WSJ: Inflation, Don't Worry, Be Happy

For once, the market's response to the nonfarm payroll number was exactly as it should have been, i.e., nothing happened. (Of course, that was because the market was closed.) Given its noise level and the regular revisions, far too much is made out of this particular statistic, and why it's such a favorite speculative catalyst I do not know. Thankfully (at least last Friday), the markets weren't roiled by what is essentially a nonevent.

There was absolutely nothing surprising in the data, as it was about as expected. On the other hand, beneath the surface the growth in jobs was less than expected: About one third came from census workers, another half contributed by the birth/death model, and only the remaining from actual job creation.

Turning to today's action, by midday the S&P and the Nasdaq had gained about 1% and the Dow about half that. From there the indices drifted sideways for the rest of the day.
Away from stocks, the piggys were weaker once again (as they're in desperate need of some QE from Bennie). The dollar was mixed. Oil gained 2%. The metals gained 1%.

Yellen: Barking Up the Wrong Tree
Regular readers know my view about inflation, and today the Wall Street Journal took pains to let us know why we needn't worry (which I'll get to in a minute). But first, in a column headlined "Inflation Fears Cut Two Ways at the Fed," Jon Hilsenrath explains a particular mindset:

"The Federal Reserve's decisions to keep interest rates near zero and to flood the financial system with credit are sparking fears of an eventual outbreak of inflation. But inside the Fed, an influential [my emphasis] band of policymakers is fretting over the opposite: that the already-low rate of inflation is slowing further." One Fed head who champions that view, Janet Yellen, is quoted as follows: "Underlying inflation pressures are already very low and trending downward."

This is what the Fed really thinks, in my opinion, regardless of its slightly more hawkish rhetoric occasionally. Bennie has one goal: He is committed to not making the mistakes he feels the Fed made in 1937-38, when he claims it tightened too soon and sent America back into depression. (He doesn't really understand the root cause of the Great Depression, but that isn't today's topic.) Thus, I believe that at some point he will feel compelled to try to stop the rise in interest rates -- being caused by an out-of-control Federal government budget deficit -- and ride to the rescue in some version of QE.

Hush-a-Bye, Don't You Cry About the CPI
The Journal's main story was aimed at letting folks know why they needn't worry: "Consumers Not Likely to Feel Commodity Costs Rise." Even though the paper notes that the prices of many commodities are heading higher, it adds that "little if any of this will filter through to the consumer in the form of higher prices for things such as cars and dishwashers." Their line of reasoning: We just aren't going to see higher prices because the raw materials component is so small and because demand is too weak. They believe that there is just too much excess capacity or "slack," as they call it. Therefore, any price increases will just be eaten by businesses.

While some businesses may be willing to absorb a portion of the price hikes for a little while, that won't last long. In fact, we're starting to see this in far too many areas. In Ask Fleck today, a longtime businessman within the hardwood industry notes that prices have leapt dramatically in the last year. One of the reasons why prices are being pushed higher is because so many mills have gone out of business. So, when moneyprinting meets industries that have been hammered, price increases do result.

I don't know when inflation will show up in the CPI, as I pointed out in my book, because it's so badly skewed by statistical manipulation, via hedonics and substitution. But an increase in inflation is coming our way. I think you can take that to the bank.

Index Close % Change
Dow 10973.55 +0.43
S&P 500 1187.44 +0.79
Nasdaq 2429.53 +1.12
Nasdaq 100 1977.83 +0.93
Russell 2000 697.65 +2
Sox Index 377.86 +2.98
Bank Index 53.44 +1.91
Dow Transports 4415.41 +0.52
Dow Utilities 384.92 +0.5
Nikkei 225 11339.3 +0.47
Gold - Front Month 1132.1 +0.53
Silver - Front Month 18.1 +1.2
Crude Oil 86.72 +2.18
Dollar Index 81.13 -0.06
Euro Spot 1.35 -0.19
Long Bond 20-year 114.38 -0.44
FOTM - Yen Spot 94.32 +0.31
4/5/2010 4:10 PM