Replies to post #12051 on Your Economy (No Politics) (YE1)

[roguedolphin]

***"Therefore, the Fed is faced with a softening housing market on the one hand, and potential inflation on the other. Since booming house prices and the conversion of these prices into ready cash was a major underpinning of the economic recovery, any weakening in this segment is likely to cause a significant economic slowdown or recession. But if the Fed stops hiking rates, inflation can well get out of hand. Although the government’s conventional statistical measures of inflation remain under control, it is evident that gold, energy and industrial commodities are soaring even as we write, while the dollar appears to be falling off a cliff. A large number of companies have started to pass these price increases along, and many more plan to do so soon. At the same time, according to ISI, 76 global central banks have announced tightenings, the same as prior to the 2001 recession. In our view all of these conflicting forces are getting beyond the Fed’s ability to control, and the chances of a soft landing for either the economy or the stock market are rapidly receding."****

The "insane proliferation" of fiat US Federal Reserve Notes all over the planet has caused the Fed's current "cunundrum".....which has been "brewing" for a long time!

The US dollar is truly a "hot potatoe" at the current time......It'll take alot higher rates I think to cause it to become "worthy of holding" instead of real assets.

A few "very smart cookies" are looking for a "fabulous buying oppurtunity" in the future for the US dollar and US bonds. It seams way,way too early for that in my opinion. But at some point it could actually be a "legitimate trade". I think those thinking that way are looking at the US Bond buying oppurtunity "post $850 gold" in 1982.

I still think the "era of re-flation" is still very "young in tooth"......but watching closely as this "historic adjustment"(that's being "nice") to our economy that has long been in the making "plays out".

[Bullwinkle]

The Tipping Point
Comstock Partners, Inc.
Thursday, May 18, 2006


The difference between the actual April increase in the core CPI and the forecast was a mere 0.1%, but proved to be the tipping point that exposed the Fed’s dilemma for all to see. The three-month annualized average of core CPI is now running at 3.2%, well above the Fed’s preferred upper limit of 2%. Since inflation is a lagging indicator, and the Fed is forecasting an economic slowdown that would presumably moderate future price increases, the FOMC would love to take a pause in hiking rates at their June meeting, and await more economic data. They are also fully aware that the central bank has historically not stopped their series of rate increase soon enough to avert recession, and they would like to get it right this time around.

Unfortunately, however, there are other key considerations that argue against this. First, the Fed forecast of a slowdown could be wrong, in which case inflation could jump, and then be that much harder to control. Memories of the super inflation of the 1970s are still vivid, and even inflation doves don’t want to get into that mess again. Second, even if the Fed’s forecast of an economic slowdown proves to be correct, a June pause in the rate hikes before such a slowdown is evident could ignite Inflationary expectations even further. Just as the Fed is aware that they can go too far in raising rates, they are also aware that inflationary expectations can themselves feed inflation. In a speech given today, St. Louis Fed President Poole stated that the risks on inflation are tilted to the upside and that he pays a great deal of attention to inflation expectations. He added that incoming data rather than forecasts would be the key to future FOMC decisions. In another speech, Richmond Fed President Lacker said that “The inflation outlook is on the border of unacceptable and perhaps moving beyond…In circumstance like that, containing inflation has to be the primary focus.”

The Fed therefore is stuck between a rock and a hard place. On the one side is evidence that the economy is already softening or about to do so shortly. This is indicated by the softening in housing, lackluster payroll growth, sluggish retail sales and lower consumer confidence. To this we can add the lagged effects of a 400 basis point rise in short rates and the elevated level of energy prices, both of which have signaled economic downturns in the past. On the other side are the rising inflationary pressures from the core CPI (which is likely understated), the weak dollar, higher energy prices, the boom in industrial commodities and relatively strong production growth.

As we have long believed, there is no easy way out of this situation. Investors are rooting for a pause on the misconception that stocks soar after the Fed stops hiking rates. As we have shown in previous comments, the market usually declines substantially after the final rate increase On the other hand, talk about a pause worries the inflation hawks who believe that if the Fed stops too soon, inflation can get out of hand. All of this is taking place in an exceedingly fragile macro environment featuring a record trade imbalance, big budget deficits, record household debt and a negative consumer savings rate.

Belatedly, the market has now taken notice of the dilemma. The S&P 500 has decisively fallen out of its narrow six-month uptrend while the key Nasdaq 100 peaked back on January 11, and has already declined near 10%. Market internals such as breadth and the number of daily new highs and lows have been looking shaky for some time. We believe that a tipping point has now been reached and that the cyclical trend has changed from bullish to bearish. While numerous rallies are likely, in our view the overall decline will be substantial.

http://www.comstockfunds.com/index.cfm/act/newsletter.cfm/CFID/3100225/CFTOKEN/15616716/category/Mar...