"As if the high prices and poor availability of business
insurance, workers comp, health insurance, steel, copper,
stainless and cement were not enough, now we may be faced
with a potentially more dreaded enemy: inflation."
We found the above quote on a website called
"It is one thing when you have to pay more for materials
and supplies in your business," says the roofer, "but it
gets downright personal when you get hit with rising prices
for bread, eggs and milk."
Here at the Rude Awakening, we’ve been pondering inflation
too. We think inflation – or at least, the Fed’s reaction
to it – is the single most important influence on markets.
The dollar, bonds, stocks, gold, commodities…they all
move in related patterns. So figure out what the Fed is
going to do (and say), and everything else falls into
It’s a sad state of affairs, we admit. But the fact is, the
markets trust Greenspan. They trust him when he says
inflation "remains well contained" and they trust the Fed
to "fulfill its obligation to maintain price stability."
This trust is still alive…we saw a good example of it
yesterday. The minutes of the latest FOMC meeting were
released. "Inflation would most likely continue to be
contained," the summary said and the dollar sold off as
traders focused on Greenspan’s reaction rather than the
Of course, your editors think they know better and we don’t
think Greenspan has control of inflation at all. And nor do
we trust him to fight it should the need arise. In fact, we
think it’s the Fed’s job to promote inflation…without
letting anyone in on the secret. It’s how they keep the
economy growing without damaging faith in the currency.
Just look at the facts:
Let’s start with raw materials. "There’s never been a
commodity boom like it," says the FT. Oil, gasoline and
marine fuel have all made all-time highs recently. The IMF
has spoken about a "permanent oil shock," Citigroup talked
of a "super-cycle" in commodities and Goldman Sachs think
oil may exceed $100 in a "super-spike."
Aluminum and Zinc have hit their highest levels for many
years in the past few weeks. Copper has doubled in the last
two years and steel has risen 75%. Coffee and sugar are
both up 50% on last year too. Everything from gold to
selenium to coal have been on the move.
Following these prices into secondary markets, we see
shipping and freight rates have been pushed and shipyards
around the world are fully booked for years. Ports can
hardly keep up with all the activity. Makers of mining
equipment and farming machinery are booming.
The nylon used to make tents is rising at an annual pace
above 8% says the Labor Department. Cement is near
impossible to find and builders in South Florida are having
a hard time filling contracts.
Companies can either eat the costs or raise their prices.
UPS has added a fuel surcharge on March 7. Carnival Cruises
has done nothing so far, but anticipates a 23% increase in
fuel costs this year.
Paint maker, PPG Industries, announced price hikes on March
15. A spokesman told the Detroit Free Press that raw
material costs had risen by $50 million in the first
Whirlpool washing machines and Caterpillar tractors have
both got more expensive as steel prices surge and even Con-
Agra foods, which owns brands such as Armour Hotdogs,
Butterball turkeys and Hebrew National lunch meats, has
announced price hikes.
Then last week we noticed the U.S. Postal Service asking
for permission from Congress to raise the cost of first
class postage by 2 cents. We explore this in further detail
in today’s Did You Notice, below…
Now look at the message coming out of the Fed in the
minutes of March’s FOMC meeting, released yesterday…
"Many participants stated that they expected total
inflation to diminish and any rise in core consumer
inflation to be limited. One source of upward pressure on
inflation had been the rise in energy prices, and it seemed
reasonable to expect that these prices would level out or
even decline mildly, as built into futures prices. Unit
labor costs were still being held down by moderate wage
growth and rising productivity. Indeed, a few saw a
distinct possibility of further positive productivity
surprises, representing a downside risk to the inflation
Are they stupid? Or, as we postulated earlier, they are
trying desperately not to let anyone in on the secret. But
the cat’s getting restless in his bag. Even a couple of
Greenspan’s minions have spoken out recently, most notably
William Poole. After the markets ramped up interest rate
expectations following the March 22 FOMC statement, Poole
said, "From my perspective, the market reaction to that
statement made a lot of sense and reflected my own
assessment of a changing inflation environment."
But as we said earlier, none of this really matters
directly to the markets. It’s Greenspan’s reaction that is
so critical, and right now, from his comfy spot behind the
curve, his reaction still seems to be "measured."
But he’s a hard man to read, and here at the Rude
Awakening, we won’t try to second-guess him. Best to wait
on the sidelines for now, we think, and wait for "Printing
Press" Bernanke to take his place.
For only then will it be safe to start shorting the dollar
Did You Notice…?
By Tom Dyson
As was brought to your attention in the text above, the
U.S. Postal Service wants to increase stamp prices by two
We started thinking about historical postal rates and their
application as a potential measure of inflation. After all,
how much harder was it to deliver a one-ounce letter across
the country in 1960 than it is today? If anything, with the
help of computers and technology, and increased commercial
air traffic, it should be both easier and cheaper.
That being the case, and given the price of a postage stamp
is based on the costs involved of shipping mail and not on
the opinion of a government statistician, we’d expect
postal rates to be a good proxy for general price inflation
in the U.S.
The chart below plots the stamp inflation against the CPI,
using 1917 as the base for both series.
Given that mail delivery is probably more efficient now
than it was in the past, if anything, we’d expect stamp
price inflation to underestimate general price inflation.
And as the chart shows, CPI-measured inflation lags well
behind stamp price inflation.
By a simple process of deduction, we’d conclude that
general price inflation is much greater than the government
statisticians would have us believe.
And the Markets…
WTI NYMEX CRUDE