About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, February 27, 2008

Inflation

The inflation thrust indicator is spiking to one of its
highest levels in over 25 years. This is consistent with a
continuation of inflation above 4% measured yr/yr. The
broader measures of inflation such as the CPI remain
highly sensitive to the indicator, signaling that commodities
continue to drive inflation. Non-commodity measures of retail
inflation have yet to incorporate costs and expectations that
are evident when retail inflation is more mature and less
sensitive to shorter term pressures in commodities prices.
The pass through of commodity price momentum has been moderate
so far. All of this is consistent with the early stage
development of deeper and more persistent inflation.

The Fed has been easing the FFR% aggressively despite the
upward pressure on commodities because it believes that a
deeper and more pervasive inflation psychology has yet to start
to blossom. The Fed has also so far opted not to provide the
monetary liquidity needed to support a materially stronger
economy. This is a "thread the needle" policy. The Fed cuts
rates in a weak short term credit environment but does not
liquify, thereby gambling that the commodities markets will
give way to deteriorating economic momentum before a broader
and more serious economic downturn develops. Old Fed hands
would be impressed with the cleverness of the scheme but would
also caution that it could well be folly to try such fancy
fine tuning.

So far the Fed's gambit has not worked, and without development
of a commodities downturn / correction real soon, the Fed could
face a more daunting time and get itself into hot water
politically.

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