Redstate

Posted at 1:52pm on Jul. 7, 2008 Commodity Prices Are Falling Sharply

Unusual Market Action

By blackhedd

Remember a few days ago, I suggested here and here that: A) commodity prices worldwide are in a bubble; B) bubbles always burst; and C) when this one does it’ll be bad news because so many global investors have piled on?

As I write at about 1:45pm EDT, every major commodity that is traded on world markets is down sharply. It’s been a long time since I’ve seen anything like this.

Keep reading...

Posted in Bond market | commodity prices | Economy | inflation | Stock Market — Comments (29)/ Email this page » / Read More »

Posted at 8:02am on Jul. 3, 2008 Have You Been Wondering Why High Commodity Prices Haven’t Created a Wage-Price Spiral?

Dow Chemical: A Canary in the Coal Mine?

By blackhedd

I’ve been writing here about high inflation for nearly a year and a half. I think the Federal Reserve has been running an extremely accommodative monetary policy for quite a long time, much longer than the mainstream press has been screaming about high food and oil prices.

But why we aren’t seeing the classic sign of hyper-inflation, a wage-price spiral? Wage increases are the channel through which inflationary pressure metastasizes to the point that it can destroy an economy.

That isn’t happening this time, for a lot of reasons, all of which are interesting. But there is one in particular that is worth calling out because it illuminates a key aspect of tax policy.

In short, businesses are unable to pass increased factor costs on to consumers.

Keep reading…

Posted in Dow Chemical | Economy | federal reserve | inflation | wage-price spiral — Comments (14)/ Email this page » / Read More »

Posted at 6:53am on Jun. 10, 2008 Market Mover: Dealing With Higher US Inflation

Geithner Drops a Hint, Bernanke follows with a bomb

By blackhedd

A funny thing happened this morning as I was writing a story for you about Timothy Geithner’s important speech yesterday at the New York Economic Club: Inflation came back.

Geithner is the President of the New York Federal Reserve Bank, and his main topic yesterday was the gap between today’s innovative financial-market practices and the regulatory apparatus (including the Fed) that is supposed to keep markets stable.

This is a critical topic of great interest to policymakers around the world, and a consensus is growing that a “unified global framework” for financial regulation is needed. I’ll write a complete post about this subject later on.

But in the Q/A after his speech, President Geithner was asked (inevitably) about where the economy is going. He said that demand is getting softer, but he also said that the Fed will be watching inflation very carefully.

Federal Reserve officials always tread a very fine line in public statements because they know everyone will parse every comma for signals about the direction of interest rates. By emphasizing inflation over economic slowness, Geithner left an impression that they might head higher.

Keep reading…

Posted in Bernanke | Economy | federal reserve | geithner | inflation | Interest rates — Comments (9)/ Email this page » / Read More »

Posted at 9:54am on May 12, 2008 China Overheats

No End In Sight

By blackhedd

Several worrisome trends in the Chinese economy that have been in place for nearly a year and a half are charging ahead with no end in sight. Here’s a news story about it.

In a word: inflation. China simply has too much money, and not enough economy. That’s putting tremendous strain on the government, which controls the economy tightly. And it’s opening up big questions about whether the country can continue its historically-unprecedented rate of change.

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Posted in China | Economy | foreign exchange | inflation | Olympics | yuan — Comments (16)/ Email this page » / Read More »

Posted at 8:48am on Apr. 19, 2008 Commodity-Price Bubble

The Financial World Gets Weirder And Weirder

By blackhedd

Of all the tangled and intertwined threads of the global financial crisis, a few have managed to capture the attention of the media and of people at large. Collapsing home values, of course. More surprisingly, the arcane and technical collapse of the Bear Stearns Companies, and the aggressive response by the Federal Reserve, which was called a “bailout” so many times that people now believe it was one.

And then there’s commodity-price inflation, which is a global phenomenon with many contributing factors. Most people don’t notice the prices of gold, silver, dry-bulk cargo holds, concrete, nickel, copper and scrap steel. But they certainly do notice gasoline, jet fuel, rice, milk, wheat, corn and cooking oil.

In a further display of how interrelated everything has become, commodity prices, already facing upward pressure from fundamentals (increased demand from Asia coupled with supply disruptions), have gotten caught up in the mess affecting the credit markets.

As a result, I now believe that many commodities are experiencing a price bubble, much like the stock-market bubble of 1999-2000 and the housing bubble of 2004-2006.

Price bubbles are inherently unstable, which means they always bust. They’re also inherently insane, which means they can go a lot farther before they do bust.

Where is the financial (i.e., the non-fundamental) pressure on commodity prices coming from? Let’s unpack it a little.

More…

Posted in bubbles | Commodities | deflation | Economy | inflation — Comments (27)/ Email this page » / Read More »

Posted at 8:27am on Apr. 7, 2008 Where’s All the Inflation Coming From?

And Where's It Going?

By blackhedd

It’s getting harder and harder to ignore the steady drumbeat of stories about inflation, particularly food-price inflation, around the world. Where is it all coming from, and who is it going to hurt?

Among the drivers for record-high grain and oilseed prices are uncooperative weather in many regions of the world, and increased demand from Asian nations that now have enough money to start consuming more calories and more protein.

But at the end of the day, the only way to get inflation, especially the pervasive inflation that’s showing up in industrial commodities as well as grains, and more recently in European wages, is to have too much money chasing too few goods.

With some exceptions, we know there aren’t too few goods, because economic production is up everywhere in the world except for the US. So where’s the extra money coming from?

It’s coming from us.

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Posted in Economy | federal reserve | inflation — Comments (35)/ Email this page » / Read More »

Posted at 7:27am on Mar. 6, 2008 The Dollar Continues To Decline

A New Leg Downward, as we continue to export inflation

By blackhedd

Back in November, I wrote about the fall of the US dollar (here and here). The decline was just getting under way at that point, as cuts in US policy interest-rates started having their effect.

Since then, the Federal Reserve has cut still farther. In November, the dollar had fallen to $1.47 against the euro before recovering somewhat. The trend was intact, however, and now the dollar is all the way down to $1.53. The betting is that the Fed funds rate will fall to 2.5% this month, so the dollar probably has farther to fall.

Is this really bad news? Or more like neutral?

Read on...

Posted in Dollar | Economy | federal reserve | inflation — Comments (50)/ Email this page » / Read More »

Posted at 9:41am on Feb. 15, 2008 A Ghost From the Past Rises in Germany

Inflation Heats Up

By blackhedd

Think back to 1923, when Germany was struggling to pay reparations to the Allied nations under the terms of the Treaty of Versailles. Germany's bankers decided to pay off the notes in funny money, and triggered one of history's classic hyperinflationary episodes.

The specter of high inflation is on many minds these days. Where else but Germany, however, can you interview a normal middle-class woman, and be told the following?

"Average households have to reach deeper and deeper in their pockets. It almost triggers existential fears."

What's the obvious thing to do in a country where labor unions are enshrined as nearly a full partner in business management and government? You start talking about "mega" wage increases and "social justice." And that possibility is exactly where the real existential fears should be coming from.

And this only tightens the box that the European Central Bank (ECB) and its chairman, Jean-Claude Trichet, are stuck in.

Keep reading...

Posted in Economy | euro | Germany | inflation — Comments (40)/ Email this page » / Read More »

Posted at 11:36pm on Dec. 27, 2007 I Know This Will Come As A Shock . . .

By Pejman Yousefzadeh

But things are just getting worse in Zimbabwe:

For some 10m Zimbabweans, Christmas 2007 will be the worst in memory. As if coping with inflation, ­estimated at more than 40,000 per cent, and shortages of food, fuel, electricity and water were not enough, they cannot draw their money from bank accounts because of a cash shortage engineered by the authorities.

For the past fortnight people have had to queue for hours - even days - at teller machines and banks to try to draw out their cash, amid repeated promises from Gideon Gono, central bank governor, the crisis would be resolved by Christmas.

On Wednesday, Mr Gono announced the issue of three new large-denomination notes, the largest of Z$750,000 ($25 at the official exchange rate or $1.50 at the more realistic parallel rate).

At the same time, he withdrew the previous largest note (Z$200,000) as he believed that 97 per cent of the Z$67,000bn note issue ($13.3m at the parallel rate) was being held by speculators, hoarders, unscrupulous business people and "cash barons".

Businessmen say that because they cannot withdraw cash from the banks, they must buy it in the parallel market at a premium of 30 per cent and more, to pay suppliers and workers.

Read on . . .

Posted in Foreign Affairs | inflation | Robert Mugabe's Incompetence | Zimbabwe — Comments (4)/ Email this page » / Read More »

Posted at 8:41am on Dec. 12, 2007 What Interest Rates are Telling Us About the Outlook

The Federal Reserve Disappoints Wall Street

By blackhedd

You've read the headline: the Federal Reserve Open Market Committee, meeting in Washington yesterday, announced a cut in short-term interest rates. The "fed funds rate" will now be targeted at 4.25%, down 25 basis points from the 4.50% rate that was announced in October. The Fed also cut the "discount rate" (at which banks may borrow money directly from the Fed) by 25 basis points.

The moves had been carefully telegraphed and were no surprise. But to say that Wall Street was disappointed is understating the case. The stock markets sold off on the news, with the Dow Jones Industrials Average dropping about 350 points from where it was when the Fed's announcement came out in mid-afternoon. And the bond market soared. There was actually a lot of anger out there.

What happened?

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Posted in Economy | federal reserve | inflation | Interest rates — Comments (32)/ Email this page » / Read More »

Posted at 9:35am on Dec. 10, 2007 Mr. Paulson Goes To China...

...And Will probably get his backside kicked again.

By blackhedd

Treasury Secretary Henry Paulson will be in China at mid-week for high-level discussions with Chinese government officials.

The topic is exchange rates. Mr. Paulson wants the yuan to appreciate against the dollar. The Chinese want the dollar to rise against the rest of the world's currencies, among other things.

Paulson won't get what he wants. But it's worth unpacking things a little, to get at the underlying issues. In particular, there are interesting political implications to some of the things China would like to do next.

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Posted in China | Economy | exchange rates | inflation | Paulson | yuan — Comments (11)/ Email this page » / Read More »

Posted at 10:15am on Nov. 30, 2007 The Bad-News-Is-Good-News Economy

Lower consumer spending portends a stock market rally

By blackhedd

All eyes on the Federal Reserve. The Commerce Department released a report showing that consumer spending rose a lower-than-expected 0.2 percent in October. Adjusted for inflation (mostly in food and energy, which are "non-core" categories), the increase in consumer spending was actually zero.

Elsewhere in the report, core inflation (which excludes food and energy prices) was subdued at about a 1.9% annual rate.

These numbers, together with elliptical remarks made yesterday evening in Charlotte, NC by Fed Chairman Ben Bernanke, are being taken by the financial markets as confirmation of what they already expect. Namely, that the Fed will cut interest rates again on December 11.

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Posted in consumer spending | Economy | inflation — Comments (21)/ Email this page » / Read More »

Posted at 1:24pm on Nov. 25, 2007 Oh for Pete's Sake!

By blackhedd

Here's the latest in a recent cascade of stories about fuel shortages, gas lines, and related violence in China. This one is all about how the Chicom regime hopes to mitigate shortages by trying to convince local authorities to monitor fuel supplies, and raise the flag when they run low. C'mon, guys! There's a perfectly simple and easy way to eliminate fuel shortages overnight: stop controlling prices. Oh wait, this is China, isn't it? Well, forget I said anything.

Posted at 11:34am on Nov. 12, 2007 Exporting Inflation to the Rest of the World

weird effects caused by the weak dollar

By blackhedd

Like many people, I'd let myself hope that last August's global financial crisis was just that: a phenomenon arising from and largely contained within the narrow world of finance and capital markets. Much like the 1998 Long-Term Capital Management crisis, or the 1987 stock-market crash.

How wrong I was. The last two weeks have seen growing evidence that disorders in financial markets are having serious spillover effects in real economies around the world.

Everyone is talking about the extreme weakness of the US dollar, which has lost ground against every one of the world's major trading currencies and continues to slide. The proximate causes of the weaker dollar are poor economic fundamentals in the US, and the Federal Reserve's interest rate cuts.

Dollar weakness is evidently resulting in a very large and worrisome burst of inflation. In nearly every major economy except the United States.

We're exporting inflation to the rest of world and not suffering much or any of it ourselves. This is really weird.

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Posted in Economy | inflation — Comments (36)/ Email this page » / Read More »