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May 18, 2005
Consumer prices (still) inflating, Wed., May 18, 2005, 8:49 AM
I seem to have this thing for writing headlines before they happen. As somebody I've known for 25 years said to me yesterday, related to a business venture I'm in, "You have an ability to sniff out problems better than anybody I know."
So at 8:00 am ET, I wrote the headline, "Consumer Prices Inflating" and at 8:30 am, the CPI for April was reported to be up +0.5 pct. I had reported that "The average consensus for CPI is +0.4 pct"
So, today's number easily beat that. I wrote the correct headline early.
But, now the 10-year U.S. T-Note has moved sharply higher in price, and the yield has dropped to 4.07 pct. This is unbelievable.
Moreover, CNBC economist Steve Liesman has just told the audience that: "The bond market doesn't see any inflation here to worry about"
I want to ask bond traders a legitimate question. Are you buying these bonds? Or is the Fed buying these bonds to keep a lid on the problems that are building in the financial system?
Why didn't the floor fall out below gold when bond yields collapsed? Is that the bond market saying that the PPI/CPI trends are pointing to deflation?
If you are one of those bond traders who really can look at these PPI/CPI numbers, and the ones yesterday in the U.K., and in many other economies of the world, and say that deflation is the world's biggest problem today, then I truly don't know what world you belong to.
You see, if you're playing poker and somebody is bluffing, you don't find out until the game is over. This situation applies to capital markets. Over the years, and I don't mean in the minutes following release of important economic data, but over the years, there is a high correlation between rising PPI/CPI numbers and interest rates, and gold prices, and falling USD.
If you want to play mind games with yourself, and say, "Oh, I guess the Fed is going to tighten tomorrow, so I'd better prepare today for deflation", then you've been watching too many Kudlow shows from your room at the Castle in Kissimmee.
As I see it, anyway.
Posted by Posted by Bill Cara on May 18, 2005 08:17:49 AM | Category: Economics
Discourse
I for one do not believe the CPI nor core CPI numbers. There is inflation out there everywhere except in the average working person's salary. The only thing preserving that average person's buying power is if they have an ATM house card as evidenced by the 700 billion that US homeowners took out of their home equity in the last year. Does anyone know the answer out in cyberspace as to why the 10 year bond is going lower? The real Fed Funds rate is still negative. Please don't tell me that it is anticipation of lower inflation unless you believe the markets are expecting a financial accident in real estate, the stock market, a crash in an economy like China, etc. I do not believe a soft landing will extricate us from stagflation.
Posted by: alan at May 18, 2005 10:16 AM [link]
I take the view on inflation that perhaps inflation is a reduction in the value of money because of excess money supply creation ("fiat" or paper money -- picture stacks of worthless paper bills in historical hyper-inflated economies). Therefore, higher prices that are a result of supply/demand realities do not spell inflation. When oil prices rise because demand outstrips supply, this does not reduce the value of money (inflation) -- it increases the value of oil. The value of money may stay the same or increase.
Posted by: Mark at May 18, 2005 11:17 AM [link]
Bill:
I've always found it wise to step back from the market if bearish news comes out and the market rallies instead. Bullish action on bearish news to me means that people willing to fade the news are buying. Those people typically have a longer term perspective than do people who trade with the news. This means that the market is still in "strong" hands and this has bullish implications.
Carl
Carl
Posted by: Carl Futia at May 18, 2005 9:57 AM [link]