Wednesday, February 6, 2008

Federal Reserve Concerned About Inflation; No Seriously!

Total crap day today. Solid rain, cold rain, from morning until night. It really sucks when it is dark when you get up, dark all day, and dark when you get home. Some snow tonight as well! Tons of fun.

Cisco Earnings - Deja Vu All Over Again?
After the bell Cisco Systems (CSCO) reported earnings. As I have said before, with all the financial trickery involved in a company earnings statement, I usually will pay zero attention to them. What makes this event of interest is a certain feeling of Deja Vu I have felt since the report and conference call came out.

CSCO reported earnings in line with estimates. So far so good. It was the forecast looking forward given by CEO John Chambers that gave the market pause, as he estimated sales growth for fiscal 3rd quarter at 10% instead of 15%. Now I do not know enough about the business that CSCO is in to make any commentary about what this may or may not mean for the broader economy. I bring this up because I was very attentive to the events of the Dot Com implosion of the year 2000. I have said here before that the moment of loss of all momentum happened in 2000 when CSCO CEO Chambers came out after a good report and gave a lowered expectation of growth going forward. Not negative growth. Not even monster contraction. Just a hint that things would be a bit lower than previously thought.

After his comments, the relentless selling that took over 2 years to finally subside occurred. You know the history. I had a profound feeling of dread when I heard and read the news about this. While certainly the problems facing the US economy are far different from the 2000 bust, it still seemed a little creepy to see the same scenario occur again. Again, this may be nothing, but I like to share my experiences.

Federal Reserve Concerned About Inflation; No Seriously!
Today the market had a reaonable day percolating until about 1:30pm when the following headlines started hitting the wires, from Yahoo Finance:
Stocks Extend Tuesday's Drop
Wednesday February 6, 5:29 pm ET By Madlen Read, AP Business Writer
Wall Street Gives Up Early Gains After Fed Official Says Inflation Remains a Worry
NEW YORK (AP) -- Wall Street pulled back for the third straight day Wednesday as investors still uneasy about the economy sold off after a Federal Reserve official suggested rising inflation could prevent the central bank from making further interest rate cuts.
Although the economic slowdown is a big concern, "we must not lose sight of the other part of the Fed's dual mandate -- which is price stability," Federal Reserve Bank of Philadelphia President Charles Plosser said, according to Dow Jones Newswires. The economy has been weakening but costs remain high, leading some economists to believe that the United States is headed for a troubling predicament known as stagflation.
Plosser's comments were not surprising, particularly since he is known for being more apt to argue against a rate cut than other Fed members. Nonetheless, the speech -- along with a dismal sales report from Macy's -- cut short a rebound from Tuesday's plunge that gave the Dow Jones industrials their biggest percentage drop since Feb. 27,2007.

This kind of a speech would be funny if it was not so terribly sad. What could possibly be the motivation for Mr. Plosser to make such a retarded comment?
In light of the easy money era we are still in, here are some of the things that the FED has turned a blind eye to on the inflation front:
  • Oil and gasoline at record highs
  • Food costs now becoming stupid
  • Dollar devaluation to all time lows
  • Commodities and materials sky high in costs
  • Health care still rising in cost at double digit rates

There is more, but I digress. This FED head is surely joking if he expects to be taken at all seriously here. The FED is concerened with price stability allright, namely stocks and home prices staying right where they are without futher deterioration!

I really cannot come up with a plausible explaination for why Mr. Plosser made the comments he did. The markets sure bought it though, with a quick reversal to the downside. Are any market participants really, I mean really, thinking the FED is not on a one way ride to 0-1% FED rates? If they are thinking that, they are truly beyond any help.

The only thing I can think of is Plosser makes this speech, the dollar gets a little lift, and then when the FED cuts well before the March meeting by 50-75bps they have a cushion for the dollar to fall again. That is really all I can come up with. If you have an idea, leave it in the comments section!

Great Observation

There is a piece in the London Telegraph newspaper online making the rounds, and it is a nasty good read. Entire article here:

My favorite snippet;

"Gordon Brown keeps telling us that, under his stewardship, this country has enjoyed its longest-ever period of economic growth. Were a business to make a similar boast, you might expect it to have cash in the bank."

And there you go. The entire problem facing the US and UK economies right now. Consumer spending is great if it is done with disposable and increasing incomes. It is not good at all if it comes from ransacking home equity, new lines of credit, and ever escalating debt burdens. If things have been so wonderful, how come everyone is broke? Excellent question. As a homework assignment across the nation tomorrow everyone should spend a minimum of 5 minutes considering that very question. Put another way consider this:

If you and your significant other both work full time jobs, how much cold hard cash can you put your hands on in 2 hours notice? Not HELOC's, not credit card cashouts, not 401k cash outs, not anything to come from a home equity extraction? If the number is less than $10,000 you have a major problem. It's that simple. I know many people with a newer home, 2 new cars, plasma TV's, all the extras that if ONE of the couple misses ONE paycheck the entire game is over. I am sure you know the type as well. That is not getting ahead. That is not the American dream. That my friends is a prison. And it is not worth it.

Have a good night.


Anonymous said...

Welcome to the PrisonPlanet


PS: Your finally seeing the tightrope act with the dollar/debt/commodity prices/inflation/wages/taxes......welcome to the party ;)-<

Anonymous said...

10k+ wouldn't be a problem for me but I don't work for an income and my wife is only a volunteer now.

I think Plosser is basically giving it to the markets straight although I don't think the market participants other then the smart money have figured out the FED can't save them. I also think that in the coming months that inflation will be falling. Oil going to 65 looks increasingly likely. The banks are curtailing lending and the credit markets are drying up along with a lack of credit worthy borrowers. The real problem with food and energy is that it doesn't mater if the FED gave the oil companies and farmers the money interest free to invest they still couldn't bring oil or crop production up any higher then it already is immediately, it takes time to drill wells, build refineries, plant crops along with the stoping bad weather. Benankie and the FED they are not gods. The government could help with some things on oil but with the BS that is going on in DC in an election year that ain't gonna happen. The Senate shot down the stimulus bill so that puppy is dead for now.


Anonymous said...

Sweet I didn't know if the BS Bill went through or not.... it prob got so full of pork barrel earmarks it almost exploded...