Why I Disagree With Bernanke

The chairman of the Federal Reserve, Ben Bernanke, gave Congress a positive view of the economy yesterday, predicting that declining energy and commodity prices are likely to reduce inflation. “There are some indications that inflation pressures are beginning to diminish,” Bernanke told the Senate Banking Committee.

The popular stock indexes rallied on this news. The Dow closed at an all-time high of 12,741.86. The S&P 500 rose to a six-year high of 1,455.30.

Since a market downdraft will eventually occur and one of these new highs will become the bull market top, it is my job to look at the other side: to review the facts critically, and see if the assumptions being made by the market are correct.

“There are some indications that inflation pressures are beginning to diminish.”

Bernanke probably studies inflation pressures by looking at economic data. I look at the three-year weekly charts for Crude Oil, Gold, and the CRB Index. Inflation pressures can not abate if those three are rising!

My read on these three is that they have finished a normal bull market correction, and are they are about to begin a new upswing which could be sharp and prolonged.

Crude Oil appears likely to challenge $70 this spring and could easily rise to $80 or higher later in the year. Gold has already risen strongly from the correction lows and appears ready to take out the old high of $730.40 in the near future. And the CRB Index, arguably the best measure of raw material costs which could impact consumer inflation, looks quite similar to the Crude Oil chart, only even more bullish. I believe the bull market in commodities is about to resume with vigor.

In view of this information, I believe the stock market’s optimism is not justified. I think inflation will remain problematic for the Fed. I do not believe they will cut interest rates this year and I suspect they actually may be forced to raise rates. I am very comfortable with my heavy commitment to energy stocks and my growing commitment to gold mining stocks. I expect the utilities, financial sector and REITs to come under pressure in the near future, perhaps enough to create a buying opportunity.

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Comments

[Bob Misko]

To pull the covers off inflation merely disaggregate the equation of exchange. What the heck does that mean. Simply, check the components of the P X Q side. Yes, consumer prices is the focus (67%+ of the economy) but also taken into account are commodity, labor, capital and asset classes like real estate, stocks, and bonds. The Money X Velocity side will pop-up in one or more of these components(save the increase in productivity). "Too much money" will always find its way to Price X Quantity. I'm sure your assessment of fulture commodity inflation has a good risk/reward ratio. Jimmy Rodgers will second your vote.

[Malkiel]

The stock market today is a small collection of shares being chased by a very large and growing pool of domestic money from tax-deferred retirement investors and foreign money through world exchanges and governments fat with the riches from their trade surplus with us. Under those circumstances, none of your ordinary economic indicators or historic precedents may matter until the supply of shares increases or the demand eases. Ironically, the commodity price increases you mention are now accessible to the market by way of ETF's and mutual funds specializing in commodities, so heating up of commodity prices may accelerate market activity, not cool it off...

[Mike Spencer]

Living currently in China, I can easily see what is one of the biggest inflation threat to the market growth in the US is the fact that labor costs are increasing at an unprecendent pace here in Asia. Import goods, and higher currencies (RMB) should have a MAJOR impact within less than 6 months on the inflation level and the economy as a whole.

Get out of the market now. The Fed won't be able to hide the true inflation numbers any longer.

[Mike Spencer]

www.bloomberg.com/apps...;sid=aCwXROmfzckg&...

[Brian Croner]

If Bernanke is saying that inflation's not so bad, he can go to hell. He looks like he instead said half the truth, where inflationary pressures from energy and commodity prices are showing signs of diminishing. I agree with the outcome predicted by the commentator above (Mike Spencer). Every goddamn thing is made in China, and nobody works for free. We are an import nation with a service economy. Our services standard is substandard to Europe in a lot of ways. China has us by the balls because of our nasty Federal Government's ongoing failed economic leadership. If they want to run Circuit City out of business, they just impose a wage standard law, and say good-bye to a company that already could not pull a profit without selling overpriced warranties they often do not honor. There is a Circuit City for a lot of industries. Either we have an economic revolution in America, or we all die in the name of the US Dollar. I keep saying <i>this crap will not last in so many ways</i>. California was said to have the 6th largest economy in the world. The US, in general, now collectively is rated 6th. The US Federal Government is screwing it up for everybody.

[Ryan Wall]

Where would one find a chart/survey showing the U.S economy to be the 6th largest in the world?

[bobbyjoe]

Remember... Bernanke is looking at the economy, not the stock market. You keep talking about the optimism for the stock market, with a short term time horizon. Bernanke is talking about the long-term health of the economy. Although there are similarities, you are talking about two different things.