The Justa & Lars Honors Bob Brinker Investment Club Message Board

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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club

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To: Justa Werkenstiff who wrote (14420)	6/13/2000 11:15:00 PM
From: MrGreenJeans	Read Replies (2) of 15132

Stagflation, Oil Prices... And I am not talking about "stagflation" in the classical sense as defined by the 1970's and early 1980s which was characterized by high unempolyment (say ranging from 6% to less than 10%) and high inflation (say 6% to 14%) which is the classic defintion of "stagflation." Nobody is talking about it in that manner The classical definition of stagflation is the only one generally accepted by economists. All other definitions generally try to apply the term to conditions that don't exist for the purposes of shock value as far as I am concerned. I am also surprised to find Bob talking about it in this manner. He should not use the term loosely. I am talking about a period where growth slows but where inflation continues above the trend line established by the Fed. at 2.5%. Call it what you want but it is not a Goldilocks economy. Paul McCulley of PIMCO refers to "stagflation" in this sense and I hope you had a chance to review that article It is hard for me to envision in this economy that the economy will slow because of rate increases and inflation will continue above trend. The rate increases seem to be currently slowing the whiff of inflation that has been exposed in recent months as the unemployment rate is rising which is not consistent with a stagflation definition. Is that Fed inflation trend line of 2.5% taking into consideration oil prices or does the Fed see oil prices as a temporary shock to the economy? High oil prices will slow the economy down doing the work of Fed rate increases and slow consumer spending as consumers spend more on gasoline and oil and less in other sectors of the economy. I suspect the Fed views it as a tax on the consumer saving the Fed from increasing rates even more. I read Paul McColley's article with a grain of salt since bonds is the area he has a vested interest in. He should be arrested for using the stagflation term as loosely as he does he knows better. As far as higher oil prices and OPEC...it is not in the interest of OPEC to see a slowing US economy which reduces the demand for petroleum resulting from higher oil prices. It is not in the interest of OPEC to see a recession in the US. There is a great deal of game theory going on in the OPEC cartel. Some members have an interest in keeping prices high while other members have an interest in selling as much as they can over time while the prices are at highs while still other members are sympathetic to US concerns and can be pressured politically. Some of these factors will push the price of oil down. Also consider that if prices remain high other fuels are substituted for oil. Further, if the US releases oil from the strategic reserve that also gets OPEC's attention. It is not a situation easily analyzed but one in which I see the price of oil falling rather than staying high over periods of time. Finally, concerning gas and gas prices. Gas is a stored commodity. No one knows whether or not gas prices will be high during the winter but if the winter turns out to be mild watch gas prices plummet. I don't need to tell anyone here energy and gas prices are volatile and turn on a dime which is why traders in the pit hedge if they can. Sometimes hedges cannot be put on because prices move too fast, are too volatile, and hedging turns out to be too expensive...if not impossible to do because of illiquidity. A couple of hot days during the summer and prices spike tremendously hour by hour a couple of cool days here and there and prices plummet hour by hour especially in the gas markets. Call it what you want but it is not a Goldilocks economy At this moment no one knows what type of economy we are in stagflationary, inflationary, recessionary, or goldilocks my bet is that the Fed holds off on a rate increase looks at the data over the summer and then gives us a verdict. I am betting on a soft landing.

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