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Posted by Kirk Lindstrom Nov 20, 2006 |
11/20/06 David Korn Guest Commentary:
OPENING MONOLOGUE - WHAT INFLATION?
Brinker Comment: Bob said he was reading the minutes of the Federal Reserve Open Market Committee meeting and was astounded to see that they were worried about inflation. Bob couldn't believe it. After all, these are astute people on the FOMC. Bob asked rhetorically where the inflation they are worried about could be found?
David's Comment: Bob was referring to the release of the minutes to the October FOMC meeting which revealed that "all meeting participants expressed concern about the outlook for inflation."
Brinker Comment: Bob berated the FOMC noting that this week we found out that the Consumer Price Index fell in October by 0.5%. That is not inflation, its DEFLATION. The year-over-year rate of inflation on the CPI is only 1.3% which is close to no inflation at all. The CPI is very widely followed and used for purposes of indexing for things like social security and wages.
David's Comment: St. Louis Fed President William Poole commented on the lower inflation report in Washington this week saying that "It's another little scrap of evidence in the right direction."
Brinker Comment: In addition to the CPI, we also got a read on inflation at the wholesale level. The Producer Price Index (PPI) fell out of bed for the month of October and was down 1.6% in the month of October alone! That decrease tied an all time record with the month following 9/11 which gives you an idea of how much a decline that is. The core PPI was down 0.9% which is the lowest reading in 13 years.
David's Comment: Read the Producer Price Report for October at this url:
Brinker Comment: How can the Federal Reserve be worried about inflation? Bob said sometimes he wonders about the Fed members. They have all of the numbers. Why are they worried about inflation? Does this have anything to do with the fact that they drove short term interest rates up to 5.25% which is where it is right now? Have you looked at the growth rate of the economy lately? It is not that good. We have only a 1.67% annual rate of growth (inflation adjusted) in the third quarter. We have a 2.1% annual rate for the last six months adjusted for inflation. That is so low we cannot create enough new jobs to satisfy entrants into the workforce. Bob thinks the Fed simply went to far in raising rates all the way to 5.25%. The economy has slowed and slowed and slowed. Last week we had a pathetic new jobs report where we lost 31,000 manufacturing jobs. Bob thinks we will see the Federal Funds rate going down next year. What that will be in effect is the Federal Reserve "eating crow" when they announce lower rates. Bob said the Fed should have listened to Moneytalk when he said they went to far.
David's Comment: Bob apparently forgot to eat his humble pie for breakfast today. You can read the minutes of the FOMC's October 24-25, 2006 meeting at this url:
Brinker Comment: On Sunday, Bob reiterated how great the inflation report was this past week. The year-over-year CPI is only 1.3%. Moreover, if you look at the last four months and annualize it, then you have a negative inflation rate of -1.2%. If we take the last six months and annualize it, we get an annual inflation rate of 0.4%. The year-over-year core rate is 2.7%. The benchmark core inflation rate which is the personal consumption expenditure index (PCE Index) is 2.5% on a year-over-year basis. However, the last four months, the annual rate of the core CPI is just 2.1%. Bob thinks you will see the core inflation rate move toward the 2% number going forward. One area that is growing faster than we want to see is medical care costs which is growing at 4.0%. Bob noted that the Democratic leadership might try to get some relief on the cost of prescription drugs.
David's Comment: A benign inflation picture is good news for purposes of Bob's stock market timing model because it helps the Valuation Indicator. Read the Consumer Price Report for October at this url:
This is an excerpt from David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2006.
NOTE: If you would like to learn how to subscribe to David Korn's newsletter which gets you his interpretation and commentary of Bob Brinker's Moneytalk e-mailed to you, visit the Bob Brinker Fan Club for instructions.