Inflation..
a point of view.. that highlights the reason for which numbers were strong although misses that with fuel cost which have not yet reflected in the numbers even in today NAPM, the rising health cost and shift to private care may be also one time item that may have led to distorted ECI..I am looking at markets from a distant place and a different set, will reply to lot of interesting issues raised by some of the posters, thanks to everyone for congratulating the thread for completing 3 years. In these markets even surviving a year with head up could be good, nice to look back and see how we went through various cycles and our interpretation of under currents, with hind sight lot of what we said in 97 still is current and very much in..
<<What had everyone spooked last week even as GDP fell was the GDP
deflator
(at 2.6% annually versus 1.9% versus the last months of 1999) and the
rise
in wages (4.3% over the previous 12 months). The rise in the GDP
deflator
was once again fueled (no pun intended) by higher energy costs. As
discussed before, the higher fuel costs brought about by OPEC's actions
are not inflation according to any economic theory we know of, but
everyone is treating it as such.
Wages were higher than expected, and the Fed thinks that higher wages
will
result in more money chasing fewer goods and result in inflation. We
need
to understand that higher wages is not inflation either. Again, the
Fed
thinks if wages rise too much, an imbalance will occur between demand
and
supply. That can happen if supply is constrained and cannot meet
demand.
You then have the monetary problem of too many dollars competing for
too
few goods. A tanking stock market could help that as the investment
money
in the form of high stock prices that companies use to retool to meet
demand diminishes, making it more difficult to meet the demand.
In a free market, supply will meet demand. When the government steps
in,
(and that can take many forms) and through its action constrains
supply,
that is usually when we have inflation or recession. One of the
government's recent tricks is to use litigation or the threat of
litigation. No one wants to have to go through what Microsoft is going
through, so companies think twice about making certain investments,
merging with another company, or taking other actions that may invite a
closer look from big brother. That has a slowing effect on investment
that would be made to meet perceived demand. The market is very
efficient
in meeting demand when left to its own devices that has been part of
this
great boom as deregulation, tax cuts and a hands off Fed let industry
free
to meet demand quickly. We feel that by raising rates the Fed is going
to
hurt one of the cornerstones that made the boom successful: investment
that led to the great productivity allowing greater growth. If
companies
cannot get investment capital at the cheap rates they have in the past,
or
if a tanking stock market due to rate hikes dries up investment funds,
are
companies going to be as inclined to sink money into the continued
research and development and keep that technology curve on its steep
ascent?
Even now, even as these supposedly 'inflationary' numbers came out this
week, let's realize that they are not in and of themselves inflation.
As
Fed governor Kelley said just last week, "either inflation has begun or
will soon begin." This guy is a hawk, and he cannot even say that
inflation is here for sure. The point is that prices have been low for
such a long time and with so low upward pressure that seeing some
acceleration in other areas has everyone concerned. We don't like it
either, but we have a different view about where we are in the cycle,
what
is driving the gains we have enjoyed, and what the future holds. That
makes us less concerned that inflation is going to spiral out of
control.
We are more concerned with keeping the forces that got us this far
going
and preparing for that point when the baby boomers are not providing
that
huge consumption engine to drive the economy. That is why we think
rate
hikes are the wrong approach at this point. As the Fed controls the
shots, however, we have to live with its collective wisdom. |
