"Bonds are saying the Fed should not be raising rates, there is no threat of inflation."
I heard something like this in an interview last night. I don't think it's quite right. There is inflation but it seems to be confined to health care and energy/commodities, if you told me other areas where there's inflation I wouldn't argue with you. I do agree that inflation does not seem to be apparent in the typical inflation measures however.
The economy's expansion, unusual as it is, and the inflation (where it exists) makes raising rates appropriate. The trading at the longer end of the curve warns that the expansion may be weak and coming to an end soon.
The worst possible outcome of this situation is stagflation, rising rates and slowing growth (or even recession). While there is no real worry right now for stagflation its not impossible.
I believe it is important to stay in touch with what can go wrong with the market. At different points in the stock market and economic cycles the market faces different threats. One thing that could take the US further down the road of stagflation would be some sort of disorderly drop in the dollar. Currency strategists always talk in terms of orderly or disorderly moves to the point of being over used but breaking 100 on the Yen or 1.40 on the Euro might count as disorderly. The domino effect here is a currency gets too weak, rates get raised to make holding that weak currency more attractive (like a lot of the commodity currencies), hopefully causing the value of that currency to rise. The downside might be that rising rates could hurt the economy. But as I say not a real concern just yet, stay tuned.
Alan Greenspan goes to Capital Hill to get yelled at by Barney Frank this week. I was asked for my opinion about his testimony the other night on CNBC Asia. I would be very surprised if he walks away from the two days having left turmoil in his wake. If there is some sort of big reaction to what he says on Wednesday I would look for it to be unwound the following day.
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3 comments:
What were the big performers during the Stagflation of the 70's? Was it Cyclicals?
-Dave
This is a great question and I'm sorry I don't know. My version of the trader's alamnac does not have the answer. I will try to find and answer but I'm not real optmistic.
Subjectively I feel inflation is higher than the numbers, I think a lot of people have that sense which encourages increased prices when people think they can get away.
It's said that the mainm deflating factor (China) could absorb a ten percent rise in their currency (or local inflation) and offer similar prices because of improving market efficiencies. They've eliminated more factory workers than we have.
I do know stagflation in the seventies had lots of psychological factors. A big one was Nixon's attempt to impose wage and price controls, it briefly worked, but it distorted things and helped drum in the sense of increasing crisis. Then came the first oil shortages and price increases of 1973 right after he started his second term. Most independant gas station owners thought the big boys were trying to wipe them out (and independants did go down massively) and then a few months later you had the Yon Kippur war, the Opec embargo.
All of this was really set in an era of great tension, of terrible angers and fears. All these tensions came through, and the country was deeply alienated and disillusioned. People didn't want to face a lot of things.
The Vietnam vets are an example. Don't be misled by the modern claims that it was *only* the left that turned away. Lots of American legion posts didn't want them because they "lost their war" and were "probably drug users." As a group they simply could not talk about what happened and were somewhat shunned.
Moods changed 4 or 5 years later after Rambo won the war, but in the period they needed it the country turned away. I live in the only town in the United States (san Mateo Ca.) that held a home coming parade.
Our country behaved shamefully and our own desire to be innocent along with pressures to minimize the image of vet as misfit, hundreds of thousands suffered immensely. Essentially alone.
Very soon we will have hundreds of thousands of returning vets of which perhaps a quarter will have suffered severe pyschological consequences.
Few will be prepared to hear the complexities and contradictions of their stories. This has always been the case. I think we all know WWII, Korean and even Desert Storm vets who have not had a chance to exorcise demons, but at least (unlike the Vietnam vets) we as society can avoid treating the new wave as untouchables.
I put that in as aside, but it is an example of the tension and ripping apart of the late sexties and early seventies. It was everywhere, apocalyptic images were common. One of the common themses of the homebrew club, the "freaks" (hippies died in 1968) who put together the first personal computers was not simply revoly against corporate and government monopoly of computational power, but devices that could be pput together from the scatterings of a society falling apart.
I don't think that we have that kind of tension now, but there are seeds in Iraq and elsewhere as will as the splitting. It's not as terrible as then, a Wallace wouldn't get tens of millions of votes, but I would suggest social malaise is something to watch for.
Along with questionable economic policies. Nixon marked the line between a sort of command oriented belief and hands off markets. With wage and price controls, even/odd number days at gas stations and the ineffectiveness of this there was loss of faith that the government could successfully intervene directly.
however the Bush economic "paradigm" is risky and could undermine faith in our government policy if tax cuts, high deficits don't create a robust economy fairly rapidly. Doubts are fairly widespread even among conservatives.
My expectation is that if you see stagflation coming then you can expect a big drop in stocks (we had that in the seventies) and probably real estate. So going to cash (possibly foreign) and then buying in at various crashes might be a good strategy. What happens is that rising prices push everyone and at least in the first few years the stretched money gets pulled out of stocks.
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