MKT  022107: Ghost of Inflation Coming Back to Spoil the Party

Japan CB’s rate didn’t bother mkt as much, but CPI did.

As Briefings.com writes:

“This one month read on inflation does not signal a new trend, or even undermine the belief that inflation trends are moderate.  It does, however, take away some of the optimism that inflation has moderated to such an extent that the Fed will be able to lower interest rates later this year.  The year-over-year core CPI now stands at 2.7%, well above the Fed's inflation forecast of 2% to 2.25% for this year. 

The 0.3% core increase follows three straight 0.1% gains and is thus not cause for alarm.  But it is, in itself, bad news.  Inflation pressures may not have diminished as much as the market hoped following Bernanke's recent testimony. “

Stock prices have been bid up in anticipation of softer inflation data & today's print did not support that view,. So bears took today’s CPI number and launched their attack.

Inflation or no inflation? It’s a tough call. If noting else, concern for inflation will always hang somewhere in the mind of mkt as well as Fed.  It’s a ghost never really going away, at least in 2007.

But a ghost is still a ghost, it is never real.

Bloomberg.com writes.

“European government bonds advanced after a government report showed inflation in France slowed in January, easing pressure on the European Central Bank to keep raising interest rates.

“Consumer prices in France, Europe's third largest economy, fell 0.4 percent from December, the biggest drop in two years. Futures trading shows investors are reducing bets on high the European Central bank will lift interest rates this year.

The fall in French consumer prices is good news for bonds,'' said Jason Simpson, fixed income strategist in London at ABN Amro Holding NV. ``I don't think it'll alter the interest- rate outlook in the eurozone much. The ECB will keep raising rates, but at least it provides some good news for the market.''

``The rate hike this time could be the last one for this year as inflation expectations aren't rising and consumer spending still looks fragile,'' said Tokyo-based Yoshimasa Kato, a deputy general manager at the investment division of Shinkin Trust Bank Ltd., which holds the equivalent of $8.3 billion in assets. ``Longer bonds may be an easier place to buy than shorter debt.''

CPI number and the shadow of inflation ghost, nevertheless, are bears’ gunpowder for a while. A market can never really function well without periodic showing of the power from bears. Bulls and bears are  an odd couple, none of them can live without each other.

We will see how bulls and bears dances with each other in the shadow of inflation and rate in 2007.

Meanwhile, don’t lose perspective. As some of you probably guessed out already, I am fundamentally a “buy and hold “ bull. Trading is the way I understand mkt, but not where most of my portfolio is.

The other day I was reading Leften Stavros Stavrianos’s A Global History: From Prehistory to the 21st Century and The Balkans since 1453.Interestingly, iIn his book, Stavros had talked about Marx’s prediction about capitalism. Marx, in his famous On Capital published in 1867, wrote that “today of industrialized countries is the tomorrow of developing countries”. In his letter to his lifetime comrade and friend Engles on Oct 8, 1858, Marx was even worried that the newly-born socialism in Europe would collapse under the attack from the momentum and success of capitalism in developing countries. What a foresight! Think about China and its amazing rise of capitalist-oriented economy since 1978. Without China’s capitalist-oriented economic reform initiated by Den Xiaoping, how can US economy ever come out of stagnation in which it was long trapped in 1970’s?

Ironically, it is CCP who was originally inspired by Marx’s theory, came to rescue of capitalism, though not a total surprise to Marx. And the capitulation of Chinese capitalism is yet to come, so  capitalism on earth has a long way to go before its dealth as predicted by Marx, which will come inevitably.

In that sense, the bulls basically have long party to play, although periodically bears would come in for a visit to check on sanity of bulls, making sure bulls don’t kill themselves in hyper-craziness and drunkenness. To not to miss bulls’ party, you need have stocks or money to buy them. So make sure you are financially, as well as physically and mentally are in one piece, not tore about by the game played by bulls and bears.

My solute to Leften Stavros Stavrianos, UCSD history professor, who died in San Diego, California, in 2004.