Posts filed under “Energy”

Inflating Our Way Into Recession

Crb_goldman

Crb_gs_chart

Chart courtesy of Bill King, M. Ramsey Securities
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For quite some time in these pages, we have been lamenting the mistaken belief amongst some on Wall Street that there was a free lunch to be had. Lowering interest rates, the Panglossians argued, would stimulate the economy, whose slowdown would prevent inflation.

If that argument strikes you as both circular and contradictory, welcome to the club. That obvious flaw was apparently lost on its authors, who required a 2 X 4 across the skull to show them the error of their ways.

That swing of the lumber took place yesterday — even as demand supposedly weakened — when Crude Oil passed $100 a barrel on a closing basis for the first time. OPEC nations are expected to reduce output when they meet next on March 5th.

But don’t think its just Oil. The promiscuity of the US Federal Reserve has led to all manners of dollar-denominated commodity price surges:

-Gold soared $26
-Platinum exploded $91
-Iron-Ore Prices Up 65-71%
-Copper surged 20 handles
-Wheat prices surge to new high
-Soybeans traded at a record high.
-Fertilizer makers soared to record share prices

Then there’s gasoline. A survey of prices shows the rising impact of inflation. Gasoline has rallied from $2.22 on Feb. 7 to a record $2.62 yesterday.
This is an 18% increase in less than two weeks – and drive season
buying is still way ahead of us. These increases have yet to work their way through to the consumer; the  economic impact of energy costs still lay off in the future.

One would imagine that expectations of ebbing inflation would be dashed by now. One would be wrong.

As we have seen time and again on the Street of Dreams, Wall Street pundits take months, if not years, to accept what is before their very eyes. Whatever you want to call it — cheerleading or Cognitive dissonance — it is a fact of life that the obvious takes much longer to be accepted than is logical. Hence, this simple numerical  inflation fact, reflected in global food prices, record energy and both industrial and precious metal inflation, will be ignored for as long as possible.

Maintaining this denial of reality is becoming increasingly difficult. Yesterday, Wal-Mart reported Q4 earnings,, and its becoming increasingly difficult to deny reality.  Net sales rose 8.3% to $106.3 billion, while earnings rose 4% to $4.1 billion, or $1.02 a share. The big increase in sales reflected a combination of new store openings and of course, gasoline and food price increases.

Sales at stores open at least a year were
sluggish, up 1.6% rise over the year-ago period. Excluding fuel
costs, sales rose 1.4%.  However, Wal-Mart (Costco also) do not break out food prices from their reports. Hence, Wal-Mart sales were likely much weaker than the headline number, reflecting inflation. We suspect that’s why the company lowered its Q1 and FY ’08 forecasts.

So why this foolhardy approach? Why, as Bill King calls it, "Inflate or Die" ?  Several theories abound, led by Fed hubris  and/or incompetence.

I’m not sure I buy that. A more likely possibility is what John Cassidy describes in A Bankers’ Bailout:

"The rescue operation brings to mind John Kenneth Galbraith’s dictum that in the United States, the only respectable form of socialism is socialism for the rich."

 

Indeed.

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Consumer Prices (CPI) is out today at 8:30am. Producer prices (PPI) are mysteriously MIA due on February 26. . .

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Sources:

Weakening Demand? Oil Still Passes $100
By NEIL KING JR. and ANA CAMPOY
February 20, 2008; Page A3
http://online.wsj.com/article/SB120346863077378499.html

Opec worries drive oil price to $100 close
Andrew Clark in New York
The Guardian, Wednesday February 20 20
http://www.guardian.co.uk/business/2008/feb/20/oil.globaleconomy

With Iron-Ore Price Hikes Like This, Who Needs a Monopoly?
Heidi Moore 
Deal Journal, February 19, 2008, 12:13 pm
http://blogs.wsj.com/deals/2008/02/19/with-iron-ore-price-hikes-like-this-who-needs-a-monopoly/

Wary of economy, Wal-Mart cautions on ’08
David Goldman
CNNMoney.com, February 19 2008: 10:43 AM EST
http://money.cnn.com/2008/02/19/news/companies/walmart_earnings/?postversion=2008021908

The Bankers’ Bailout
John Cassidy   
Portfolio, March 2008    http://www.portfolio.com/views/columns/economics/2008/02/19/Massive-Bailout-Planned-for-Banks

Category: Commodities, Consumer Spending, Economy, Energy, Federal Reserve, Inflation

NYC Temp: 11 degrees

Category: Commodities, Energy, Psychology

Cramer: “Ethanol is a fuel that doesn’t work”

Category: Energy, Taxes and Policy

Crude Oil = $100

Category: Commodities, Energy, Technical Analysis

Performance of Commodity Sub-Groups

Category: Commodities, Energy

Oil Movements

Category: Commodities, Energy, Financial Press, Web/Tech

Cartograph of Oil Reserves

Category: Commodities, Data Analysis, Energy

Crude Oil = $94

Category: Commodities, Energy, Federal Reserve, Technical Analysis

Oil = $88

Category: Commodities, Consumer Spending, Economy, Energy, Technical Analysis

Inflation? What Inflation?

A tale of two headlines:

Inflation Fears Hit Eurozone

          and

Goldman Sees Funds Rate Cut to 3%

Won’t someone please explain this to me?

How is it possible that the regions of the world with strong currencies — like Europe, U.K., Australia, and Canada — are having inflation problems. And yet at the same time, the nation having a record low currency — i.e., the United States and our Dollar — doesn’t seem to either inflationary pressures (At least according to official CPI data). And we seem to have little concern about further currency induced price increases.

Am I the only person who finds this incongruent?

If Goldman Sachs is correct, and the Fed does eventually cut rates to 3% — what might that mean for various dollar priced commodities like Oil & Gold?

Probably very little — if (and this is a big IF) we are in the throes of a recession. But what if the Bulls are right, and this is merely a mild mid cycle correction?

A 3% Fed rate could mean Oil at $150 and Gold at $1200.

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Excerpts after the jump . . .


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Sources:

Inflation fears hit eurozone

By Ralph Atkins in Frankfurt and Krishna Guha in Washington
FT, November 27 2007 18:02

http://www.ft.com/cms/s/0/55ff8ca6-9d10-11dc-af03-0000779fd2ac.html

Goldman Sees Funds Rate Cut to 3%
Greg Ip
WSJ, November 27, 2007, 9:26 am
http://blogs.wsj.com/economics/2007/11/27/goldman-sees-funds-rate-cut-to-3/

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Category: Commodities, Credit, Derivatives, Economy, Energy, Inflation