Stop Printing Money...

....like the Fed did this summer and you kill inflation.

Wholesale prices plunged a record amount in October.

The Labor Department reported today that wholesale prices dropped by 2.8 percent in October, the biggest one-month decline on records that go back more than 60 years.

The 2.8 percent overall decrease marked the third straight month that wholesale prices have fallen.

Money supply growth, as measured by M2 nsa, was under 2% on an anualized basis this summer, but is now back up over 7%. Take advantage of the inflation pause while it lasts by buying hard assets.

The Ultimate Result of Inflation

"I feel safer with Warhol than with U.S. Treasury bonds."-Jose Mugrabi

HT2fs

Cheerleader Warren Buffett Warns On Inflation

Warren Buffett, whom I consider to be part of the new American Oligarch class, has written an Op-Ed piece that is published today at NYT.

In the piece, Buffett takes on the role of cheerleader for the American stock market. He tells us that for the first time he is buying stocks for his personal account.

Buffett's argument in favor of buying stocks is that in the long run they always go up--and he has the data from the 1930's to date to prove his contention. But the one thing Buffett does not point out in his article is that the current United States is much different from the United States of the 1930's to approximately the year 2000. During this period the United States was a growing, sprawling Empire. But, current day America is different. It is stretched thin. The Empire has debt owed to nations around the world. It has domestic obligations in the form of Social Security and Medicare that will soon haunt. And regulations grow on the creative business sector on a daily basis. This isn't the America Warren Buffett grew up in. It is unlikely the stock market will perform the same.

This does not mean there will not be opportunities for investors, but they will be different kinds of opportunities. Those who are quick to identify changes in macro-economic trends and find the stocks that benefit from those changes in trends will do extremely well. Those who truly dig into the fundamentals of companies and find the niche operators that outperform in the overall oppressive environment will also do well.

This does not mean that stocks in general won't go up, it will be a roller coaster period for them because of very strong inflation. The trick will be though to find the stocks that outperform the coming inflation.

Buffett understands very well that this inflation is ahead. He writes in his article:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.

Truer words have never been written by an Oligarch to the general public.

Murphy: There Is Inflation

Headlines today blare that there is no inflation, but Bob Murphy can't be fooled. You can follow his reasoning here.

Inflation Is Raging

* From Sept. 07 to Sept. 08, the prices of "intermediate goods" went up 15.4%.

* From Sept. 07 to Sept. 08, the prices of "crude goods" went up 26.0%.

Bob Murphy explains how to take the BS out of the BLS figures, here.

Global Hyper-Inflation Ahead: We Are All Zimbabweans Now

From Paris:

European financial and political leaders agreed late Sunday to a plan that would inject billions of euros into their banks in a bid to restore confidence to the teetering financial system.

Taking their cue from a rescue plan announced last week by Britain, the European countries led by Germany and France pledged to take equity stakes in distressed banks and vowed to guarantee bank lending for periods up to five years.

From Washington:

The world's leading industrialised nations have pledged to do everything in their power to prevent any more Lehman Brothers-style failures of systemically important financial institutions...

There is unanimous agreement that the global system in its current extremely stressed state could not take the collapse of another systemically important firm such as Morgan Stanley, which came under attack last week in the markets.

Felix Salmon explains how this is protection for Wall Street's chosen ones:

This is much more important, for Morgan Stanley, than any cash injection from MUFG, no matter how it's structured. The G7 is essentially telling market-makers that they can write credit protection on Morgan Stanley with impunity: they're not going to let it go the way of Lehman Brothers, with all the systemically-disastrous messiness that would entail.

All these billions being pumped into the system make one thing clear, Henry Paulson, Nicholas Sarkozy, Gordon Brown, Angela Merkel, and the like, haven't come up with anythng Zimbabwe's Robert Mugabe hasn't already thought of: PUMP MORE MONEY.

Above: A Robert Mugabe study group.

The Federal Reserve Is About To Engage In The Greatest Money Supply Inflation In Its History

Up until now, the Federal Reserve has been sterilizing its bailout activities by either loaning out or selling Treasury securities that it has had in its portfolio, to match the bailouts activities it has been conducting. In the last 52 weeks, the Feds portfolio of Treasury securities has declined by $303 billion and stands at $476 billion. But, commercial banks and bond dealers, just in the last seven days, borrowed $348.2 billion from the Federal Reserve as of yesterday.

If the Fed attempts to sterilize these borrowings it will be down to $128 billion in its portfolio. If it does sterilize the borrowings, in a day or two with only $128 billion in Treasury securities left, and more borrowing likely, the Fed would be forced to print money, as they would have run out of Treasury securities for further sterilization operations. Either way, it is likely the Fed will start printing money at unheard of rates.

Indeed, they may have already started. According to the latest data, during the week ended September 22, the Fed increased the money supply by nearly $100 billion.

We may be about to experience the greatest inflation the United States has experienced since the Civil War. Gold could break above $1,000 an ounce in record time. You have been warned.

-Robert Wenzel

TIPS Have Underforecasted Inflation

By Dr. Robert P. Murphy

Back in 2003, the Treasury began selling 5-year Treasury Inflation Protected Securities, or TIPS. (Longer maturities were available starting in 1997.) What happens is that the government pays a fixed coupon rate, but the principal is adjusted based on increases in the Consumer Price Index (CPI). Thus, TIPS yields are one of the closest things you can get to observing the real interest rate; it measures what lenders need to be offered to part with their money for a period of time, over and above the fall in the purchasing power of their money.

TIPS are really neat because, in theory, they should allow you to back out the market's expected rate of inflation (subject to a million caveats, as everything in mathematical finance is). The nominal yields on Treasurys (and yes, that's how The Man spells it, not Treasuries) incorporate both the real yield and expected inflation, and so Nominal minus TIPS (for comparable maturities) should give the average expected inflation rate during the life of the bonds. (Again, I want to stress that this is a simplification. For example, regular Treasurys are more liquid than TIPS, and so you would expect the former to have a slightly lower yield for this reason.)

Anyway, a lot of people are currently trying to calm investors by pointing to the bond market. "Look," they might say, "the monthly averages show that in August, five-year nominal Treasurys were yielding just under 2 percentage points more than TIPS. So that means the market expects average inflation of only 2 percent per year, over the next five years. Do you Chicken Littles think you know more than all the world's bond traders?"

OK I think one would have to be INSANE to predict average (price) inflation of only 2 percent over the next five years. It will be much higher than that. (Note that I am talking about the overall CPI for urban consumers, not the "core inflation" that deviously removes food and energy prices.) So what gives? Well, one thing is that--as noted in the parenthetical remarks above--there might be a liquidity premium placed on nominal Treasurys, even versus TIPS. Another is that nominal Treasurys are safer, especially as things get crazier and crazier.

It's not so much that the government will default on TIPS, but rather that they might stop indexing them for inflation. Another possibility for why the market is apparently underestimating future inflation is that the bond traders know full well how full of BS the BLS is, and so the "Inflation Protected" securities aren't really fully covering their owners. For example, if an investor expects actual price inflation of 5 percent per year, and he requires a real yield of 1 percent, then in theory he should buy a TIPS yielding 1 percent. But what if he knows that the BLS will understate the true inflation rate, and instead announce annual CPI increases of only (say) 3 percent per year, in contrast to the true inflation rate of 5 percent? In that case, the investor who requires a real yield of 1 percent will insist on a TIPS yield of 3 percent. Thus, naive analysts who trust the BLS (or who think bond traders do) would say, "Sweet! The bond market is anticipating strong economic growth, with expected real yields of 3 percent!" Note that this same bond trader--who remember expects actual inflation of 5 percent and requires a real yield of 1 percent--would buy regular Treasurys yielding 6 percent. So by our method of simple subtraction, we would erroneously conclude that this bond trader expects 6 - 3 = 3 percent inflation, when we know he really anticipates 5 percent. The difference is how much the bond trader thinks the government will understate inflation.

Finally, I have done some empirical analysis to see how the (Nominal-TIPS) technique has done so far. Now unfortunately, you can't do a true test, because the 5-year TIPS have only been around for a little over five years. However, even so I think the chart below (click to enlarge) is very instructive. It contrasts the monthly "expected future five-year inflation rate" (based on nominal minus TIPS yields) versus the monthly actual, backward-looking year-over-year increase in the CPI. I think it should be obvious that the bond market is not currently forecasting 2% inflation over the next five years.



Robert P. Murphy is an economist with the Institute for Energy Research and author of The Politically Incorrect Guide to Capitalism. He writes an infromative  blog called Free Advice and you can email him at bob.murphy.ancap@gmail.com

It's Time The Fed Adopts Volcker Religion

By Robert Wenzel

Federal officials and market players are struggling with the same issues, WSJ reports.Why haven't the steps taken so far calmed the system? What can policy makers do next?

In our book, the answer is simple. The boom was fueled by the Fed's money printing under Alan Greenspan and the early Ben Bernanke.

As we have been emphasizing in lone wolf fashion--with no regulator or other commentator coming close to mentioning this most important event of the current crisis environment--the Fed over the recent months has for all practical purposes stopped printing money. That's why the market continues to struggle.  The Fed has turned this from just a mortgage crisis, to the beginnings of a major full-fledged economic crisis.

Over the last three months M2 money supply has been growing at a 1.8% annualized rate. This can be compared to earlier this year when M2 annualized money growth was over 10%. In fact, as recently as March, three month annualized money growth was at 12.7%. Few seem to recognize the dramatic shift downward.

A lot of headline watching commentators are even reporting that the Fed is adding gobs of liquidity through their bailout operations, when in fact the Fed has been sterilizing its bailout operations, including the Term Auction Facilities, by either liquidating or loaning out the Treasury securities already in their portfolio.

WSJ reflects current beliefs when it reports:

The Federal Reserve has already slashed interest rates to counteract a deepening credit freeze and instituted its broadest expansion of lending facilities since the Great Depression to keep financial markets functioning.

As mentioned the lending facilities have been sterilized so as not to increase money supply. And we should have learned from the Volcker period that you don't target interest rates to impact the economy, you target money supply. The current Bernanke Fed has seemingly, without being completely aware, slipped into interest rate targeting.

At this point we must add that ideally the Fed shouldn't be monkeying and manipulating the money supply at all, but in realworld economik if the Fed is going to be messing with the money supply, they should be good at it. This means reverting back to Volcker's rejection of targeting interest rates, and instead targeting money supply. In Volcker's case, he targeted money supply to fight inflation, in Bernanke's case, money supply targeting is required to battle economic crisis.

This economy isn't going anywhere until Bernanke gets Volcker "Target The Money Supply" Religion. Failure to do so will lead to an enormous economic crisis which in one sense can be viewed as a cleansing of the mal-investments caused by the money manipulations of Greenspan and Bernanke. However, in the land of realworld economik, the crisis is likely to lead to untold suffocating new regulations, restrictions etc., given that the two current presidential candidates, John McCain and Barak Obama, display no knowledge of the fundamental workings of an economy. 

Robert Wenzel is an economic consultant and Editor & Publisher of EconomicPolicyJournal.com. He can be reached at rw@economicpolicyjournal.com.

A Securities and Exchange Commissioner Gets It Right

Unfortunately, he's a former Securities and Exchange Commissioner from the Republic of Panama. But David Saied does understand inflation. Saied's take on ten myths surrounding oil and inflation are here.
-Robert Wenzel

Soaring Gas Prices Force P. Diddy to Fly Commercial

Climbing gas prices have cut into the standard of living of hip-hop entrepreneur Sean "P. Diddy" Combs. He no longer takes his private jet from New York to L.A. In a video he explains gas prices are too high:

As you know, I do have my own jet, but I've been having to fly back and forth to L.A. pursuing my acting career.Now, if I'm flying back and forth twice a month, that's like $200,000, $250,00 round trip. I'm back on American Airlines...Give a shout out to all my Saudi Arabia brothers and sisters and all the brothers and sisters in all the countries that have oil... if you could please send me some oil for my jet, I would truly appreciate it...

Here's the full video:

Producer Prices Jump 1.2% in July

Inflation at the wholesale level is running at the fastest annual pace since 1981, with a 9.8 percent gain over July 2007.

For July, wholesale energy prices jumped by 3.1 percent following a 6 percent gain in June. That increase reflected big jumps in the price of natural gas, home heating oil and liquefied petroleum gas, which offset a 0.2 percent dip in gasoline costs.

Food prices rose by 0.3 percent in July after a 1.5 percent surge in June. Beef prices jumped by 7.4 percent, the biggest increase in nearly four years. Milk prices shot up by 5 percent, the biggest gain in a year, while soft drink prices rose by 2.4 percent, the largest increase in four years.

Hershey To Raise Prices 11 Percent

The Hershey Co. has announced it is raising prices on its products by an average of 11 percent.

The price increase will be the second already this year.

The immediate increase was necessary to offset "significant increases" in the cost of raw materials such as sugar, cocoa and peanuts -- up as much as 45 percent since the start of the year -- as well as the growing cost of fuel, utilities and transportation, Hershey said.
"Commodity costs have been volatile over the last several years and continue to remain at levels that are well above historical averages," Hershey's President and Chief Executive David J. West said in a statement.

Hershey said it expects sales to grow between 2 and 3 percent in 2009, down from its earlier projection of a 3 to 5 percent increase. The company also warned its 2009 adjusted profit would likely miss its target of 6 percent to 8 percent growth

Behind The Great 2008 Commodity Sell- Off

Commodity prices continue to fall.

Gold fell nearly 5 percent in early European trading on Friday. Oil prices have also slipped some more, a session low of under $113 a barrel was hit. Silver suffered the most in the sell-off of precious metals, with prices plummeting to a low of $12.39 an ounce, their weakest since last September.

Platinum and palladium slipped 7 percent and 6 percent respectively. Both have suffered significant losses in recent weeks.

The overall downtrend in the commodity markets in recent months can be seen in the performance of indices such as the Reuters-Jeffries/CRB index, which has fallen almost 18 percent since early July.

Meanwhile, the dollar extended its rally overnight, hitting a nearly 2-year high against the pound and gaining further against the euro.

What's going on?

There are four factors that may be contributing to the sell-off.

The first may be the likelihood that some of the sell-off is simply a normal technical pullback against the major trend. The commodities boom has been a multi-year boom, and thus a pullback was due at any time.

Second, the climb in commodities prices was so dramatic and long lasting that many economic actors, both consumers and producers, have had time to adjust and consider alternatives to paying higher prices and, thus, cutting back on demand.

Third, the possibility exists that some of the sell-off may be the result of hedge fund liquidations. There are continuing rumors that some hedge funds are in trouble, if so, the first things they may try to sell off to meet marginal calls and partner liquidations are various futures positions since the futures offer a very liquid market to sell into.

Fourth, the Federal Reserve over the last three months has dramatically reversed its huge money printing operation. Generally, it takes time for changes in money supply operations to impact the markets, but this change in Fed actions could impact sooner because of the enormity of the change. From double digit growth to growth in the last three months of under 3%.

To the degree that the current sell off is simply a technical pullback, it should be over soon with commodities moving higher, again.

To the degree that it is the result of economic actors adjusting their activities, the drop should soon be over and prices should stabilize at current levels.

To the degree hedge fund liquidations have been behind the decline, then as soon as the liquidations are over (and they could be over very soon), commodity prices will begin to climb again.

To fourth and final factor is most important for the long-term trend in commodities. If the Fed maintains the current low growth rate of money supply, then commodities have much farther to go on the downside as the United States will be in a deep recession--extended far behind the housing crisis.

If the Fed reverses ts low growth operations, and begins printing at double digit rates again, then this will fuel further advancements in commodities prices.

Finally, it should be noted that these factors are not mutually exclusive, and that more than one of these factors could be operating on commodities prices, sometimes in countervailing fashion.

Inflation Takes Out McDonalds' $1.00 Double Cheeseburger

In may be replaced with two burgers and one slice of cheese, or a double hamburger without cheese.

Janet Adamy at WSJ reports:

McDonald's Corp. is testing modifications to its popular $1 double cheeseburger, and higher prices for the sandwich, as it prepares to change its Dollar Menu by next year.

In an interview, Don Thompson, president of McDonald's U.S. business, said the company has tested ways to make the burger less expensive to make. Some restaurants are selling it with one slice of cheese instead of two, and billing it as a "double hamburger with cheese." Others are offering a double hamburger without cheese. Some are selling the traditional double cheeseburger at prices ranging from $1.09 to $1.19.... High dairy prices have pushed up the cost of cheese, and McDonald's predicts more pressure because its beef costs will be higher this year.

Propoganda From The Bureau of Labor Statistics

LaTi gets to follow around a price checker that helps put together the Consumer Price index. Of course, the manipulation of the CPI Index is not done at the grunt level, it is done higher up the calculation chain. Sometimes, way up the chain. Richard Nixon was responsible for the wacky "Core Inflation" that removes food and energy from the CPI.

The propaganda in the article reaches its peak when it quotes government apologist and former Council of Economic Advisors member, Michael Boskin. LaTi reports:

...economist Michael Boskin said the CPI historically has overstated inflation...

San Francisco Auto Dealers Increasingly Reluctant to Accept Trade-Ins of Trucks and SUVs

The Federal Reserve is out with its Beige Book report on the state of the economy through July 14.

Here are key excerpts:

Reports on automobile sales were almost uniformly weak across Districts. Sales were especially poor for large vehicles such as trucks, SUVs, and some minivans. Indeed, auto dealers in the San Francisco District were increasingly reluctant to accept trade-ins of trucks and SUVs due to a lack of a wholesale market for these vehicles. Demand for small fuel-efficient and foreign vehicles was reported to be solid or increasing in the Philadelphia, Cleveland, Chicago, Minneapolis, and Dallas Districts. Dallas reported that consumers were paying sticker prices for such vehicles, and that they were in short supply...

Residential real estate markets declined or were still weak across most of the country. Slower home sales were reported in the Boston, Philadelphia, Richmond, Atlanta, and St. Louis Districts. Cleveland reported flat to declining sales, while sales remained sluggish in the Kansas City and New York Districts--especially at the high end--and were below year-ago levels in the Minneapolis District. New York also reported a drop in Manhattan condo and co-op transactions. Inventories of unsold homes or condos were reported as higher or excessive in several Districts, but Dallas noted a continued decline in inventories, especially at the low end. Home prices continued to decline in most Districts, and increased use of incentives and discounting was noted in several Districts. San Francisco noted particularly sharp declines in home prices in areas of California, Arizona, and Nevada that have experienced large increases in foreclosures. Atlanta said home prices dropped across the board. On the other hand, home prices were said to be holding up in the Dallas District and were little changed in the Kansas City District. Difficulties obtaining mortgage financing were reported in the New York and Chicago Districts. All Districts reporting on single-family construction said activity continued to decline, and builders in the Philadelphia District noted a rising number of cancellations. The decline in new construction accelerated in some areas of the Chicago District...

All reporting Districts characterized overall price pressures as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food, and chemicals. Chicago said the rate of growth in steel prices had flattened, but overall levels remained high. Construction industry contacts in the Cleveland District noted rising prices for all types of products, including concrete, shingles, and steel. Boston reported that contacts were anticipating further price increases in oil derivatives, shipping, and travel. Many Districts reported on manufacturers' plans to raise selling prices as a result of higher input prices, with several commenting on fears of a corresponding decrease in customer demand and overall sales volume...

Demand for labor remained high for skilled workers in most industries, while several Districts reported widespread weakness in the financial services, auto, and construction industries. Contacts in the Cleveland, Atlanta, Chicago, and Kansas City Districts reported very little upward wage pressures, with the exception of the energy and skilled labor markets. San Francisco noted some downward movement in wages for construction, finance, real estate, and retail jobs

Is The Fed In Crash Dive Mode?

Krishna Guha at FT writes this morning that the Fed has moved towards an inflation bias.

If Guha is correct, the Fed may very well crash the economy.

According to Guha, this inflation bias comes in spite of the continuing troubles at Fannie Mae and Freddie Mac, extreme volatility in bank stocks and the recent dip in the price of oil.

He focuses on the June 30 Fed meeting where the minutes of that meeting say:

With increased upside risks to inflation and inflation expectations, membersbelieved that the next change in the stance of policy could well be an increase in the funds rate.

Bernanke is no Alan Greenspan. He will never get away with tightening money now, if he does we could very well have a stock market crash of the October 1929/October 1987 variety, with an accompanying recession.

Is this where Bernanke is going? Who really knows with this guy? I have never before seen a Fed that has gone from double digit money printing to zer growth, but that has just occurred with this Fed.

M2NSA money supply growth has been flat--zero growth--for the months of May and June. If Bernanke thinks he needs to get around to fighting inflation now, then he doesn't even realize what he has been doing for the last two months.

Further, given the failure of IndyMac, the fears of a bank run have escalated, which means that some bank customers from around the country are likely to have pulled their funds from banks and those funds are now in the form of physical currency. Thus, there are likely to be all kinds of distortions in the money supply numbers which make a shift in Fed policy at this time particularly insane.

Wall Street Journal Newstand Price Increased

On July 28, WSJ will increase the price of its newstand price by 50 cents, to $2.00. After the paper increased its cover price from $1 to $1.50 last year, average single copy sales fell by about 8%.

But, we should be getting more fun front page headlines. "The paper's editors are being urged to think more about how they can use the front page to boost newsstand sales — not something that has traditionally been a major focus," reports Jeff Bercovici at Portfolio.

Consumer Price Index Soars; Inflation Continues To Accelerate

The Consumer Price Index (CPI-U NSA) increased 1% in June for an annualized rate of 12.0%. It is fastest rate in 16 years. All major categories showed increases over the most recent three month period.

The index for energy rose sharply for the second straight month, increasing 6.6% in June following a 4.4% in May. The food index rose 0.8% in June after rising 0.3% in May.

Large increases in the indexes for shelter and for tobacco and smoking products and an upturn in the apparel index also contributed to the larger increase.

The food and beverages index rose 0.7 percent in June. The index for food at home increased 1.0 percent, following a 0.3 percent rise in May. Four of the six major grocery store food group indexes accelerated in June. The index for fruits and vegetables, which was virtually unchanged in May, rose 2.8 percent in June. The index for fresh vegetables rose 6.1 percent in June and the indexes for fresh fruit and for processed fruits and vegetables increased 0.8 percent and 1.2 percent respectively. The index for dairy and related products increased 1.6 percent in June after a 0.1 percent decline in May. The index for meats, poultry fish and eggs rose 0.8 percent in June after a 0.1 percent increase in May. The beef and veal index increased sharply for the second month in a row, up 1.7 percent in June after a 1.5 percent increase in May. The pork index turned up, increasing 0.6 percent in June after declining 0.8 percent the previous month. The index for eggs increased 1.4 percent in June after a 3.8 percent decrease in May and is 23.2 percent higher than in June 2007. The index for nonalcoholic beverages and beverage materials rose 0.2 percent in June after a 0.9 percent decline in May. The two decelerating groups were cereals and bakery products, increasing 0.5 percent in June after a 1.6 percent rise in May, and other food at home, up 0.4 percent in June after a 0.5 percent increase in May. The indexes for food away from home and for alcoholic beverages increased 0.5 and 0.1 percent, respectively. The index for housing rose 0.5 percent in June, the same increase as the previous month. The index for shelter increased 0.3 percent, following a 0.2 percent rise in May and a 0.1 percent increase in April.
Within shelter, the indexes for rent and owners' equivalent rent increased 0.4 and 0.3 percent, respectively. The index for lodging away from home increased 0.7 percent in June. The index for household energy registered its fifth consecutive large increase, increasing 2.1 percent in June. The index for fuel oil rose 10.4 percent for the second consecutive month and is 78.0 percent higher than in June 2007The index for electricity, after increasing for three consecutive months, declined 0.1 percent in June. The index for natural gas increased sharply for the fifth consecutive month, rising 4.9 percent in June and is up 21.5 percent over the last 12 months. The index for household furnishings and operations was virtually unchanged.

The index for apparel rose 0.1 percent in June following a 0.3 percent decline in May.Medical care costs rose 0.2 percent in June, and are 4.0 percent higher than a year ago. The index for medical care commodities-- prescription drugs, nonprescription drugs, and medical supplies-increased 0.1 percent in June after a 0.7percent decline in May. The index for medical care services increased 0.3 percent in June after a 0.5 percent increase in May. The index for recreation was increased 0.1 percent in June, the same percent change as in May. The index for education and communication increased 0.5 percent in June.

The index for other goods and services increased 0.4 percent in June. The index for tobacco and smoking products rose 1.5 percent.

PPI Rockets

Over the past 12 months, the producer price index, which tracks inflation at the wholesale level, gained 9.2% -- the largest year-over-year gain since June 1981.

The index for gasoline rose 9% in June.

Prices for fresh and dry vegetables gained 14.7%, while prices for eggs for fresh use rose 11.6%.

Prices for pet food rose a record 6% on the month. The prior record was a gain of 3.5% in July 1988.

Prices of crude goods rose 3.7% in June, as prices of energy materials rose 5.4%. Prices for crude foodstuffs and feedstuffs rose 3.5%.

For all practical purposes, inflation in the United States is now at 10%. The Fed has recently slowed money supply growth, if the slowdown continues (unlikely) it will eventually put a damper on inflation. If the Fed starts the money engines again (likely) 20% inflation down the road is very likely.

Bernake Warns On Inflation, But Generally Clueless

Fed Chairman Ben Bernanke is testifying this morning before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate. The gist of his comments: We don't know what the hell is going on, but it sure looks scary, and inflation is definitely a problem We'll play it one day at a time.

Here are key excerpts from his prepared remarks, our emphasis:

The economy has continued to expand, but at a subdued pace. In the labor market, private payroll employment has declined this year, falling at an average pace of 94,000 jobs per month through June. Employment in the construction and manufacturing sectors has been particularly hard hit, although employment declines in a number of other sectors are evident as well. The unemployment rate has risen and now stands at 5-1/2 percent.

In the housing sector, activity continues to weaken. Although sales of existing homes have been about unchanged this year, sales of new homes have continued to fall, and inventories of unsold new homes remain high. In response, homebuilders continue to scale back the pace of housing starts. Home prices are falling, particularly in regions that experienced the largest price increases earlier this decade. The declines in home prices have contributed to the rising tide of foreclosures; by adding to the stock of vacant homes for sale, these foreclosures have, in turn, intensified the downward pressure on home prices in some areas.

Personal consumption expenditures have advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes...

In the second quarter, the available data suggest that business fixed investment appears to have expanded moderately. Nevertheless, surveys of capital spending plans indicate that firms remain concerned about the economic and financial environment, including sharply rising costs of inputs and indications of tightening credit, and they are likely to be cautious with spending in the second half of the year. However, strong export growth continues to be a significant boon to many U.S. companies...

FOMC participants indicated that considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside.

Inflation has remained high, running at nearly a 3-1/2 percent annual rate over the first five months of this year as measured by the price index for personal consumption expenditures. And, with gasoline and other consumer energy prices rising in recent weeks, inflation seems likely to move temporarily higher in the near term...

The elevated level of overall consumer inflation largely reflects a continued sharp run-up in the prices of many commodities, especially oil but also certain crops and metals. The spot price of West Texas intermediate crude oil soared about 60 percent in 2007 and, thus far this year, has climbed an additional 50 percent or so. The price of oil currently stands at about five times its level toward the beginning of this decade...

The decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices. The precise size of this effect is difficult to ascertain, as the causal relationships between oil prices and the dollar are complex and run in both directions. However, the price of oil has risen significantly in terms of all major currencies, suggesting that factors other than the dollar, notably shifts in the underlying global demand for and supply of oil, have been the principal drivers of the increase in prices...

Although the inflationary effect of rising oil and agricultural commodity prices is evident in the retail prices of energy and food, the extent to which the high prices of oil and other raw materials have been passed through to the prices of non-energy, non-food finished goods and services seems thus far to have been limited. But with businesses facing persistently higher input prices, they may attempt to pass through such costs into prices of final goods and services more aggressively than they have so far. Moreover, as the foreign exchange value of the dollar has declined, rises in import prices have put greater upward pressure on business costs and consumer prices...

...in light of the persistent escalation of commodity prices in recent quarters, FOMC participants viewed the inflation outlook as unusually uncertain and cited the possibility that commodity prices will continue to rise as an important risk to the inflation forecast. Moreover, the currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation. If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term...

At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy makers. The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher. Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth. In light of the increase in upside inflation risk, we must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage- and price-setting process.

Fannie and Freddie May Go Under

NYT is reporting:

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

We have given less coverage to the mortgage crisis of late because it is pretty obvious how the Federal Reserve will react to further crisis situations. They will buy any junk. If Freddie and Fannie have junk in their portfolios (and they probably have billions), Buy'em up Ben Bernanke will buy'em up. Nothing new here. It is now obvious this is Bernanke's modus operandi.

To date, Buy'em up Ben has been sterilizing his buying operations by selling other parts of the Fed's portfolio simultaneously with his junk mortgage purchases, but soon he will be out of paper to sterilize his buying operations, and at that point Ben will become Ben the money printer. If we get to that point, all our aggressive inflation projections will be taken off the table and replaced with even greater inflation projections.

IMF Chief Warns on Inflation

Inflation is in danger of “getting out of control” in some emerging economies, Dominique Strauss-Kahn, managing director of the International Monetary Fund,told the Financial Times.

Note to Dominique:

It's not just emerging economies, and although you spouted off that the G8 are doing important things to fight the inflation, the fact of the matter is that the only thing that needs to be done is for central banks to stop printing money.

Inflationary Price Action at Alcoa

Watch market prices, not indexes.

Stefan Karlsson reports on inflationary price action at Alcoa, here.

Another Inflation Hawk to Join ECB

WSJ reports:

The ECB - already leading the charge for higher interest rates among the world’s major central banks, having boosted its key rate by a quarter-point last week - looks set to take on yet another staunchly hawkish decision-maker in January when Slovakia joins the euro-zone.

Slovak central bank governor Ivan Sramko is expected to bring with him the strong anti-inflation bias that helped gain his country’s acceptance into the euro zone when he joins the European Central Bank’s governing council in January.

Slovakia is also almost certain to be the last new entrant to provide a member of the ECB governing council for several years to come as other prospective members, including Poland and the Czech Republic, are unlikely to join the euro-zone before 2012...

In May 2006, over year into his job at the helm of the Slovak central bank, Sramko started a monetary policy tightening cycle to tame inflationary pressures. The bank’s benchmark two-week repurchase agreement rate went from 3% to 4.75% in March 2007.

During the same period the Slovak koruna firmed over 12% against the euro, intensifying further interest rate hikes.

Yellen, Repeat Yellen, Nails It

San Francisco Fed President Janet Yellen on Monday morning gave the best speech, on the current state of the economy, that any Fed member has given, in recent memory.

Does Yellen have a new advisor/speech writer?

Normally, a Yellen speech is a "on the one hand this, on the other hand that", type speech. Never saying much but never straying far from the mainstream Fed policy line.

The fog has obviously lifted on lower Market Street in San Francisco. Here's Yellen on the economy, clear and to the point.

Even a Macbeth reference to start things off. Cool:

To get a little fanciful with the stage-setting metaphor for a moment, it is a bit like the opening of Macbeth, with the three ghastly witches brewing up trouble amid thunder and lightning—only here, the three troublemakers are the housing market, the financial markets, and commodity prices.

But the overall economy is fine, says Yellen:

In the face of these adverse developments, the recent strength of spending data has been somewhat reassuring. The pace of consumer spending, in particular, has been surprisingly robust of late...The spending appeared to be broad-based, with the not-so-surprising exception of motor vehicles, where sales have been very weak in recent months. On the business side, orders and shipments of nondefense capital goods excluding aircraft also look to have rebounded somewhat in recent months. In addition, export growth has been a continuing bright spot. It has been buoyed by continued strong growth abroad and by the weakening of the dollar. The strong incoming data on spending ease my concerns somewhat about the intensity of the slowdown...

She knows there is an inflation problem:

Inflation has become an increasing concern. Over the past twelve months, the personal consumption expenditures—or PCE—price index rose 3.1 percent, up from 2.4 percent over the prior year. An important reason for these disappointing numbers, of course, is the rise in commodity prices. Some of those increases may have also passed through to core PCE price inflation, which excludes food and energy. This measure has averaged 2.1 percent over the past twelve months, which is slightly above the range that I consider consistent with price stability...

She remains negative on housing:

Unfortunately, it appears to me that there are at least three reasons for thinking that housing prices have further to fall. First, the ratio of house prices to rents—a kind of price-dividend ratio for housing—still remains quite high by historical standards, despite having fallen from its historical peak reached in early 2006. That suggests that further price declines may be needed to bring housing markets into balance. Second, inventories of unsold homes remain at elevated levels. This "excess supply" of available homes will put downward pressure on housing prices. Indeed, these inventories are likely to directly depress construction activity, since there is little point in building new homes when there is already a large backlog of unsold homes.... The bottom line is that construction spending and house prices seem likely to continue to fall well into 2009.

Yellen on the financial markets:

The ongoing fall in house prices has important implications for the financial markets, and it is one reason that we may continue to get troubling news from that part of the economy...Still market stress has subsided to some degree, and better quality borrowers are still able to get credit...But markets remain very fragile. For example, credit-default-swap spreads for many financial institutions are again on the rise, the debt ratings for several important bond insurers have been cut, and stock prices for financial institutions have plummeted.

There is further evidence that financial markets are still not operating efficiently or effectively. In particular, the market for private-label securitized mortgages of even the highest quality remains moribund.These securities were the primary source of financing for nonconforming residential mortgages, including subprime lending...Unfortunately, progress toward sturdier and more efficient financial markets is going to take some time, and that means the flow of credit is likely to remain impeded.

She gets the nature of the securitization that caused the credit problems:

First, securitization was a key driver of the credit expansion. Financial institutions originated loans that they then bundled into securities and sold to other investors. With hindsight, it is clear that this originate-to-distribute model suffered severe incentive problems—the originator had insufficient incentive to ensure the quality of the loans, since someone else ultimately held them.

She again points out the inflation problems in the economy:

As if housing and a credit crunch weren't enough, prices for food and energy have gone through the roof. The spot price of West Texas intermediate crude oil has surged over 40 percent since January and over 100 percent in the last year, rising above $140 per barrel in late June. Prices for other commodities, such as many metals and foods, have risen sharply as well. Corn and wheat prices are up some 50 to 80 percent from a year ago.

And, makes some very astute observations on why speculators are not the problem:

There has been much discussion about speculative trading in commodities markets and its possible influence on recent price movements. Hedge funds, institutional investors, and other traders have certainly increased their positions in commodity markets, typically by investing in commodity index funds, which consist of baskets of different commodities that trade on exchanges. But I am not yet persuaded that speculation, rather than the fundamentals of global supply and demand, has played an important role in driving up prices. For example, it should be harder to speculate and take positions on commodities that are not easy to trade on futures markets and are not included in index funds. But the prices of individual commodities that are not in index funds have risen just as fast as those that are.

In addition, if speculators were important in driving prices up, then, at the high prices now prevailing, demand by nonspeculative end users would fall short of current supply, causing inventories to rise. In fact, however, inventories appear to have been declining in most commodity markets.

In short, an overall excellent recap of the current state of the economy. She, of course, dismisses, and sometimes excludes, the Fed's involvement in causing the financial and housing crisis and the inflation, but we will take what we can get.

Even if she also is a bit blind to the future severe inflationary problems that we see.

It is, thus, most appropriate that from the very Macbeth she quotes, in the closing stanza of Act I, Scene I of Macbeth, the three witches warn in unison:

Fair is foul, and foul is fair:
Hover through the fog and filthy air.

Watching Zimbawe Hyper-Inflation

WSJ carries an Op-Ed this morning from Roger Bates, who speculates that runaway inflation may put an end to Robert Mugabe rule in Zimbabwe. Here are some of the latest reports out of Zimbabwe via Bates:

Consumer prices have more than doubled every month this year, in some cases doubling every week. A conservative estimate provided by Robertson Economic Information Services, a Southern African consultancy, says that prices are now three billion fold greater than seven years ago. That's right, billion. The exchange rate is currently an astronomical 90 billion Zimbabwe dollars to one U.S. dollar.

When I first went to Zimbabwe in 1996, $1 would buy you eight Zimbabwe dollars – a depreciation in exchange rate of perhaps 10 billion fold in 12 years. A decade ago, 500,000 Zimbabwe dollars would have bought you a house; today it can't buy you anything...

Mr. Kipuru bought groceries with his debit card, which remarkably still works. The card, he explained, maxes out at just under 10 billion Zimbabwe dollars. So he had to run it 74 times, given that his food bill was nearly 730 billion Zimbabwe dollars.

Buying anything is a "bizarre experience," said Lucy Chimtengwende from Bulawayo, who spent $12 U.S. on lunch recently, with the bill in local currency being an astonishing 1.1 trillion Zimbabwe dollars. The menu had no prices on it, she told me by phone, prices are quoted to you and are constantly changing.

And here's how the economy is really able to function under these conditions, "greens":

Ms. Chimtengwende was breaking the law by paying for her meal in U.S. currency (or "greens" as they're known locally), as was the owner of the restaurant accepting it. But the economy is dollarizing as the local currency literally becomes worthless.

This underground dollar economy is actually helping Mugabe, as it is keeeping the economy from entire collapse.

Trichet On The Facts Of Life

Following a 25 basis point hike in interest rates, ECB president Jean Claude Trichet told reporters at a news conference that rising global prices might mean an unavoidable reduction in euro-zone living standards: “The shift in relative prices and the related transfer of income from commodity-importing countries to commodity-exporting countries have to be accepted.”

Certainly, what goes for the EU, also applies to the United States to an even greater degree, since inflation and currency depreciation are an even more significant problem in the U.S.

Those who are getting their hands on new dollars first will see their standard of living climb relative to those who receive new dollars later on in the new dollar timeline.

Harvard University Cashing In On Inflation

Fed Chairman Ben Bernanke recently spoke at Harvard University. He told Harvard College’s graduating class that "I see the differences between the [inflationary] economy of 1975 and the economy of 2008 as more telling than the similarities."

Meanwhile, elsewhere at Harvard, Harvard's money management team was witnessing huge profits from their bets on inflation.

The Harvard Crimson reports, "Harvard's endowment posted returns of approximately 9 percent through the first 10 months of this fiscal year, according to data from the University. The increase puts the endowment's value at around $38 billion as of this April, up from $34.9 billion as of last June."

During the same period the S&P 500 Index lost 8 percent. So how did Harvard do it?

Heavy bets on inflation.

The John Harvard Letter that was released last August shows that Harvard's investment in commodities was at 17 percent of the endowment for fiscal year 2008, making it their single largest investment by asset class. That number reflects a near tripling of the share of the endowment invested in commodities since 2000. Further, the endowment held another 7 percent of its portfolio in inflation-indexed bonds. Thus, a full 24 percent of Harvard's endowment was a bet on inflation.

With commodity prices soaring, it was the place to be, and Harvard was there.

What's Behind The Oil Price Climb?

Stefan M.I. Karlsson provides a thorough analysis of the oil markets in a column at LRC, today. He explains what is causing the current spike in oil prices, including a great analysis of why speculators are not the cause of the current price spike in oil.

My only slight quibble with Karlsson is that he seems to put a bit more emphasis on new demand factors, then on the Federal Reserve's monetary policy, for the spike in oil. He certainly mentions the money supply factor, I just think it should have been emphasised a bit more, given the seeming across the board hikes in commodity prices--which, to me, is an indication of a strong monetary influence.

Karlsson's column is here:

http://www.lewrockwell.com/orig6/karlsson9.html

No Apparent Inflation Concerns Displayed In Newest Fed Member's Significant Stock Portfolio

The U.S. Senate on Friday confirmed former Virginia bank executive Elizabeth "Betsy" Duke to the Federal Reserve Board.

Duke began her banking career as a part-time teller, helped organize a Virginia Beach community bank and later served as its chief executive officer. She also worked on mergers while an executive vice president of Wachovia Bank and was the first woman to chair the American Bankers Association. She was also at one time a director of the Federal Reserve Bank of Richmond.

Her disclosure statement for 2007 suggests that she didn't have any inflation fears, given the stock positions she held.

Although she maintained a number of money market funds, checking accounts, savings accounts and mutual funds, she also held over 50 stocks in her portfolio, 8 were banks stocks, including Wells Fargo, Wachovia, Bank America and Bank of Hawaii. She was apparently bullish on the overall market as she held a position worth more than $1 million in the Vanguard Index Trust 500 Fund.

Her total net worth is somewhere between $8 million and $35 million, according to the filing. Other stocks in her portfolio included Harley-Davidson, Harrah's Entertainment, Nike Class B, and Sirius Satellite Radio. She apparently had no major inflation concerns. Outside of a minor position in Exxon-Mobil, she held no stocks that would be clear beneficiaries of inflation. No gold stocks for this new Fed member.

Let The Show Trial Begin!

Billions upon billions in mortgage losses, and the Feds bust these two poor saps, Matthew Tannin and Ralph R. Cioffi--subprime fund managers at the defunct Bear Stearns....

While the real criminals, Alan Greenspan and Ben Bernanke, get away...


...and the counterfeiting, that will really take out the middle class, goes on to this day!

Last look Bernanke is printing new money (M2NSA) at a 10.0% plus rate...and you wonder why prices are climbing? When the inflation rate hits 20%, and it will, can you imagine the price collusion show trials we will have?

To the execs reading this blog, keep in mind what the show trial expert of all-time, Eliot Spitzer, said, before he got busted for his own (heh, heh) private shows:

Never write when you can talk. Never talk when you can nod. And never put anything in an e-mail.