Deflation >>>I was especially interested in that he had the first plausable explanation that I have heard for the current deflationary problems that are alongside a rising and close to breakout CRB index, which has been a puzzle for me.<<
I as well. Interesting graph showing the CRB as compared to the 10 year treasury back to 1980. Big divergence. Would hace been nice to see the chart go back further than the beginning of the last economic expansion. Say through the 71's as well.
Thought this comment after the graph was interesting.
"The above chart suggests that either commodity prices and financial prices are possibly seriously "out of whack" at the moment, or the directional relationship between these two is changing. It suggests that the Fed is attempting to fight perceived domestic price weakness while simultaneously the economy is being squeezed on the cost and profitability side of the equation by higher commodity prices. The cold hard fact is that the domestic system has never "cleared" as of yet during this cycle (capacity coming in line with ultimate demand) due to continual reflationary efforts up to this point that leave the question of healing through the price mechanism completely open to question looking ahead. How does this ultimately weigh on households? What was crystal clear in this week's upward GDP revision was that 3Q profits were down quarter over quarter, despite apparent 4% GDP growth. Year to date corporate profits from operations are down close to 7%, again despite quite positive headline GDP. In the endgame it's profits that count at the corporate level and if corporations are not improving them, they will continue to cut costs. And you know the most expedient measure of reducing costs, especially when commodity input costs are not obliging. Just look at the productivity chart above to have a guess at where those cost cuts will come from.
Although this may sound like a very far-fetched comment, the Fed simply cannot reflate the world. The very basic laws of global supply and demand will ultimately outweigh Fed Governor Bernanke's "printing press" over the long run. But in the meantime, the Fed will probably give it all they've got in trying to set a new standard for reflationary attempts in what has been a greater credit expansion cycle that has been going on for decades. Ultimately successful reflation will depend on the willingness and strength of corporations and households to borrow and spend immediately ahead. The exact modus operandi that has already played out in multiple Fed tonic administrations over the last half decade. After all, it takes two to tango. Or in this case, three.
One last and very important note is that attempts to reflate the system ahead will necessarily spill over into the financial markets. Given what at least appears to be the dogged determination of the Fed, we cannot see how it will play out any other way. If the corporate and household sectors cannot "make use" of the monetary accommodation most certainly to flow from the largesse of the Fed ahead, just where do you think it will end up? That's right, in the very place it ended up in late 1998 and late 1999/early 2000. We're not saying this is good or bad, just that it is a strong possibility and needs to be acknowledged in individual decision making moving forward. Call it what you will. The ultimate Greenspan put. The grand finale in moral hazard. It's coming and will undoubtedly influence both the real economy and financial markets ahead. As a last comment, this discussion has been nothing short of a cursory glance at what we perceive to be a significant change in Fed posture. Notice we did not address the dollar, potential characteristics of flows of foreign capital, the bond market, etc. Many important direct consequences and unintended consequences of the Fed's new take on life. More on these later as one of the greatest stories ever told in the land of monetary expansion plays out. "
