Inflationary Pressures Heating Up

Commodities have been moving up in lock step with equities. Eventually, that will disrupt the virtuous cycle I described this morning of cheap money leading to buybacks and M&A. Evidence is gathering that inflationary pressures are heating up:
  • China has been a source of deflation but there are daily stories of inflation and price increases coming from China. Most notably, a contact of mine received a 30% price increase in the cost of clothing from their Chinese manufacturers.
  • Depending on which commodity index one looks at, commodities are up between 15% and 25% this year. Were it not for the brief 2008 spike in energy prices indexes would be at all time highs.
  • The newspapers are rife with stories about less discounting this holiday season. 
  • Con Agra has been one of the latest food companies to complain about rising input costs. They are raising prices and reducing the size of packages. 
  • The price at the pump is rising and brent crude trades at $93. Once oil crosses the psychologically important $100 level it will be hard for Ben Bernanke to maintain there is no inflation.


    Anonymous said...

    Not sure about the oil/inflation argument. We are actually in a deflationary environment pumped by artificial inflation. in other words, without qe in any form, i'd estimate oil prices to be in the 30's. fed's mission is for inflation. why would they try to thwart it or deny it?

    Tsachy Mishal said...

    "without qe in any form, i'd estimate oil prices to be in the 30's"

    Without a couple of things my grandpa would be my grandma.

    Anonymous said...

    asset prices or your sexuality is now artificially determined by a bearded man in the federal reserve

    jewelin said...

    What are your thoughts on POMO (permanent open market operations) and how this influences your forecasts on stock/bond market short-term tops and bottoms?

    Tsachy Mishal said...

    I think the effects are indirect. I don't believe that the same traders/investors that buy 5 year notes are the ones that buy stocks.

    But as I wrote this morning lower rates allow corporations and PE firms to apply leverage that can lead to higher markets.

    Anonymous said...

    And that is why the average us household just got a 2000 gift on payroll taxes. Takes care of energy and food inflation for 2011. And do you really see them hiking taxes in 2012? No the GOP will say you can't raise taxes in 9% unemployment. So another$ 2K payroll tax holiday in median$ 50K household ($4K for$ 100K household) in 2012

    Anonymous said...

    there's nothing indirect about what the fed is doing.

    Anonymous said...

    Yes, Fed wants short term inflation but they do a good job creating perception of the opposite. They are not pressures, they are on Fed's Christmas list. That is what all this deforestation is all about.

    Tsachy Mishal said...

    Indirect in that I dont see a trading strategy utilizing the POMO data.

    Anonymous said...

    POMO cash from bond sales to the fed are immediately used to purchase hi beta assets. This is an ordered mandate directly from the fuzzy faced genocidal overloard known as ben bernanke

    Anonymous said...

    Yes. POMO is essentially how the Fed gives cash to banks to buy up a spectrum of assets.

    It sure sounds alot better when they say the Fed is purchasing treasuries from bank's balance sheets, vs. here's a freecash handout to the banks to buy AAPL, Silver futures and crude oil.

    Anonymous said...

    This is how the fed manufactures inflation.

    Steepen the curve.

    bubble. rinse & repeat

    Anonymous said...

    Bespoke poll time again!

    What's in Store For Stocks in 2011?

    At the end of 2009, we asked Bespoke readers whether they thought the index would be up or down in 2010, and 54% said the index would be up. The S&P 500 is currently up more than 12% this year, so barring a huge drop over the next 7 trading days, the majority will have answered correctly in our poll.

    As 2011 looms, we would once again like to get a sentiment gauge of Bespoke readers in regards to the stock market. Instead of just asking whether the S&P 500 will be up or down, however, this year we're asking for more defined answers (up 0%-10%, 10%-20%, etc.). Please take part in the poll below, and we'll report back with the final results as the new year approaches. Thanks for participating, and happy holidays!
    What will the S&P 500 do in 2011?
    results so far...

    Decline more than 20% 10% 33
    Decline 10% to 20% 9% 31
    Decline 0% to 10% 11% 36
    Gain 0% to 10% 31% 106
    Gain 10% to 20% 28% 96
    Gain more than 20% 11% 37

    339 votes total

    70% of voters think we finish next year higher.

    Anonymous said...

    This market has an over-extended "feel" to it.
    Are they trading just by the calendar now?

    Anonymous said...

    while traders on the street are signing off for vacation, the fed is pushing overtime with 2 pomo's a day.

    PJ said...

    POMO is a mysterious operation that only the insiders understand. There are undoubtedly secret agreements between the Fed and the banks about how banks will use capital freed up by the POMO and when and under what circumstances the excess reserves created in exchange can be withdrawn.

    Without knowing those agreements, it's impossible to trade. If we try to guess, the rug could be pulled out from under us at any time.

    I can't believe it's as simple as "bid stocks up every day to infinity." That would put the banks at great risk and force the Fed to backstop an inflated stock market in perpetuity, something which they lack legal authority to do.

    But clearly it's helped stocks and commodities to date. I have to believe the big banks will be the first out of these markets at some point.