James Brumley

Rampant Inflation Paints Fed Into a Corner

OK, I'm back.

4) You said....Why would the Fed believe that this current inflation spike is anything more than a run in commodities? Especially now, when commodities prices across the board are already down significantly from recent highs.

I say...all inflation spikes are led by commodity spikes. Even then, inflation has been above 4% for the last three months....July's figure wasn't wildly out of control...just higher than recent levels, which were also significantly high.

Rampant Inflation Paints Fed Into a Corner

BS Detector,

Well, you've certainly worked hard to live up to your name. My concern is this....are you trying to highlight BS so much that you'll point out anything that could be argued? Having an opinion is fine. Having a specific bias is dangerous.

If I ever implied or stated this model was iron-clad an inarguable, I apologize. I'm just trying to give investors some perspective they won't have gotten from the media. All of it's up for debate...which is a healthy thing.

I'll try and respond to your points in the same order you voiced them..

1) You said...."Quite a lot, actually, because things are not nearly as bad as you seem to indicate. The economy certainly isn't dead - ailing a bit, perhaps. The lending market certainly isn't dead, but if it were, changing interest rates would have no effect on the economy, would it? The real estate market isn't dead, and by most accounts has some ways to go before recovery begins."

I say...THINGS AREN'T BAD? Seriously? Yeah, they can always get worse. But brother, yes, things are bad. You are correct in that changing rates probably won't heal the lending market. What I don't get is why you're arguing with me....I said the same thing. That's why I said "what have we got to lose"...because changing rates won't matter to lenders. But, slightly higher rates will curb inflation.

You call it 'ailing'; I call it 'bad'. Semantics. It's far from good.

2) You said..."Of course, the fear of an inverted yield curve is clear - the last two inversions did indeed jump-start a bear market."...You really think there's causation here?

I say....actually you make a valid point. I'm not always a fan of economic reasons for the market's performance. So, no, I don't know that the yield curve caused a bear market. I do think it was a symptom of what causes the bear market. Cause or symptom? Doesn't really matter. The CORRELATION is too uncanny to ignore though.

3) You said.....(this is me) "but long-term (10 year) rates thus far have been pretty stagnant at 4%. At the same time, annual inflation is now topping 4% to 5%." Then YOU said....What does this indicate? The market clearly does not believe that inflation is a long-term problem - otherwise the market would demand a higher return on these bonds. Pretty fundamental stuff.

I say....you're reading too much into the absolute levels. The fact that long-term yields and inflation were about the same level is coincidental. I was just suggesting that a Fed Funds rate higher than inflation (whether it was 4% or 14% historically has been healthy). The yield curve inversion could still be a problem whether it happened at 4%, 2%, or 10%.

As for the market not worrying about long-term inflation based on accepting a relatively low yield on long-term bonds, THERE IS NO STATISTICAL CORRELATION BETWEEN INFLATION AND YIELDS, NOR IS THERE A CORRELATION BETWEEN YIELDS AND EXPECTATIONS OF INFLATION. (I can show you my math.) As you asked earlier yourself, you really think there's causation here?

OK, I'm running out of room. I'll continue in another post below.

Note to I.R.S.: How To Make This Rebate Work

Interesting point - I never thought about the psychology of the words used, but I've thought long and hard about the very problem you described.

My biggest fear is that the rebates will be used to pay off loans and mortgages that would have otherwise been late...the problem you alluded to.

Here's my solution (and I'm not entirely joking)...send the rebate as a gift certificate that expires in sinx months. Stipulate that it can't be 'cashed in', can't be accepted as a bank deposit, and can't be accepted by a credit card company or mortgage company.

A perfect and flawless strategy? Nah - somebody will find a way around the rules. By and large though, the money should indeed be spent on goods and services that may not have been bought otherwise.

If It Looks, Walks and Quacks Like a Recession...

Let's see....where to begin? How about the beginning?

WakeUp, yeah - the unemployment figures may be meaningless and 'tweaked' for optimism. However, that's not new. We just have no feasible way to know just how trumped the historic numbers were as well. That's why I said (though not emphatically enough) the absolute level of unemployment means nothing to me or you. The only thing I have any faith in is the direction of the trend. (e.g. if unemployment rises from 5% to 6%, it's the same effect as rising from 10% to 12%.)

Gordon, I don't know that the GDP is fraudulent, but I do know it's worthless to investors. So, fraudulent or not, I don't even care. As for a BLS investigation, I don't see it happenin'.

Old Style, well said. I still feel a recession will be minimized, as the Fed only seems interested in short-term patches (3 to 12 months). Should the recession last longer? Yes, I think so. A good, long, normal recession would burn off a lot of excess...a much needed does of good medicine. I suspect we'll only get the short-term fix though.

Will Rahal, thanks for the chart. Good stuff.

If It Looks, Walks and Quacks Like a Recession...

Big Fat Meanie,

Yep, the unemployment analysis is a whole 'nother ball of wax. I didn't touch on it here, but I have observed that there is no 'ideal' unemployment. The only thing that matters (to investors) is the direction of the trend. (e.g. the unemployment rate falling from 18% to 17% is good for stocks, even if still astronomically high by historical measures).

As for the 5% rate now being more of a real burden than say 5% from the 80's, while I never thought about that, I think I agree. Good point. Maybe I'll be able to cross reference unemployment and debt in a future commentary. Thanks for bringing it up.

Hooligan,

I hear that. The more they tinker, the worse it seems to get.