russ,
anybody who wishes to enter this debate needs to present third party evidence one way or the other.
Well one good source of external evidence (linked to earlier by Archimedes on this thread) is the ECRI future inflation gauge:
businesscycle.com
They claim:
Our group of researchers, led by Geoffrey H. Moore, pioneered the creation of leading inflation indexes. This work began two decades ago in the wake of the 1970s stagflation when weak growth was accompanied by high inflation, demonstrating that cycles in growth and inflation, while related, were distinct. In the late 1990s growth and inflation again de-linked with strong growth now accompanied by subdued inflation.
The monthly FIG has a mean lead of 11 months and a median lead of 9 months at inflation cycle turns.
For the period ending January 2004, the indicator stood at -5.8% - hardly auguring big inflation ahead.
However, they also have figures supporting the recent rise in industrial prices, particularly metals:
joc.com
Now that I threw in some hard data, I get to give my opinion as well: <g>
1. I think there is a general consensus that the housing and auto areas are totally dependent on continuing low interest rates. Further, consumer re-fi activity has clearly funded much of the consumer spending.
2. Let us assume that the current inflation in raw materials and the continuing effects of the dollar's decline do create some increase in overall price levels. (The alternative is a big squeeze on industry profits). Presumably the Fed would respond by some degree of tightening.
3. Once the Fed tightens even a little, re-fi activity screeches to a halt, and housing (and perhaps auto) slow rapidly. In that environment I can't see raw material inflation continuing for long. Further, there are no real mid-term supply constraints in raw materials.
4. Bottom line is that I do believe we will see a moderate uptick in inflation, but the uptick will rapidly be snuffed out later this year by Fed tightening.
5. My overall thesis is thus that it will require very little tightening by the Fed to have a fairly dramatic slowing effect on the economy. Thus the carry trade is likely to continue for a good while (good for financial institutions) but credit risk will increase (bad for financial institutions), and a moderate dollar decline will continue.
6. This thesis doesn't really suggest that any available investment class will do well this year. A moderate increase in US rates might well force a moderate increase in foreign rates as well.
Right now I'm personally still long biotech (which is where I normally hang out) but short the overall market and have the highest cash position in a few years. Biotech fundamentals are pretty independent of macro-economic trends, but biotech stock prices are not - they are fairly heavily driven by hot money. Right now there is still plenty of it around - just look at the typical gains since the beginning of 2004 in SI's biotech charity portfolio contest:
Message 19697838
Peter |
