Principles of the Stock Market » Inflation is a Problem!

Inflation is a Problem!  

Posted Feb 22 2008, 07:51 AM
by Richard Schwartz

INFLATION VIEW/FED’S INFLATION VIEW.  Out of Touch!  Federal Reserve Chairman Ben Bernanke told lawmakers February 14th that “inflation expectations appear to have remained reasonably well anchored.”  He says that each time he speaks and I’m totally sick of hearing it because I can’t agree.  He must be trying to jawbone us into believing this since jawboning is one big tool in the Fed’s arsenal.  Guess we do believe what we hear over and over.  I see Newsweek columnist Robert Samuelson calls this phenomenon a “vast echo chamber in which if something is repeated often enough, it becomes its own reality.”  Anyway, inflation expectations have been well anchored for a couple decades now because of globalization, but everything changes, right?  My problem is I see inflation rising and the deflationary backdrop economic environment of lower and lower prices coming out of China has lifted.  As I’ve reported to you a number of times China’s exports are now costing (the world) more.  First, former Fed head Alan Greenspan noted this new trend as he went to press last year with his fabulous book, The Age of Turbulence.  Now two days back Investor’s Business Daily ran a chart showing Chinese export prices have risen for eight straight months.  And as I reported to you yesterday, Asia is battling rising inflation with higher interest rates and putting caps on prices and using subsidies as well.  Europe is extremely worried about rising inflation as well which has caused the European Central Bank (ECB) to resist lowering rates during this global credit contraction.  So inflation is rising, no matter what the Fed says.  Thus, as for the bogeyman of rising “inflation expectations” I have to think they are just not well anchored anymore.  Schwartz View:  In fact, since the Fed has been totally wrong in most all their predictions and forecasts for some time now, I’d use their bad streak as even more evidence that inflation and inflation expectations are indeed rising.  Remember Michael Kay of ESPN said he thought the  New England Patriots were going to kill the NY Giants in the Super Bowl and I took that as evidence supporting my long shot pick of the Giants.  We all know how that one turned out.  Sometimes one gets on a great roll and sometimes one has bad karma.  Right now I’d say inflation is a problem.  In fact, the trend of inflation is acting just as anything does after a long, long trend in the opposite, in this case downward direction since ex Fed head Paul Volker broke inflation’s back in the early 1980s.  It spikes up for awhile off the bottom, then recedes a bit, that starts a long lasting upward move.  Remember as well and finally, the one thing we can always bet on is change. 


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