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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (49971)	4/23/2006 7:13:07 AM
From: Square_Dealings	Read Replies (1) \| Respond to of 116555

<Oil has next to nothing if not NOTHING to do with inflation.> hello? bayrecovery.com ..

To: mishedlo who wrote (49971)	4/23/2006 10:13:47 AM
From: Perspective	Read Replies (2) \| Respond to of 116555

Been thinking about 'FLATION and money supply again. A little new way of thinking for me perhaps. It seems that money supply creation through time has rippled through different asset classes. It seems that the most immediate impact of artificial pressure on interest rates by the Fed is to inflate bonds. However, there is fairly quick transmission to other asset classes. Stocks follow on short order, and real estate usually tags along a little later. However, once inflation has marked up bonds, stocks, and real estate, it begins to stoke demand and turns up in commodities. Now why is it that price increases are "good" if it involves bonds, stocks, or housing, but "bad" if it involves commodities? Pretty simple. In our economic system, anything that causes corporations to turn the crank more times in a given year leads to higher employment and profitability. Rising bonds, stocks, and real estate create purchasing power that boost aggregate demand, if only temporarily. However, the impact of monetary policy on commodities occurs with a lag, and rising prices there sap corporate profitability because they are inputs. This declining profitability becomes sand in the gears and brakes the economic engine. Thus the Fed is asymmetrically inclined toward increasing prices on assets, and against rising prices of any inputs: commodities or labor. The big question for me now is whether or not the Fed still perceives rising commodities as its problem any more. With our so-called miracle service economy, the main input for US corporations has shifted almost wholly to the price of labor. It could be that the only thing the Fed concerns itself with any more is the price of labor. Commodities pricing is a problem only for the manufacturing economies of the world. Under this scenario, we could be set up for an unprecedented continuation of this commodities pricing cycle until the producers can bring more supply online. The only way that the Fed then cares a jot about commodities is via the still further lagged impact on labor pricing. While there is certainly global pressure on labor pricing, eventually higher gas prices will lead to wage demands in the U.S. What do you think? If it were true, we should be rethinking the potential for commodities this cycle. It may be that "it's different this time." BC

To: mishedlo who wrote (49971)	4/23/2006 10:41:17 AM
From: Perspective	Read Replies (1) \| Respond to of 116555

While I'm reluctant to carry much of any commodities exposure any longer (actually I'm now out of them completely, and very nervous about the decision), I think I've found another couple of investment themes that succeed under either scenario, just due to natural market forces. Basically, the old-line commodities-intensive companies are darned if the Fed does and darned if they don't. The Fed is hosed on commodities, and may not even care. So if your costs depend highly on commodity inputs, you are hosed. The first theme is airlines. I think we're finally hitting the tipping point on them where their profitability falls this late in the cycle regardless of Fed action. If the Fed stays tight, we get a general recession and revenues drop. If the Fed eases, their cost of inputs has risen to the point where it outstrips the positive impact on the revenue side of the equation. I think we're just now seeing this show up in their stock prices: stockcharts.com\|D The other two themes I've got are the auto manufacturers and - you guessed it - construction. We've hit the threshold where the steel companies' gain has become the construction companies' pain. Materials prices are rising faster than demand for construction, and I suspect this is really starting to nail profitability just as the demand is tipping due to higher financing costs. Do you have other suggestions along this theme? Short manufacturers, with a service economy long hedge would seem to be a pretty decent combination. BC

To: mishedlo who wrote (49971)	4/23/2006 10:51:10 AM
From: Tommaso	Respond to of 116555

>>>Oil has next to nothing if not NOTHING to do with inflation. Please tell me how peak oil has anything to do with anything other than peak oil. <<<< I used to think that. But here's how it works. Cheap oil makes it easier to produce more goods and services. Real economic activity increases with cheap energy supplies. There are more goods and services to share, and they are therefore priced lower. Expensive energy means less production--fewer goods and services are available. Those that are available are priced higher. It's the ratio between money and what money will buy that determines whether there is inflation or deflation. Not purely the quantity of money. Cheap oil increases production. Expensive oil reduces it. Even if the money supply is held steady, prices will rise--as they always do in wartime when goods and services are destroyed in unproductive ways. You are just trying to counter the simple-minded view that energy prices "feed through" and raise other prices. Inflation is only and always a monetary phenomenon. But sometimes it results from constrained supply rather than increased money. And deflation, or disinflation, can occur if productivity increases the supply of goods and services.

To: mishedlo who wrote (49971)	4/23/2006 12:25:33 PM
From: Steve Lokness	Read Replies (1) \| Respond to of 116555

Mish; Let me turn it around. If it is money supply which is responsible for inflation, why haven't we as yet had an explosion of inflation? Here is what I believe. Unscientific at that. There is an increased pressure on a lot of commodities and especially oil. The cost of raw basic materials start the spiral whereby every manufacturer must either absorb or pass along the increases in their production. So very slowly at first but then increasing prices start to rise. The spiral continues to escalate. Now we have higher prices in the production of all necessities - food, energy, etc. The worker becomes increasingly strapped for enough cash and soon has no alternative other than to demand more pay. I think that is where we are right now. The economy is absolutely humming and prices are rising. Money supply of course is part of the equation, but that was cooked in long ago thanks to recklessness of Greenspan. The tipping is the increase in oil. Remember the 70's? It was the price of oil then for sure. Why would it be different this time? People were building houses with interest rates near 20% in some instances!!! That is why I suggested the need of a .5 increase right now to stop. (that's the comment I thought all would jump on). Will it be painful? Sure - so will the result if it gets out of control. ........House building in Washington State is out of control. They are building everywhere right now and the developments have unbelievable numbers of new houses just starting. I visited one site Friday and at 8:00 PM on Friday evening many of the contractors were still working. Don't think those workers have pricing ability? I do. And they will ask for it because they can and because they have a reason - their cost are going up. That's inflation. Steve