The One & Done Crowd Strikes Again!
Once again, the portfolio wrecking crew know as "Team One & Done" have suckered investors for the umpteenth time (we have lost count) into believing that there is little inflation, the economy is slowing, and therefore the Fed is done.
Astonishing.
This morning's core PCE price index, which excludes food and energy, grew 2.4% in June, the fastest monthly growth since September 2002. On a year-over-year basis, this was the largest gain in 11 years (April 1995). This reflects the costs of commodities (as discussed earlier today in the WSJ) and especially energy pushing its way into the core.
Sarcasm alert: I guess this mean that the Fed is ready to pause . . .
As we noted on July 21:
"One and Done crowd may have finally gotten their wish. This Ship of Fools have been behind nearly every failed rally of recent vintage … as history has shown us more often that not, when the Fed finally stops it is because growth has slowed to the point where inflation has been tamed, but at a cost of setting the economy to the point of contraction."
The silver lining in today's report is that personal incomes rose 0.6% in June, outpacing the 0.4% increase in consumer spending. Incomes got a boost from higher hourly wages. Compensation of employees increased 0.6% in June, with wages also up 0.6%.
Also of note: the personal savings rate improved to negative 1.5% from negative 1.6%, the 15th consecutive month of negative savings. (negative savings = spending previous savings, or by borrowing or selling assets to support consumption).
Marketwatch noted that "after adjusting for inflation, real consumer spending rose 0.2%, the fourth straight month of tepid spending. After inflation, real take-home pay rose 0.4%, the biggest increase in disposable income since December."
While the Fed looks at that as inflationary, I also see it as allowing consumers to continue their spending.
~~~
Let's see if the Fed Fund Futures maintains that 30% chance of a 1/4 point hike in the August meeting.
>
Source:
Core inflation rising at 11-year high in June
Real consumer spending tepid for fourth straight month
By Rex Nutting, MarketWatch
Last Update: 8:30 AM ET Aug 1, 2006
http://tinyurl.com/m3u6g
Tuesday, August 01, 2006 | 09:55 AM | Permalink
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Comments
But does the Fed have the fortitude to do its job? Bernanke does not seem to. Remains to be seen if as a group they can do the right thing.
If not, we may be looking at signiicant inflation and a dollar rout.
Posted by: Spectator | Aug 1, 2006 10:23:05 AM
Just in case someone has lost the link:
http://clevelandfed.org/research/policy/fedfunds/Index.cfm
Cripes, "pause" [implied probability] is up from 35% to 65% in 10 days. Quarter point increase is down from 60% to 30% over the same period. IMO a tradeable delusion of crowds.
Posted by: Robert Cote | Aug 1, 2006 10:26:22 AM
I don't know about the Fed, they think differently than 'the rest of us.' However, I'm interested in the year over year consumer spending declining as a leading indicator. Wages and employment aside, tepid spending is going to keep us in a holding pattern.
Thanks again to whipsaw for pointing out that guy in the corner, drinking all our whiskey, that no one remembered inviting, as Stagflation.
Posted by: FliteTime | Aug 1, 2006 10:41:08 AM
If the bill increasing the minimum wage by 31% passes the Senate, won't structural wage inflation be assured?
Posted by: S | Aug 1, 2006 10:41:49 AM
S,
It won't pass. BTW, is the current state we've been in for the past 3 years earnings inflation?
Floors are not inflationary by their nature. Theoretically they affect supply and demand. Even 3 yrs from now when the $7+ minimum would hit, we are talking such a small part of the population affected, that it won't make much of a difference.
The more I hear people talk inflation, the less I think people have any idea what it is.
Posted by: M.Z. Forrest | Aug 1, 2006 10:55:45 AM
Is increasing wages really a silver lining at this point? Sure, it can help hold off the consumer led slowdown a while longer, but it can also help fan the inflation flames. The lack of strong wage pressures has been a sort of ultimate cap on inflation expectations.
Fed is really over a barrel, damned if they do, damned if they don't.
S. makes a good point on the min wage, and since there is also estate tax "relief" (I'm sure Paris Hilton needs some relief) in that bill, govt tax receipts are likely to fall increasing the deficit (anyone have the numbers of min wage hours worked vs. estate taxes...could be a net positive tax receipt for all I know).
Posted by: Alaskan Pete | Aug 1, 2006 11:03:23 AM
A/P-
I'm with you on that one. I think the big fly in the ointment was the wage figure. I think that's the LAST thing that the Fed wanted to see.
I wonder if we will see gold bust out of this trading range. If the Fed pauses, it surely will.
Posted by: Mark | Aug 1, 2006 11:07:50 AM
of course wages have to go up. how the hell are we going to pay the rent now the no one is buying houses and just renting them? how the hell are we going to afford the gas to fill up the tanks and drive to work?
Seriously. There is only one way out of this, and that is put the screws on the economy until we start saving and stop consuming all these rapidly vanishing commodities.
Posted by: blaze | Aug 1, 2006 11:17:22 AM
The CBO doesn't seem to have an evaluation of the bill yet. Trying to do a back of the hand calculation is difficult except for the estate tax. The minimum wage change would have several effects:
1) Increase Social Secuirty and Medicare receipts, both individual and employer end. For every person at $5.25 that goes to $6.50 (I believe that is the first year change.) you would be looking at an extra $312 per year.
2) Reduced EITC payments.
3) Increased consumption.
I'm curious if the wage inflation picture isn't more reflecting the cost shifting taking place in healthcare. Employers have steadily been increasing deductibles, copays, and employee contributions, and this may be reflected in an increased wage demand.
Posted by: M.Z. Forrest | Aug 1, 2006 11:17:32 AM
of course wages have to go up. how the hell are we going to pay the rent now the no one is buying houses and just renting them? how the hell are we going to afford the gas to fill up the tanks and drive to work?
Seriously. There is only one way out of this, and that is put the screws on the economy until we start saving and stop consuming all these rapidly vanishing commodities.
Posted by: blaze | Aug 1, 2006 11:17:22 AM
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Any kind of screw put on the indebted consumer will put a screw in the coffin. We are
talking about a debt / spending induced economy here.
Posted by: rick | Aug 1, 2006 11:28:55 AM
of course wages have to go up. how the hell are we going to pay the rent now the no one is buying houses and just renting them? how the hell are we going to afford the gas to fill up the tanks and drive to work?
Seriously. There is only one way out of this, and that is put the screws on the economy until we start saving and stop consuming all these rapidly vanishing commodities.
Posted by: blaze | Aug 1, 2006 11:17:22 AM
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Any kind of screw put on the indebted consumer will put a screw in the coffin. We are
talking about a debt / spending induced economy here.
Posted by: rick | Aug 1, 2006 11:28:56 AM
I stopped caring about the Fed long, long ago. Not trying to be derogatory, but worrying about them seems a little masturbatory, IMHO. If they raise rates ten more times, does it really affect how I'm going to trade? An inverted yield curve tells me quite a bit, but whether or not they raise is inconsequential to whether or not I'm going to go long or short.
As far as gold goes, Mark, The action looked pretty encouraging until the last few weeks. Volume has really dropped off during this decline, and unless it picks back up, metals could be headed for free fall city. A high volume surge back above $660 would make me a big-time buyer, but a high volume break of $600 gives me a downside target in the $400 area. At this point, I'm inclined to think the downside is the more likely scenario, especially given the resurgence of bullishness amongst the Gold Bugs.
Posted by: Bynocerus | Aug 1, 2006 11:29:20 AM
quick add: meant to say that volume declined during the decline, but it has dropped off even more during this rally.
Posted by: Bynocerus | Aug 1, 2006 11:30:37 AM
I'm sure that's a big part of it from my own experience.
i wouldn't necessarily attribute the increases to employers, as they are really passing through increased co-pays, deductables, premiums, etc. from the insurance/healthcare cos. Definitely a big factor in job searches addressed in other threads.
Posted by: Craig | Aug 1, 2006 11:33:09 AM
I agree with the concern of Spectator above: does the Fed have the strength for another rate hike?
As we speak, the minions at the Fed are probably rerunning their models with the most recent numbers. What are the models telling them about future inflation and growth? The likely answer is -- that the risk to future inflation is now only slightly higher.
This leads me to think that a Pause is still coming.
On the other hand, Bernanke is a shrewd political animal and probably doesn't want to rock the boat before an election. IMHO, this puts policy change at the late October meeting (a few weeks before the election) off the table. This only leaves the August and September meetings for policy changes. What if they pause in August -- but then are forced by the data to raise in September -- or even worse also in October? This could roil the markets before an election.
This leads me think that a rate hike is coming in August.
Now that I've contradicted myself in 2 paragraphs, I return you to your regularly scheduled blog.
Posted by: WhateverMan | Aug 1, 2006 11:38:38 AM
Min wage increase might not create inflation if, instead, it creates unemployment. IE, instead of paying workers more, workers get shown the door.
Posted by: 23 | Aug 1, 2006 11:45:06 AM
Byno-
Thanks for your thoughts on gold. I have been monitoring the "summer doldrums" (volume/price) in gold for a re-entry point. I have a feeling that a bursting base metals bubble could be the catalyst that sends the gold price reeling as you suggest. The macro environment looks tailor made for gold strength though ($USD, war, etc).
Posted by: Mark | Aug 1, 2006 11:52:01 AM
Mark,
I was starting to wonder if the "old crowd" still posted here. I know I've been pretty infrequent in the last month, and I only rarely see your name and BDG. Looks like Pete's been carrying on without us, though.
$600 and $660 look like good places to take small positions long or short respectively, with a willingness to take an immediate loss and flip into a much larger position.
Speaking of good entries, anyone notice that Pimco Total Return is a screaming buy from a TA perspective? Gross has been banging the gong for two years now, and it looks like he might finally be right.
Posted by: Bynocerus | Aug 1, 2006 11:57:43 AM
Barry,
Just wondering if you saw this on NY Times. Highlights the droves of people not employed that you've pointed out numerous times before.
http://www.nytimes.com/2006/07/31/business/31men.html?ex=1155096000&en=d7e64fbfed21a09d&ei=5070
Posted by: CBazz | Aug 1, 2006 12:05:25 PM
Byno-
Who can compete with Pete these days? He's got a fan club headed by divas and he does Elton John impersonations to boot. .And The Poster Formerly Known as "B" hasn't been the same since his name change operation. Nary a four letter outburst from him. A shame really.
Posted by: Mark | Aug 1, 2006 12:17:13 PM
re: Gold. The miners and physical have been out of synch for much of the summer. To my eyes, the physical is setting up in a symmetrical triangle. I'll take the breakout of the formation on either side assuming it occurs on decent volume. The volume contraction isn't too surprising given the summer doldrums and consolidation pattern developing.
Posted by: Alaskan Pete | Aug 1, 2006 12:28:01 PM
'one and done'... 'buy and hold'... 'it's different this time'... same BS different day
Posted by: Bob A | Aug 1, 2006 12:53:08 PM
minimum wage increase will affect inflation??? I don't know where you live but where I live illegal mexicans get $15/hour for digging ditches.
Posted by: Bob A | Aug 1, 2006 12:55:02 PM
"Min wage increase might not create inflation if, instead, it creates unemployment. IE, instead of paying workers more, workers get shown the door."
To your point, 23, I've hired people who were super-marginal. I won't say I did it out of charity, but darned near! The problem is that really marginal people cost considerably more than their (low) minimum wage. They almost always have to be supervised carefully and sometimes I have to redo the work and/or hire someone else to redo it.
When forced to pay more, I just have to pass. Kills me
(some of really marginal workers can really use the financial and moral lift of "earning" money) but I can't spend/donate heavily in the work place.
Posted by: ~ Nona | Aug 1, 2006 1:15:51 PM
Dr. Roubini takes the hard landing side:
"once the signals of this recession build up, the slowing demand, sales, profits, earnings will severely batter the stock market. Expect 10-15% losses on the major equity indexes between now and year end as the bearish reality of a recession sinks in delusional investors still hoping for a soft landing of the economy. There will be no soft landing; it will be as hard a landing as it gets."
Treas Sec Paulson says "whaaa?":
"Asked if the economy faces a recession in the near term, Paulson declared, "Absolutely not."
A bull, a bear...now how about a chart:
http://photos1.blogger.com/hello/243/2888/640/saving0606.0.jpg
Posted by: Alaskan Pete | Aug 1, 2006 1:32:03 PM
