Inflation Fears vs. Reality

posted by Nima

June 7, 2009 · Posted in General Economics 

Markets everywhere are unanimously heralding a return to dollar inflation

Perceptions:

Inflation expectation is up:
inflation-expectation-june-2009
Click on image to enlarge.

Stock markets are up (S&P 500 below):
sp500-june-2009
Click on image to enlarge.

Treasury yields are up (10 year Treasury Note yield below):
10-year-treasury-notes-june-2009
Click on image to enlarge.

Spreads between Treasury Inflation Indexed Securities and regular Treasuries have widened significantly:
10-year-treasury-notes-vs-tips-june-20091
Click on image to enlarge.

The dollar is dropping against major currencies:
dollar-euro-june-20091
Click on image to enlarge.

Recent news are screaming Inflation:

Gas prices above $2.60:

Gas prices have been steadily rising since early December, when the national average was around $1.60 a gallon. But despite the recent rise, gas prices are still well below year-ago levels of $3.986 a gallon and last year’s all-time high of $4.114 a gallon.

But some are concerned that prices will continue to rise. Part of that has to do with the usual increase in demand for gas during the summer months.

In addition, rising hopes of a U.S. economic rebound have helped push oil prices higher as the dollar has weakened against other currencies. A weaker greenback tends to push up the price of oil since oil is traded in dollars around the world.

Dollar’s wounds reopen:

Emerging market indexes and commodities are surging as investor wealth pours in once again. Profligate US spending and skyrocketing deficits, hyper-loose monetary policies in this crisis, and collapsing confidence that the Fed will actually be able to withdraw such policies and excess liquidity when required, are all causing dollar inflation expectations to become deeply rooted in investor psychology.

The overpowering perception on the part of global investors that the Fed, Treasury and Administration are losing control of the US fiscal position, and that inflation (more likely hyper-inflation) is virtually becoming inevitable is threatening to wreak irreversible harm upon US finances and upon the dollar itself.

Reality:

Actual market data, however, tells us the following:

Credit is imploding across the board…

Consumer Credit:
consumer-credit-june-20091
Click on image to enlarge.

Commercial Bank Credit:
commercial-bank-credit-credit-june-2009

Industrial and Commercial Loans:
industrial-and-commercial-loans-june-2009

Loans and Leases at Commercial Banks:
loans-and-leases-at-commercial-banks

Real prices are dropping at unprecedented rates:

Case-Shiller-CPI (CS-CPI) vs. CPI-U

click on chart for sharper image.

See CS-CPI Negative 5.0% Third Straight Month for more details.

Greenspan ignored the effects of asset bubble like housing, by failing to take into consideration housing in the CPI. Real interest rates were -5% in mid-2004 and stayed that low for quite some time, spawning the biggest credit boom the world has seen. Now in spite of a Fed Fund’s rate that is zero, real interest rates are +5%.

Home prices continue to decline:

home-price-index-march-2009
Click on image to enlarge.

According to the new Case Shiller report nationwide home prices dropped by 18.7%.

Top 3 annual declines:

1. Phoenix, AZ: 36.02%
2. Las Vegas, NV: 31.23%
3. San Francisco, CA: 30.06%

Top 3 monthly declines:

1. Minneapolis, MN: 6.25%
2. Detroit, MI: 4.85%
3. Phoenix, AZ: 4.52%

…this is not the stuff from which inflations are made.

I expect a reversal of market data to adjust to real conditions sooner or later. I think Treasury Notes will be a good call. The dollar should start to rise again against other currencies. I think gold is likely to do fine. It is merely back to where it was before the inflation fears began. Silver’s excessive gains, however, may have partly been fueled by these inflation expectations. I would advise caution here. It may be time to ring the register on some silver gains and buy at another low.

Bit.co.in Advertisement: Get your shortlink before someone else does at Bit.co.in.








Related Content

Comments

2 Responses to “Inflation Fears vs. Reality”

  1. LauraB on June 9th, 2009 2:25 pm

    Thanks for the two excellent posts on Inflation/Deflation!

    Did you see this: Top Chinese Banker Calls for U.S. Sales of Yuan Bonds
    http://www.reuters.com/article/newsOne/idUSTRE5561QK20090607

    Here’s Denninger’s take: http://market-ticker.denninger.net/archives/1094-To-China-Bite-Me.html

  2. Nima on June 24th, 2009 4:02 pm

    What Denninger does not consider: What if the dollar gains against the yuan over the years to come?

Leave a Reply




 

Subscribe without commenting