Oil at $96, Gold at $800 (Fed belatedly worried about inflation)
Everybody loves an easy bartender, pouring generous drinks, filled with lots of alcohol.
No one likes the hangover the next day.
Which is what we are experiencing today.
Gee, who woulda thought that cutting rates yet again would spark another round of dollar weakness AND commodity inflation? The inflation picture remains front and center, as indicated by yesterday's FOMC statement, which noted that the risks of weaker growth and higher inflation were balanced.
Stop to consider for a moment what that means. We know that, notwithstanding yesterday's bogus GDP number, growth has slowed, the consumer is starting to tire, Housing is an enormous economic drag, and the credit crunch continues to be a worry. DESPITE ALL OF THIS, INFLATION RISKS ARE ROUGHLY BALANCED.
Consider how bad INFLATION must be, if that's the case. A few recent examples:
• P&G, Colgate Plan to Increase Prices: Higher commodity costs will increase prices between 3% and 12% on consumer stables like diapers, fabric softener and pet foods. P&G gave an anemic outlook for the current quarter, noting it was seeing some slowdown in the U.S. market as consumers are hit by high energy costs and the housing downturn. "There is not going to be much customer resistance [to price increases] because they are seeing the same energy and commodity cost increases." -A.G. Lafley, P&G's CEO
• Kraft Foods whose third-quarter profit fell 20%, is the latest consumer company to warn that rising commodity prices will continue to take a big bite out of profits. High commodity costs have put the company in somewhat uncharted water. To offset high dairy costs, Kraft has raised cheese prices by an average of 7% this year. But those increases, besides driving some consumers away, weren't sufficient to offset higher raw-material costs.
• Commodity Prices Rise to Record on Slumping Dollar: Commodity prices rallied to a record as a decline in the dollar enhanced the appeal of energy, grains and metals as a hedge against inflation. The UBS Bloomberg CMCI Index of 26 commodities rose to 1,271.20 today, the highest ever. Commodities have gained 3.9 percent this month. The UBS Bloomberg gauge jumped 7.8% in September and was headed for a sixth straight annual gain.• By Rail or Road, Travel Costs Rising in New York Region: The agencies that operate the buses, trains, tunnels and bridges that spill commuters into Manhattan are in the midst of one of the biggest and most sustained rounds of fare and toll increases in decades. The MTA board wants to raise tolls and fares on its subways, buses, commuter rail lines, bridges and tunnels by an average of 6.5 percent. The Port Authority of New York and New Jersey is hoping to raise tolls by at least 33% on its Hudson River crossings early next year.
• Record Diesel Prices Squeeze Commercial Construction: Average price of diesel, $3.157, ties the all-time high set two years ago. “This will squeeze contractors’ margins on existing projects and push up bids on future work, especially highway and other projects that require a lot of earthmoving, which is very diesel-intensive."
• Business-Travel Costs on the Rise: Business travel costs, including airfares and hotel and car-rental rates, will continue to rise next year, and companies will respond by cracking down on employees' compliance with corporate travel policies, according to the American Express 2008 Global Business Travel Forecast, released this week.
• Small Firms’ Data Indicate Persistent Inflation
• FedEx to Raise Rate For Express by 4.9%: FedEx said it plans to increase rates on air shipments by its largest percentage in more than a decade early next year, reflecting the company's need to squeeze more revenue from customers amid a weakening economy to cover the costs of its China expansion and the rising price of fuel. The move will raise the cost of the average U.S. air package 6.9% on Jan. 7, compared with this year's 5.5% increase, which had been the biggest jump in 10 years.
Did I miss any? Use the comments to post additional inflation stories . . . .
Sources:
By Rail or Road, Travel Costs Rising in New York Region
KEN BELSON and WILLIAM NEUMAN
NYT, November 1, 2007
http://www.nytimes.com/2007/11/01/nyregion/01toll.html
Dollar Ben
November 1, 2007; Page A18
http://online.wsj.com/article/SB119387944491678507.html
Commodity Prices Rise to Record on Slumping Dollar
Millie Munshi and Pham-Duy Nguyen
Bloomberg, Oct. 31 2007
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKll3I6_qLEU
Thursday, November 01, 2007 | 11:36 AM | Permalink
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Barry Ritholtz over at thebigpicture.com is great. Here is a post from today explaining how even though rates were lowered yesterday the market is down today on inflation fears. In Barrys typical fashion he lays out several reasons and warning signs ... [Read More]
Tracked on Nov 1, 2007 3:05:59 PM
Comments
What will the toll be for going across the GWB if the toll increase is passed? 33% seems a bit much. What's "Helicopter" Ben gonna do when a Dem becomes President in '09?
Posted by: Joe Klein's conscience | Nov 1, 2007 11:54:50 AM
If the LIRR increase fares can they at least have a quite car
Posted by: Costa | Nov 1, 2007 11:58:14 AM
Remember in 2006 when the uptick of gas prices was moving ahead of the price of oil? Here in San Diego, it was ridiculous - oil would move up a $1/barrel, and gas would jump $.10/gallon.
And now this year, oil is significantly higher, but gas prices have remained stagnant (though climbing slowly). Is there ANY doubt now that the oil companies manipulate the price of gasoline?
Posted by: Big E | Nov 1, 2007 11:58:59 AM
after the regional elections are over you will see one of two things.
Crude oil tumbling to stay in check with the price of refined gasoline...not very likely or
The price of gasoline mysteriously jumps up after next tuesday (election day) to meet the price of still climbing crude.
Remember the price of gasoline jumped up on election day (last year) after the little "adjustment" on the GSCI caused it to fall off a cliff in the lead up to the election.
Gasoline will be up going into Tuesday and then it will go nuts on the next "shortfall" in inventory...nevermind that it( the shortfall) had no affect on gasoline in the prior three weeks of "shortfalls"......
how this is any different than the action in the overall market is beyond me. We have had our economy hijacked by traders that learned how to pump in the oil pits.
Ciao
MS
Posted by: michael schumacher | Nov 1, 2007 12:06:56 PM
If a stock were melting up like the price of gold, everyone would be saying to stay away, it's a bubble.
Why is it different now, somehow?
Posted by: Eddie | Nov 1, 2007 12:10:30 PM
Damn. I was hoping to avoid the whole eating-dog-food-for-dinner thing until I was at least 70 or so.....
Posted by: JJ | Nov 1, 2007 12:13:48 PM
If the economy is doing well, the GDP charged ahead nearly 4%, and we have had inflationary pressures for the last three years, why hasn't personal income for the average American kept pace?
If the major financial institutions are unable to make money without practicing questionable accounting gimmicks (see:
http://blogs.abcnews.com/theblotter/2007/11/ny-attorney-ag-.html
), what does that say about the state of the underlying economy? If you have reason to question every statistic the government puts out on the state of the economy, such as unemployment, inflation (be it "core" or anything else), and GDP, then who or what in this market can you possibly trust?
With all this and the collapsing dollar, if I were a foreign investor, I would be running and screaming away from all U.S. markets and investments--you'd do better to put your trust in the financial and government institutions of a central African bourse.
Posted by: Jay | Nov 1, 2007 12:23:12 PM
look at a chart once and a while eddie...
with all the losses that are still unaccounted for and the ones that have been reluctantly taken. The Stock market HAS melted up in spite of all of the rhetoric and talk.
Gold?? and stocks.....hmmm let's try to keep apples with apples and oranges with oranges. Or does the fact that inflation is presented as no problem (when in fact it most certainly IS) have more to do with the price of gold than a pump job (as you are suggesting)
Nice try..
Ciao
MS
Posted by: michael schumacher | Nov 1, 2007 12:25:07 PM
Barry -excellent post pulling a lot of things together and making good points. Fed is between a rock & a hard place and that's not fingers being ground away. Here that screaming - oops...that us, isn't it ?
There's more and a deeper story on the inflation front and the headlines from Kraft, P&G, et.al. really highlight. The scariest thing isn't CPI or CPIx per se. It's that over the last several years the cumulative changes in PPI vs CPI are wide, growing and accelerating. This is a cusp point. Try here for charts: http://tinyurl.com/2anlj6
Going with that will not only be what we see but escalating profits and earnings pressures. While following market and economy trends will get you so far the question is what asset classes and then what companies will do well in this environment.
In other words it's going to be (in addition) about understanding company performance IMHO.
That'll mean parsing some really hard stuff on what makes business work. Try this for a pass at Home Depot.
HD Performance Re-visited: http://tinyurl.com/2yesj9
Posted by: dblwyo | Nov 1, 2007 12:29:37 PM
Jay,
Personal income has been going up. Today it was reported that personal income was up 0.4% for September. That is up 4.8% annualized.
Posted by: Logic | Nov 1, 2007 12:36:12 PM
1. Inflation isn't in the dictionary anymore. I has been replaced with a more stalinesque worker- productivity
2. Standard-of-living also removed from unabridged version. It now links to indentured servant
3. Pre-bellum now includes link to Cramer America: last remaining bull market in America discover while in Utah rehab: Wives - Buy Buy Buy
4. Utah declared a bubble - fed deems risk of overpopulation balanced by servitude - expect further rate cuts
5. Shining light on hill is forced to be extinguished due to high oil prices
6. Neo-liberal democracy new addition to nomenclature; wiki links to 1984, gulag and sovereign wealth fund
7. Newspapers face double conundrum: record readership erosion and massive increases in ink costs as they face growing threat from the unconventional black swan: M3
8. As further evidence that naysayer of EMH are bunk, it is revealed that Gold is edible after all
9. ...so is silver and platinum
10. Man vs. Wild viewer ship hits all time record while United States seeing dirt shortage on new bestseller: Kim Jong-il Kitchen
Posted by: s | Nov 1, 2007 12:54:10 PM
Even Gray's Papaya is raising it's prices! You gotta love their sign (click) "Please don't hate us!"
http://pbp.typepad.com/economy/2007/10/prices-are-goin.html
I went thru the publications I sign off for here at work, I couldn't believe some of the price increases, found some increases of 10% and more.
Posted by: Michael Donnelly | Nov 1, 2007 1:05:54 PM
Look at it this way:
Through rate cuts the newly "data driven" Fed will drive more people and businesses into bankruptcy thereby justifying more "data driven" rate cuts.
Posted by: Neal | Nov 1, 2007 1:18:21 PM
Kimberly-Clark price increases:
http://smartguystocks.com/?p=130
Posted by: SmartGuyStocks | Nov 1, 2007 1:36:57 PM
Here in WA state, diesel is anywhere from 3.60-3.85 a gallon and regular grades of gasoline are anywhere from 3.15 for regular-3.50 for premium. Crazy.
Posted by: Brian In Seattle | Nov 1, 2007 2:00:50 PM
Brian In Seattle,
If you think that's crazy, consider this comparison chart.
The UK, for example, is closing in on US $8 per (US) gallon.
Posted by: Estragon | Nov 1, 2007 2:22:28 PM
BR, how should we think about declining housing prices and its influence on inflation? Also, yesterday you noted competition among the retailers is creating bargains for this holiday season - does this influence the rate of inflation? thx.
Posted by: dan | Nov 1, 2007 2:39:16 PM
I think that inflation effects poor people more than rich. the things that you need gas,health ins, food, education, rent are all going up. if you are below the median income i would guess that inflation is running at a much greater rate (maybe more than 15%). Inflation for the rich is just not as great a factor. goldilocks depends on your income level.
Posted by: Steve | Nov 1, 2007 2:47:30 PM
when is the $41 bil dump today goint to take effect
Posted by: Costa | Nov 1, 2007 2:52:09 PM
So, where does inflation really stand? Has anyone crunched the numbers to get a "real" rate of inflation that includes all of the things an average consumer buys (real rate versus governement core rate)?
Posted by: Ed | Nov 1, 2007 2:53:54 PM
Ed:
http://www.shadowstats.com/cgi-bin/sgs?
Posted by: Kp | Nov 1, 2007 3:00:33 PM
National Park Pass.
2006: $50
2007: $80
Posted by: MAS (Seattle) | Nov 1, 2007 3:56:32 PM
Isn't this called stagflation?
Posted by: KDruff | Nov 1, 2007 4:10:53 PM
blood test for ENZO LABS in NY on teachers insurance plan
Last year - $9.55
Now- $18.00
WHAT ABOUT MONEY SUPPLY GROWTH????
Posted by: SINGER | Nov 1, 2007 4:26:49 PM
...and talk about tying things together;
Just exactly how is Kraft supposed to pass the higher input costs of food on to the consumer, if incomes aren't rising?
They got a 2% increase in volume by "eating" 2.5 % in gross margarine.
Posted by: tjofpa | Nov 1, 2007 4:37:33 PM
