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September’s inflation data is hardly “deflationary”. Conversely, it looks quite sticky when considered on a y/y basis. We define stagflation as the rate of inflation meaningfully outrunning the rate of growth. You don’t need a PhD. in math to realize that +5-9% inflation run rates (see charts) are expansionary. Yes, everything that matters in our models happens on the margin, and yes, both of these upward “Trends” have sequentially rolled over. But do not mistake this as deflation in American consumer or producer prices. Deflation is what you see in your home or portfolio right now – i.e. their prices are DOWN year over year, not UP.

There is a tremendous divide right now between the alarmist Bush administration rhetoric and economic reality. Not unlike their reactive approach to Iraq, Paulson has come out guns a blazin’ and a huntin’ for the evil doers that he can blame for this mess. “Heli-Ben” has his back and is right there willing to drop free moneys from the skies even though the last thing you should be giving to American junkies is more cheap money to borrow. It’s time to take a deep breath. Look at the charts and do the math. GDP in the USA for Q4 is going to be flat to negative, while inflation is going to be up. That’s called stagflation, and you need to raise rates (or stop cutting them) in order to stop it.

KM