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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club
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To: MrGreenJeans who wrote (14422)6/14/2000 5:59:00 AM
From: Justa Werkenstiff  Read Replies (1) of 15132
 
MGJ: Great post.

Re: "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."

One must also entertain the possibility that this a typical second quarter slowdown with reacceleration of demand to come later in the year especially if we get a rally in the equity markets. The lag effect of any rate increases would support this view. Consumer confidence is still at record levels. Equity markets are supportive of continued economic activity at this point.

Re: "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?"

The Fed. is smart enough to realize that oil shocks are unpredictable as to duration and scope. It could end next week. It could go on all summer. It could go on all year. Nobody knows. It is an undiscounted risk because it is unknown. So far consensus is that it will just go away. So far consensus has been wrong.

Re: "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."

True. But, on the other hand, rising energy prices (natural gas included) could impact the cost of goods which lends itself to the stagflation scenario. So you have reduced economic activity as you suggest coupled with higher costs or lower earnings if those costs cannot be pushed through.

Re: "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."

Good point. But these things are unpredictable and the law of unintended consequeces could prevail.

Re: "Also consider that if prices remain high other fuels are substituted for oil."

The time lag in bringing new energy sources on line would be too great to matter.

Re: "Further, if the US releases oil from the strategic reserve that also gets OPEC's attention."

Sure would. But what would the unintended consquence of such an aggressive move? A polarization of sides and the prospect that OPEC will retaliate once power shifts back to them in one possibility. Many OPEC countries have been hurting for years with $10 oil. They want their fair share of the worldwide prosperity.

Re: "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."

Yes, I believe energy prices will fall once economic activity slows sufficiently. It may be too late by then.

Re: "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 think there is the liklihood now that the Fed. will pass come end of the month but the same pressure will emerge once again at some point during the summer.

Re: " I am betting on a soft landing."

I am preparing for either a soft landing or hard landing. I can't lose then. And you had better hope that you are in the minority. I firmly believe that the more people that believe in a soft landing (equity markets), the less likely it is that it will happen.
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