gluts can switch places and leave long-term investment strategies overturned. rolatzi observed to the CLOWN-FREE ZONE... sorry, no clowns allowed thread on May 10. . .
It will be interesting to see how such real estate behaves in the next few years as the economy deflates and inflates at the same time. Clearly inflation in the short term will help, while increasing long term interest rates will decrease demand. Also if you at some point use the home as a primary residence for five years, the tax laws allow you to sell without paying any capital gains. (excepting, recapture of depreciation). In general, the tax laws have always been more generous for an individual's real estate than stocks.
Avoiding danger is becoming the operative investment strategy. But safe havens can be a scarce commodity when there is a shift in psychology that has been in place for decades. John wrote on May 9. . .
There is much speculation in the media that gasoline prices will increase to near 3 dollars per gallon this summer in the U.S. Also, there seems to be increasing concern that the energy crisis in California will worsen and spread elsewhere across the country, and that the potential for inflation will limit the FOMC's rate cutting options going forward.
I wonder if the value of NASDAQ 100 stocks have already discounted all of this. One school of thought is that technology is immune to higher fuel prices and the like, but I'm having some trouble believing that at this point.
And John signed his post. . .
Ciao,
John in Iceland
(Unleaded fuel in Reykjavik is over 4 dollars per LITRE!)
There are those who prosper when prices move up. Farmers, roughnecks, loggers and those who bet on the right side of the commodity du jour are all pleased to see prices pick up. Still, the dangers of the inflation mentality are real. When an economic trend takes root in the popular psychology, it becomes a difficult thing to alter. The Fed knows about the inherent dangers of letting loose an inflationary stampede, but for now there are more pressing problems. A rapidly cooling economy needs the kind of medicine that would overstimulate a healthy one. So the Fed has a multitude of conflicting constituencies and tasks to perform, and only a handful of tools.
Jacob Snyder described the splits in the economy and the pitfalls for the central bank to the Applied Materials [AMAT] thread. . .
The market shrugs off an unending stream of bad macro, tech, and sector news. Unemployment up is good news, because it means the Fed keeps lowering. But bad news about inflation (especially in service sector wages) is ignored, even though this throws into doubt the hope that the Fed can lower rates to whatever extent needed to avoid a recession.
NewVision wrote to the MDD - Market Direction Discussion thread that wage pressures aren’t a major danger. . .
Wage pressure downward in return for job security. I have seen a few of the reports with announced pay cuts. Also agree that wage pressures will not be there. For now we are just seeing a lag between the time the job cuts or wage freezes are announced and when the show up in the data. That is why Greenspan has made it clear that he is not fighting inflation.
But NewVision added another important element in the inflationary molecule. . .
The other key factor that will prevent inflation in the near term is the strong US dollar.
NewVision added in another post on May 12. . .
If the dollar remains strong, there is no chance of any inflation. Import prices will continue to decline. Since so much focus is on energy costs, one can bet there will be a solution this year...the same way we had a Y2K crisis that disappeared so fast.
One of the main factors countering inflation in recent years has been the surge in productivity, which grew last spring at a 6.3 percent annual rate. In the first quarter of this year, productivity actually dropped at a .1 percent rate. An end to surging productivity gains of the past decade is another important link in the chain of inflation.
But the key is money. Inflation means that the prices of staple goods appreciate, while the value of money depreciates. And it all begins to happen fast enough that it can’t be swept under the rug. The United States has enjoyed a shopping spree thanks to the strong dollar. Charles Tutt wrote to the CSCO - Cisco Systems, Inc. thread. . .
Trade deficits are mostly a good thing,
He explained. . .
They represent the rest of the world working for paper we print. If they really start to get excessive, they're self correcting - as the dollar cheapens, foreign goods get expensive and so aren't as attractive relative to domestic, and our goods start to look cheap to the rest of the world, so exports rise.
Nikita Yakubovich responded. . .
But $$ accumulates abroad, and when(if) it will come back there will be inflation.
Charles Tutt countered. . .
When (if) they come back, they either cause explosive domestic growth because of a boom in exports, or else a surge in the price of assets like stocks and real estate. Some inflation, too, maybe, but on balance still a good thing.
If the dollar really begins to slip, traders may need to decide if they should stop worrying and learn how to love inflation. marginmike wrote to the MARKET INDEX TECHNICAL ANALYSIS - MITA thread on May 9. . .
I like the lack of interest in GOLD, the less people who own it the more the rush to buy when people accept that the dollar WILL deteriorate and Inflation is not a myth.
Discussion Threads
Trader J's Inner Circle
CLOWN-FREE ZONE... sorry, no clowns allowed
Sharck Soup
Applied Materials [AMAT]
MDD - Market Direction Discussion
CSCO - Cisco Systems, Inc.
MARKET INDEX TECHNICAL ANALYSIS - MITA
SI Members Featured
furrfu
patron_anejo_por_favor
Softechie
sammaster
Jim McMannis
Tom Michaud
kvkkc1
rolatzi
John
Jacob Snyder
NewVision
Charles Tutt
Nikita Yakubovich
marginmike
David Zgodzinski is an ex-petroleum geologist, ex-stockbroker, ex-machinery broker and ex-journalist who now reads the threads for a living. His company, Market-Animals Ltd., started publishing online stock market information in 1989.
Are there some new developments on your thread? Radical personalities? Hot New technologies? Takeovers? Scandals?
Please let us know. All stories are welcome.
Dave Zgodzinski
siliconinvestor.com |
