Inflation and Dollar Watch, May 2007

Doomsday is still eluding us.  Inflation hasn't gone anywhere, and the dollar has a long, long way to drop before it'll be as weak as the Nixon/Ford/Carter dollar was. 

Here's the monthly inflation chart.  Looks to me as if the sideways-moving inflation measure is almost where the Fed should like to keep it: 2% plus or minus a smidgen.  Click to enlarge:

Next are the trade-weighted dollar charts, and a brain teaser: Is the dollar "dropping like a stone"—€”or is it just coming of its recent peak?  Click to enlarge:

Besides those items, there's more good news: Looks like GDP growth for the rest of 2007 will be back on track, according to this upbeat article by Brian Wesbury's folks.  Nonetheless, I keep hearing the incessant chant that doomsday is just around the corner, so I'll keep watching for signs of it—just as I've been doing for decades. 

==========
End note...

Here's where the data came from:
• 10-yr T-note nominal rate
• 10-yr TIPS rate
• Dallas Fed trimmed mean PCE inflation
• St. Louis Fed weekly dollar index
• St. Louis Fed monthly dollar index

Comments

[Bob]

Headline sensationalism doesn't bother me. The affect it has on the naive and ill informed is a concern though.

What does make me less positive than I would like to be is lingering problems that have the potential for harm if they continue to linger. Admittedly, my cynical, dark side is more prominent these days and is likely to remain so until I see much more progress made. Too much talk and analysis these days. Way too little results oriented action.

[caveat bettor]

Steve, thanks for clarifying the truth for us. Unfortunately, those wearing tinfoil hats will tell you that government numbers are manipulated and therefore useless. But until those folks point me to better datasets, the ones you're using are the best available.

[Iqbal Latif]

On ‘doomsday is just around the corner’,’ your analysis is one of the best on the net, I read your pieces everyday without fail, one of the most simple and clear. The saga of non inflationary growth continues as GDP expands and create a platform for a big move in the markets. The debt markets have finally realized that fear of recessions were overblown and yields are just correcting, a move towards a normal looking yield is now being interpreted as inflation fears retuning to markets. Last GDP numbers had shown the deflator to be anaemic for $, new interpretation of Fed remarks every day and search of instant gratification will wipe out short term players. The market will roar up as numbers would show that $ maintains its grips on the global economy, until $ is the currency of trade for Oil and major commodities, and R&D is top activity of the US entrepreneurs, US will maintain as the safe haven for orphan world liquidity. Where else Chinese or Japanese can place their trade surpluses? Other than US treasury there is no other big enough market to absorb the global excess liquidity. Indian rupees is heading north creating problems for exporters as hot money threatens economic stability so are Russians worried about their new found 400 billion $’s. Top lace huge global forex liquidity is a nightmare for host countries they have become rich but they realize that the fulcrum of this system is continued prosperity of North America, the consumption of North America is eradicating poverty in China and India. No one is interested in destabilising the economy of its best cherished customer.

In my humble opinion this is only half way of the Bull Run. NASDAQ has not even participated; it is well below the year 2000 delusional highs. S&P’s broad-based rally has helped it break a new high in an environment where overall P/E ratio is at a low of 18 in spite of year-on-year productivity gains of 2.5%.

Most of the DOW stocks have quite a room to go up; HPQ is just rising from slumber; C, CAT, XOM and KO, the quintessential part of any global portfolio, have a lot more opportunity to move up. If a lagging NASDAQ catches up with the S&P breakout and DOW stocks with a room to move break out, we will see the present levels as a platform for a good juncture for a grand rally.

Debt markets have finally started pricing the non-inflationary growth scenario; instead of a recessionary scenario, where the conundrum of inverted yield curve was disturbing many a guru, the rising yields and upward movement of the long end and lowering of the front end of the yield curve makes it a more normal looking yield curve signaling a customary growth economy, in other words, non-inflationary nature is not yet priced by the equity markets. This onset of the correction in the shape of the yield curve in the next stage will lead to a parallel drop of the entire yield curve, as the non-inflationary nature of the economy notion settles and is priced in the markets. I see a kind of bull market that will move forward based on year 2000’s bull call by GS’s Abby Cohen’s correlation between dividend yields and long bond yields.

In the 1990’s Sir Greenspan used to worry about US’s unique status as an oasis of stability within the global economy facing daily turmoil;

Now we have several new countries called BRIC’s that have rising capacity to consume, capitalism survives on consumption and availability of choice,

In the bull run of year 2000, billions living in absolute poverty in today’s emerging Brics were not consumers or savers then; today, they are both. Chinese trillion plus foreign exchange reserves alongside India’s new prosperity, and yesteryear’s bankrupt Russian state replaced by a nation that has 400 billion $’s of reserves, have created a new demand. These new billionaires on the block have created a new demand of infrastructure; hence, Cat and FWLT are so sought after. These new consumers will create requirements on a level that will eclipse baby-boomers’ spending. Rising consumerism in the world is ascendancy of capitalism. US markets, the ultimate sanctuary of global liquid funds and savings, and as a world leader in R&D, will benefit the most.

New oases of stabilities have been created by new levels of consumerism and new levels of prosperity. The huge increase in global money supply is matched by an increase in productivity and low-cost manufacturing. When China gulps energy, it manufactures not only for its own populace but for the entire world; per capita consumption of Chinese energy has actually to be distributed to the entire spectrum that benefits from Chinese products. It has become the low-cost exporter of goods that helps stem the glut of paper money. Indian brains and Russian and Brazilian capacity increase in commodities have helped the low inflation to continue despite massive increase in money supply. Previously, any such increases, like we saw in Weimer republic, were hugely inflationary. Now, money supply is matched by production increases in which billions are partaking in the benefits. The increase in inflation of tangible asset class has seen a massive growth, a classic example of huge amount of paper money following prime assets; the recent increase in takeovers and mergers of private and listed companies is, rather, a fulfillment of a huge appetite of private equity to place their paper money to work.

If one compares the global money supplies in year 2000 to the present and then see S&P at the same level as year 2000 sitting at a P/E multiple of 18 instead of 28-35, one can perhaps assume that equity markets’ assets are underpriced compared to the huge increase in the global money supply. Like global real estate and frenzy of the Chinese stock market, I feel the time of US equities is approaching near.

[Ken]

Well on a "common man" level inflation is thru the roof, or should I say the cost of common goods (especially food stuffs) and services has increased sharply.

For instance, my 5.5 oz. bag of Golden Flake Bar-B-Que potato chips has gone from about $1.00 in the early 2000s to $1.59 in 2007. And pretty much everything else has gone up similar levels (bread, milk, cereals, etc.).

Consumer electronics prices seem to always being going down. I wouldn't doubt that offsets the price increases in other areas. However, to tell the truth, our family doesn't buy a lot of electronics every year, those are like every five or ten year type of purchases.

Anyway what I call the common goods, those items that people purchase on a regular basis (such a gasoline) seem to be going thru the roof.