Ignoring real-time data is not part of our process and we would suggest that you make sure it does not become part of yours.
The constant pace of the posting on the topic from one certain academic is enough to tell you that the inflation-deflation debate is here to stay. What is not here to stay, it seems, is basic common sense. All the accolades in the world (deserved or not) are merely noise when simple logic is cast to one side for the sake of an unyielding loyalty to one idea.
Yes, our favorite – and most dogmatic – correspondent from the Ivory Tower is apparently dissatisfied with the focus on commodity prices as an indication of inflation. Today, Professor Krugman has enlightened us to the fact that “commodity prices are a global phenomenon, driven by world demand” and that the “United States doesn’t drive these things”. Looking at the math instead of paying heed to dogma, we have seen on a daily basis over the last number of months that the inverse correlation between the dollar and commodity prices has been extremely high during the recent melt up in commodity prices. The prices of oil, copper, cotton, and other key commodities are denominated in dollars. When Federal Reserve policy debases the dollar, the prices of commodities denominated in dollars go up. Other factors also impact commodity prices, of course, but to ignore the real-time prices and the fact that commodities are denominate in dollars is – in my view – ridiculous.
We are maintaining our stance that the Federal Reserve’s policy of Quantitative Guessing will result in inflation. QG=i. The world is not waiting hear the selection-biased views of academics on this. The World Bank, Dai Xianglong, Chairman of China’s National Council for Social Security Fund, and German Finance Minister Wolfgang Schäuble have all recently expressed strong reservations about QE2 and its impact on the dollar and global asset bubbles.
Since the Bernanke speech in Jackson Hole in August, the eight commodities and two commodity indices shown in the chart below have gained an average of 40% in price and 26% if you exclude the 170% move in Cotton. No, it’s not “core” inflation; it’s “real” inflation that reflects a significant portion of what every US consumer consumes. More importantly, it’s a regressive tax on consumer spending, especially for the middle class. So who is going to pay the inflation tax? A segment on NPR Radio yesterday morning outlined the hindrance that rising gas prices poses for the U.S. economy. One commentator on the segment quantified a $10 rise in oil prices as a $200 million tax on the economy per day.
As it stands, the earnings and guidance from corporate America are not reflecting a slowdown in demand from the inflation tax or any significant pressure to margins. The past earnings season has been one of the strongest in recent memory as measured by Bloomberg’s forward guidance index. The index looks at the comparison between the companies forecast and the consensus analyst estimate. The trend of companies reporting positive guidance versus negative guidance has accelerated for four straight weeks.
In the upcoming quarters, something will need to give way and it will likely not be The Conscience of a Liberal. Ironically, The Conscience will be in New Haven today and will likely be hearing from The Conscience of a Hedgeye!
Howard Penney
Managing Director
