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 !!!

Monday, November 03, 2008

Inflation Situation

Since registering a major interim peak this June, my inflation
pressure gauge has taken the steepest plunge in decades. This
reflects the heavy weighting given to commodities prices as an
inflation leader. The commodities composites have simply tanked.

Technically, the major commodities composites are deeply oversold
and remain as mercurial as ever. But if commodities stay low or go
lower, the long term evidence is consistent with 12 month inflation
going to zero from 4.9% posted for September. This would imply
some month-to-month declines in the CPI going forward. Frankly,
if the main commodites composites weaken significantly further,
then the inflation thrust would be better called deflation thrust.

The outlook for rapid deceleration of inflation primarily reflects
a sharp weakening in demand for basics rather than a blend of
rising production capacity and a mild weakening of demand.

The rapid decline underway in the weekly economic leading
indicators suggests an extended period of depressed economic
demand lies ahead. But the case is not quite so clear cut. That is
because the leading indicator measures include sensitive raw
materials prices which have dropped off the cliff, but partly as a
result of the unwinding of large speculative positions in futures
and hefty inventory speculation by users and suppliers. Now, the
economic shock effects of the financial crisis are obvious enough
for now. However, since economic shocks do not always translate
into longer running difficulties, one needs to be careful not to
jump too far ahead in one's thinking. I am not trying to pull a
bullish chestnut out of the fire here, but am merely pointing out
that sudden reversals of economic fortune can, on occasion, be
shortlived. And, do not forget how volatile oil, petrol and other
commodities can be.

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