June 22, 2004
DEFLATION WITH TEMPORARILY HIGHER GAS PRICES:
A W-for-President scenario (Larry Kudlow, June 22, 2004, Townhall)
There's a lot of angst these days over the threat of rising inflation. Sensitive market prices are saying don't worry about it, but economists are worrying nonetheless. Should you worry, too? No. Markets are smarter than economists.
Key leading indicators are showing 5 percent to 6 percent real growth of gross domestic product this year, with roughly 2.5 percent inflation. This is quite a good scenario. It's a pro-stock market scenario. It's a pro-growth scenario. It's an anti-budget-deficit scenario. And it's a George W. Bush-for-president scenario.Liquidity and inflation indicators do not suggest that virulent inflation is headed our way. The mere hint of a slightly less-accommodative policy from the Federal Reserve has driven down the prices of gold and other metals by roughly 10 percent this spring. (Commodities, remember -- in particular gold -- are leading indicators of changes in general price levels.) And even with rising energy prices, the Commodity Research Bureau's broad-based futures index has declined about 6 percent.
True enough, consumer prices have moved up to 3 percent and producer prices have jumped to 5 percent. However, buried inside the latest producer price report, crude materials (less food and energy) have registered a 19 percent annual decline rate over the past three months, picking up the recent commodity weakness. The 10-year Treasury -- another inflation-sensitive indicator -- is hovering around a historically low yield of 4.7 percent.
If they just keep predicting the return of inflation, they'll be right eventually, but likely not for a decade or two. Posted by Orrin Judd at June 22, 2004 8:42 AM
Don't mistake Larry Kudlow for someone who has a clue about the economy. He's a Wall Street cheerleader who doubles as a political pundit (or is it the other way around?). If you want good advice on the economy, turn to some longtime pros who have had to make real money in the markets, and have done so decade after decade, like Warren Buffett and Bill Gross.
Oh yeah, also ask all the corporate insiders who have been selling stock since last year.
Posted by: Robert Duquette at June 23, 2004 1:21 AMIf you've been aggressively buying stock indexes since he told you to start you're a wealthy man now. If you try timing your purchases and sales like a Buffet you're likely a pauper.
Posted by: oj at June 23, 2004 8:48 AMWealthy if you get out now. (Assuming that you got out in Feb 2000 and got back in in Nov 2002. I don't recall Kudlow telling people to get out before the crash, but I may be wrong). The indices have gone nowhere since the beginning of the year, they are getting set to fall off a cliff.
Buffett has been buying precious metals. I exited the general equities market in August 2002 and got into precious metals mining stocks. I did a lot better there than I would have staying with Dow and NASDAQ stocks.
Posted by: Robert Duquette at June 23, 2004 11:14 AMRobert:
Why would you have gotten out? Why would you get out now? Stocks are still drastically undervalued and with profits going up so much faster than inflation the market has a long way to run up before it's even close to its proper value.
You're looking at day to day or year to year, not the long term. That's a mug's game.
Posted by: oj at June 23, 2004 1:32 PMYou see a different reality than I do. Stocks are still, historically, OVERvalued. The historical mean for p/e ratios for the broad market is 15. The p/e for the S&P500 is around 25, Dow & NASDAQ are higher.
Don't rely on core CPI for inflation, it leaves out all the important stuff, like energy and food and commodities. Real stuff is getting more expensive all the time, but wages aren't going up to compensate. A falling dollar will make this worse.
The stock market will be a good place to invest again someday, at price levels well below their current values.
Posted by: Robert Duquette at June 23, 2004 2:28 PMYes, you're not looking at reality, though you see the outlines of it.
A market around the same pioint it was five years ago despite dynamic growth has pushed p/e down (last I saw was 17).
The inability of business to raise prices or workers their wages demonstrates that inflation is dead.
etc.
Posted by: oj at June 23, 2004 5:03 PM