Wednesday, June 11, 2008

We Have Nothing To Fear but Inflation Psychology Itself!

It cooled down here today. The humidity went away, but the temps stayed high. I have no problem with that. Crazy storms went through last night when the cooler weather smashed into the hot and humid air! Lots of lightning, thunder and wild winds.

Merrill Lynch cuts Lehman Rating a Week After Upgrade
I know I would never buy a stock just because some guy on tv ( hello Cramer) or a investment firm said to. For some reason markets do tend to move when the "buy, hold, neutral, sell" ratings are changed one way or the other by analysts. Enron was a buy of course the day before they closed the doors forever, so you can guess the value of these ratings. AAA all the way!

I mention one of these changes today only for the context it provides to my theory that the usual suspects have no idea what they are doing right now. As if we needed any more proof, look at this from Yahoo Finance (Reuters):
Merrill cuts Lehman rating a week after upgrade
Wed Jun 11, 2008 3:39pm EDT
NEW YORK (Reuters) - Merrill Lynch downgraded its rating on Lehman Brothers Holdings Inc (LEH) to "neutral" from "buy" on Wednesday, just a week after upgrading the stock, and Lehman shares fell 8.4 percent.
Merrill analysts Guy Moszkowski and Patrick Davitt lowered their price target to $28 from $36, saying Lehman's "business mix is poor for this environment," according to a research note obtained by Reuters.
Lehman's shares, which were already down after a report that it may look to raise more capital and amid a broader decline in financial stocks, fell to $2.33 to $25.17 in afternoon trading on the New York Stock Exchange. The stock fell as low as $24.97 during the session.
"Clearly we don't like removing the Buy rating just a week after putting it in place, and at a price 10% lower," the Merrill analysts wrote. "But it seems clear to us now that the move to Buy was premature."

But Moszkowski and Davitt said they expected the brokerage would survive because of a strong liquidity position and access to the Federal Reserve discount window.

MER analysts were wrong by a long shot just last week, but this new report should be taken seriously? In the words of John McEnroe "YOU CANNOT BE SERIOUS!" And what is with a "neutral" rating for a firm the writers of the report themselves pin the survival of on continued access to the FED discount window? Without the special emergency facility of the FED, LEH would be finished? What happens after August when the FED's cash is all done? I guess there will be another report at that time.

We Have Nothing To Fear but Inflation Psychology Itself!
On June 3rd I included a quote from Mr. Bernanke that clearly showed how he saw inflation as an issue. To recap:
"A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010"
Here we see Bernanke is not concerned with high prices we get stuck with per se, just that those increases may not "moderate" and thus will stoke "inflation expectations".

Today Federal Reserve Vice Chairman Donald Kohn had the same theme running as well, from Reuters:
Fed's Kohn says risks of inflation psychology higher
Wednesday June 11, 11:40 am ET
WASHINGTON (Reuters) - A steady rise in energy prices has fueled an inflationary psychology in the United States and could be a problem if it does not reverse, Federal Reserve Vice Chairman Donald Kohn said on Wednesday.
"Repeated increases in energy prices and their effect on overall inflation have contributed to a rise in the year- ahead inflation expectation of households," Kohn said in remarks prepared for delivery to a conference organized by the Boston Federal Reserve Bank in Chatham, Mass.
Kohn said evidence that longer-term inflation expectations have edged up is a particular worry.
"Any tendency for these longer-term inflation expectations to drift higher or even fail to reverse over time would have troublesome implications for the outlook for inflation," he said.

Besides the usual roundabout, broken sentence way of saying things that Kohn has, you see once again that the FED types have no moorings in reality. They are worried that the doubling of your energy bill over the past year, in no small part due to the FED's own mistakes, will become something you actually think about! Imagine if people began to assume that the prices of food and gas and other items will keep going up! Inflation expectations running amok! Oh No!

To the FED, that you are paying $4 a gallon for gas is not important. What is important is that you do not fear you will be paying $5 a gallon in the near future! Too funny. If you screwballs at the FED had been up to the task, I would not have to fear $5 gas, or $4 gas, or even $3 gas. Keep the acronym lending facilities open. Keep accepting "AAA" rated mortgage crap paper for treasuries. Keep bailing out firms that deserve to fail and I can guarantee inflation psychology will keep going up. And up. It is called looking around and seeing what is going on around you. Some people do it. The FED should give it a try.

Have a good night.


Anonymous said...

I think MER and LEH are both a short to zero personally but that's just me. As far as the FED I fully expect to see $5 gas so it's to late my expectations are already looking for prices of necessities to skyrocket. I don't fully blame the FED as monetary policy is joined at the hip with fiscal policy. Government spending and a fractional reserve banking system are the real cause.


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