Stcgg, From Larry ( Kudlow ). A different point of view,
pehaps a more bullish point of view.
He feels no need to raise interest rates because high oil
prices will do the job, slow the Economy, commodities are in
a bear market and there is no inflation among other points,
TA
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CNBC
June 28 2000 9:00AM ET
cnbc.com
Commodities to Fed: Stop the Hikes
By Lawrence Kudlow
Contributing Editor
As the Fed huddles to deliberate policy in its fortress headquarters in Washington, DC, surely it realizes that a public backlash to tight money and slower growth is gathering force in this election year.
Congressional member groups are writing letters to the Federal Reserve to protest higher interest rates. A recent Investor's Business Daily poll of top executives at fast-growing companies shows that 67 percent want rates left alone.
A Rasmussen Portrait of America survey reports that just 30 percent of Americans believe that Fed rate hikes will have a good long-term impact on the economy. Forty-seven percent think that rate hikes will have a negative effect.
For the Fed, Congress and the public, there's a way out: abandon the austere Phillips curve and move to a prosperous price-rule.
In a price-rule model of monetary policy, inflationary signals of excess liquidity are thrown off by key market indicators such as gold, commodity indexes, the dollar exchange rate and various bond market spreads. Currently, these price indicators are unanimous in their verdict: the Fed tightening cycle should end.
The price-rule approach to stable prices uses real world market trends -- which capture all available information -- instead of discredited econometric forecasting models. In other words, markets, not government planners, drive policy. It's a better idea.
Usually I emphasize the gold price as the mother of all barometers of excess money and future inflation. Over the past 2,500 years gold has exhibited an unerring record in flagging monetary value, or the lack thereof.
Admittedly, the data between 450 BC and, say, the twelfth century, are a little sketchy. But the evidence is there. Trust me on this one.
Today's gold price of $286 is at the low end of its twenty-year range, 30 percent below its early 1996 peak, and right on the line of its 200-day moving average. Using this smoothing technique gold is only about 5 percent above its recent $270 low registered last September, but well under the recent twin peaks of $330 and $315. There's no inflation signal here.
Wake me when the precious metal moves to a $350 to $400 range.
In the commodity arena, there's a similar lack of inflation evidence -- outside the oil story. Temporary oil shocks, however, do not cause inflation without a surge of excess liquidity to "monetize" the single price rise into a general inflation increase. In which case the problem is really too much money.
Anyway, during a period of tight-money liquidity withdrawals and higher financing costs such as the present, the important point about oil and gasoline pump price increases is the tax hike effect that will temporarily depress economic growth. The oil story is not only not inflationary, it is recessionary. It's already taken a whack out of the consumer confidence index, and could take real GDP growth below 3 percent in the second and third quarters.
Meanwhile, if money remains scarce, then oil is destined toward a $20 to $25 range, or even lower. On average, an ounce of gold buys about twenty barrels of oil during the past two decades. If gold holds around $285, then oil could actually fall below $15. Think of it.
Better to exclude the temporary oil bounce from the widely-followed CRB futures commodity index, which misleads by appearing to have increased by 25 percent over the past year or so. Really, commodities are in a bear market.
fp.cnbc.com
And guess what? There's a Bridge/CRB spot index that does in fact exclude energy, along with precious metals. So take a look at the accompanying chart. This is the chart du jour. It may be the chart du mois. Perhaps even le chart de l'annee. If only the FOMC would focus on it.
Between the end of 1995 and the end of 1998, the Bridge/CRB spot index shows deflationary money as represented by falling commodities, then commodity price stability in 1999 and 2000. In fact, the most recent spot for the spot index is actually below its 200-day moving average. Investors prefer financial assets to commodities, a sign that future inflation expectations remain low.
Is this commodity index a reasonable measure of inflation? Absolutely. It is made up of a broad range of twenty-three individual commodities, covering raw industrials, metals, livestock, textiles, foodstuffs, fats and oils. Take a look at the second chart, which shows the post WWII history of the spot commodity index. Between 1946 and 1971, when the Bretton Woods dollar was linked to gold, the index was virtually flat for 25 years, a period when inflation was essentially nil.
fp.cnbc.com
Then, the index took a mighty leap upward as the dollar was de-linked from gold and the money supply spiraled out of control between 1971 and 1975.
And then another great leap upward as the monetary problem worsened between 1977 and 1980. All in, the Bridge/CRB spot index moved from 100 to 300 during the period of double-digit inflation.
Over the past two decades, however, the spot index has zigged and zagged in a relatively stable range centered mainly between 240 and 280. This was a period when inflation generally averaged less than 3 percent per year.
During the past four years, a period during which the consumer spending deflator averaged less than 2 percent per year, the index fell from 320 to 220, the low end of its twenty-year range. That's just about where it is today. No inflation in sight. This sort of commodity price rule is a first cousin to the gold price rule. They're both sending the same signal: no inflation. No need for Fed overkill.
Elsewhere on the market price front, the dollar exchange rate index has appreciated to a five-year high and now stands above its 200-day moving average. This signals plenty of dollar buying power at home and abroad. Counter-inflationary.
The TIPS spread (10-year Treasury yields minus the rate on inflation-indexed 10-year notes) has narrowed to 200 basis points from 250 bps, another signal of tame price worries. The 10-year Treasury itself has declined over 60 basis points from its winter high. Baa-rated corporate bond rates have declined over 50 basis points, mostly in the last month. These are all disinflationary signals.
Market prices are smarter than econometric models. They are also smarter than Phillips curves and NAIRUs. They are also smarter than the advocates of Malthusian limits-to-growth.
Once upon a time his monetary eminence Sir Greenspan used to follow market price indicators of excess liquidity and inflationary money. Perhaps he will return to the price rule before long. If he does, he will see that interest rates today are too high, not too low.
Investors take heart. Better times are coming.
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Message #55640 from Stcgg at Jun 28, 2000 7:00 PM ET
Rally in Naz & SnP Ended this Afternoon..
Per the waves, abc corrections complete - I expect a decline in all indices over the following weeks to bring the indices to lower lows than their Apr/May lows - Dow close to a sell signal..
If not, bears no longer in control of this market..
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