That would be the Fed. On the
one hand they are raising interest rates to keep inflation
under control. On the other hand they continue to increase
the money supply at a rapid pace to stimulate investment in
plant and equipment and new businesses. We have commented
ad nauseum about the cause of inflation. The media is rife
with articles on the price of oil today and how it is causing
inflation. Well, the higher cost of oil today is not the cause
of inflation – it is the effect of inflation.
The escalating increase in the money supply (not just in
the US but abroad also, most notably in China and Japan) is
the cause of inflation. Just as easy money in the 1990s was
a major factor in the stock market bubble (greed being another
factor) easy money (coupled with low interest rates) is propelling
the housing market and the price of oil. We may be witnessing
a bubble of some sort in oil. However, like the stock market
bubbles of the 1920s and 1990s and the tulip bulb bubble of
the 1630s in Holland, market forces will solve the problem.
Analysts at Goldman Sachs last week predicted oil would hit
$100 a barrel. Who is to say how far speculation can carry
any item? Remember the predictions for the Dow Jones Industrial
Average to surpass 36,000 in the 1990s or the price of gold
to hit $5,000 an ounce in the 1980s? The prime rate reached
22% in 1981, and Paul Volcker, then head of the Fed, advised
President Reagan not to worry, that market forces would correct
the abnormally high rates. We always seem to be moving from
one crisis to the next, but the beauty of capitalism is that
it is self correcting. As for oil, higher prices will prompt
more conservation, more efficiencies and more hurried approaches
to alternative fuels. The Middle Eastern countries should
be most concerned about high oil prices as they will eventually
be rendered obsolete as alternative fuels are discovered.
They are already concerned that high oil prices might cause
a world-wide recession and have agreed to increase output.
And speaking of money, what’s with short-term interest
rates up 175 basis points since last June while long-term
rates have barely budged? Again the answer is too much money
flooding the globe and the fact that market forces control
long-term rates. The Fed can mess with short-term rates all
they want, but they have no impact on long rates. With investors
awash in money there is a continuing demand for returns on
that money. The demand, therefore, by investors for yield
is holding prices up for long-term bonds while keeping yields
low. Normally (see paragraph #1) all this liquidity would
cause inflation. However, overcapacity problems and strong
productivity gains in the 1990s have held a lid on inflation,
and there are strong deflationary pressures exerted by cheap
goods coming out of China. Therefore, we expect inflation
to remain mild for some time. Housing and healthcare are the
exception since they are not outsourced. This will not remain
forever as over capacity problems will disappear, and new
technologies will provide a haven for the excess liquidity
now over hanging the globe. Bottom line is that we are in
a long-term economic cycle and being buffeted by short-term
economic data. We are preparing the way for the next great
economic boom. Then maybe we will see 36,000 on the Dow.
The most dangerous job in America today? That would be holding
the position of CEO and/or CFO in a public company. How the
mighty have fallen or are falling. Just another fallout from
the excesses of the 1990s – a welcome and necessary
wake up call that further solidifies the foundation for the
next boom.
It must be spring. Can’t you just smell the hot dogs
and beer (Pinot Noir on the west coast) and hear the crack
of the bat hitting the ball. Steroids aside, fans are lining
up for the start of the baseball season, and all is right
with the world.
It was twenty years ago on April Fools Day that George Plimpton
wrote an article for Sports Illustrated extolling the virtues
of a pitching phenom that the New York Mets discovered in
Tibet. The article came replete with photos of this man by
the name of Sidd Finch throwing a 168 mph fastball off the
pitcher’s mound with one bare foot and a work boot on
the other. One of the definitions of Finch can be “small
lie.” It was a great article by a great and funny author.
It also fooled many people, some of whom cancelled their subscriptions
to Sports Illustrated. Some general managers from other teams
actually called the Mets asking about Finch, and the man from
Chicago who posed for the photos is still recognized on the
street as Sidd Finch. Things are not always as they seem.
Random thought for April 2005:
“The only difference between a tax man and a taxidermist
is that the taxidermist leaves the skin.”
~ Mark Twain
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