Reply #70: When it Rains It Pours (Stagflation in the air?) [View All]

[54anickel]

Edit to replace Mogambo dupe

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=47829

No, I am not talking about the Northeastern US in October, although I noticed that we got better than a foot of rain in the middle of October- who could have missed that? I am referring to the macroeconomic and inflation data that has been pouring in and is beginning to strain the dams of the “all positive all the time” macroeconomic outlook. Stagflationary dynamics are starting to show up in the data. This is no minor matter for two reasons. Firstly, economic policy- never a precision instrument- is particularly inept at handling the confluence of inflationary and recessionary conditions simultaneously. Second, investors tend to feel about inflation, rising interest and softening profits the way New Yorkers feel about heavy rain. These undeserved and unreasonable perils detract from life and should never have to be tolerated.

The effects of persistently high energy costs and the growing, begrudging discovery that energy prices are not just going to fall and stay low soon, have started to show up as upward price pressures. Rising consumer goods prices, producer goods prices and import prices are getting difficult to ignore. The CPI-U, consumer price measure of all urban consumers, stood 4.7% higher in September 2005 than it did in September 2004. PPI, Producer Price Index, data makes clear that over the last year unadjusted producer prices rose 6.9%. Both CPI and PPI increases have been accelerating across the course of 2005. Import prices advanced 2.3% in August 2005, about 200% of their average increase in months past. The price index that tracks imported industrial non-petroleum materials and supplies has now increased more than 11% in last 12 months. To complicate matters, interest rates are rising, across the curve. I don’t need to remind you that we are a debt fueled consumer driven economy. And our macroeconomic gas - consumer debt - is rising in price, and home price appreciation looks to be cooling.

The above jiffy tour of inflation pressures has a corollary as a recession indicator. The debt bonanza is looking a little peaked. This is true in the corporate debt world and the housing world. S&P analysts are reporting a record 618 corporations poised for debt downgrade consideration as against 318 positioned for possible upgrade. The number of firms and dollars in or nearing below investment grade status looks to be at, or approaching, record levels these days. GM, Ford and Delphi are only one part of this story. The distressed auto parts and manufacture spaces are hugely overweight in the bond markets and their debt figures into a frighteningly high number of structured products. We have recently seen prices flattening or declining in some leading hot housing markets. These developments, rising rates, flat personal earnings and increasing pension and benefit concerns among working Americans begin to hint at a rising probability of a growth recession. This has to be considered alongside a growing likelihood that profit growth will decelerate from recent stellar highs. These are the standard bearers of growth recession risk.

If considered together, the above dynamics suggest a rising probability of stagflationary dynamics. This would deserve real concern absent the fact that economic policy performs poorly in such circumstances. Given this fact, the specter is particularly haunting.

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