Tuesday, October 9, 2007

Moving the Goalposts for Goldilocks

Another banner day for the DOW, closing at a new (non adjusted for the dollar) record. As I had written on Sunday, the FOMC minutes seemed to be the only market moving news that had that special ability to be spun bullish no matter what the minutes may have stated. Here is the headline at Yahoo Finance:
"Stocks Bound Higher on Rate Cut Hope"
So again, the market went from the Goldilocks line of thought to the line where the FED is going to continue rate cuts to spur the struggling economy.
The minutes released are always a fun read. If you have never read one of these, they are real gems of intellectual prowess. I can sum up in one sentence "We have no idea whats going on in the inflation area, jobs numbers, consumer spending, and the banking mess, but we are ready to do something depending on the data we see come out". Powerful stuff.
There was a good sentence in the minutes that highlights the Economic Disconnect however:
"With economic growth likely to run below its potential for a while and with incoming inflation data to the favorable side, the easing of policy seemed unlikely to affect adversely the outlook for inflation"
I know I am not the smartest person in the world, but the logic seems poor to me. If economic growth is going to be so slow as to lower inflation, and you cut rates to spur growth, won't that just add to inflation? I have collected a few headlines from the past couple of days to highlight how inflation has been kept low by the wonder of the FED:
  • AP Heating Costs Seen Jumping This Winter Tuesday October 9, 6:17 pm ET By John Wilen, AP Business Writer
    Government Predicts Heating Oil Customers Will Pay 22 Percent More This Winter Than Last
  • From the FOMC minutes "Inflation risks could be heightened if the dollar were to continue to depreciate significantly." (Where you been checking the dollar chart dudes?)
  • Kimberly-Clark Announces Price Increases For U.S. Consumer Products Businesses
    Increases Slated for Early 2008 Driven by Cost Inflation
    DALLAS, Oct. 9, 2007-Kimberly-Clark Corporation (NYSE: KMB) today announced that its consumer tissue and baby and child care businesses are notifying customers of plans to raise prices in the U.S. during the first quarter of 2008. The company said the increases are necessary to offset significant inflationary pressure from higher raw material and energy costs.
    Prices for Cottonelle and Scott bathroom tissue, Viva and Scott paper towels, Huggies diapers, Pull-Ups training pants, Goodnites youth pants and Huggies Little Swimmers swimpants will increase between 4 and 7 percent effective February 3, 2008. K-C's annual net sales for these products in the U.S. are in excess of $4 billion.

Compare with this money saving headline:

  • Wal-Mart chops toy prices extra early
    World's largest retailer ignites holiday price war in October by announcing deep discounts on some holiday toys.
    By Parija B. Kavilanz, CNNMoney.com senior writer
    October 1 2007: 11:48 AM EDT

Good thing inflation is well contained. The Kimberly-Clarke announcement coupled with the Walmart news perfectly captures what is called over at Minyanville "Inflation in things we need, and Deflation in things we want". Here is the current state of things for the US consumer; If you want to buy some useless china crap your kid does not need, prices are falling and we have deflation. If, however, you need to collect your kids actual crap or wipe your own butt, we have inflation running wild! Its a tough choice, another lead paint toy for junior, or an E. coli outbreak at home.

The Economic Disconnect is at a fever pitch. The market, the FED, and all the mainstream media talking heads are continually moving the goalposts as it relates to earnings expectations, job creation, inflation, the dollar, etc. The current market attitude cannot go on much longer, but may go on longer than you think.

Just in case, I advise stocking up on diapers and toilet paper.

Have a good night.


Anonymous said...

"So we've got all the toys and none of the necessities...."

Reading Kim Stanley Robinson's latest, "Sixty Days and Counting", and there is a discussion that fits in here with that line, based on an old book by economist Janos Kornai, "Economics of Shortage". The gist is people start hoarding because of inflation in necessities and imagined shortages, even though they don't really exist. Which leads to real shortages, which leads to queuing for goods like in the socialist failed economies.

Since paper should be getting cheaper, with less housing being built there should be more lumber available for paper, Kimberly-Clarke is pretty much just choosing to rip us off on necessities.

But then I guess you can't wipe your butt with a plastic toy. Although parents could certainly switch to cloth diapers.

I would be watching the economy for more examples of these artificially created price hikes and "shortages".

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