Bob Brinker: Inflation and the Fed

Bob Brinker discussed the economy, inflation and the Fed in his opening monologue on Sunday, March 30, 2008. Here are some excerpts:

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Bob Brinker said: “Well, if you’ve been listening to Moneytalk for a while, you know full well that I’ve maintained that this business about run-away inflation is total nonsense. This business about pre-occupation with high inflation is total nonsense. We have said over and over on a consistent on-going basis that the problem is not inflation. And as has been the case, we’ve received more good news on inflation this past week. The most important gauge of inflation, according to the Federal Open Market Committee, is an index known as the Chain Price Index for Personal Consumption Expenditures. I usually refer to this on the program as the Personal Consumption Expenditure Price Index. And this index came through this week showing some really outstanding numbers showing that inflation is decreasing. The year-over-year rate of inflation on the Index came in at 3.4, in the latest data. And the year-over-year core index – excluding food and energy – came in at 2%.

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Now you’ll remember that the inflation hawks told us last year that because oil prices were going up, that was going to feed into the overall rate of inflation and cause higher inflation..........That’s what they told us. That’s not what happened. Oil prices went up.......... They are up over 19% over the past year. They’re up over $100 a barrel for crude oil, but so what..........Even though oil prices are very, very high, we continue to see a situation where inflation is low.

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And because inflation is low, we have very, very low interest rates right now. In fact, when you take a look at interest rates right now, even if you go out to the longest Treasury..........to 2038, the 30-year Treasury Bond, the yield on that one is just sitting in at 4.34%. It’s also interesting to see that investors are pricing low inflation into quality bonds..........Triple-A rated full faith and credit U.S. Treasury securities..........Ten year Treasury Note yielding 3 1/2 %. The ten-year Treasury Inflation Protected Security base rate at 1.1%..........That’s one of the lowest base-rate in the history of the ten-year Treasury Inflation Protected Security..........The difference in there is 2.4, the 3 ½ minus 1.1..........That’s the implied inflation rate over the next ten years based on the current market pricing of yields on the ten-year Treasury Inflation Protected Security versus the Note. Now if you do the five-year comparison, the numbers are similar..........again, one of the lowest yields in the history of the five-year Treasury Inflation Protected Security at 0.4% -- pretty close to zero when you look at it..........the five-year implied inflation rate is only 2.1%.

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So bond holders, and they have often been called bond-vigilantes in Wall Street because bond-holders, bond-buyers are the most vigilant of all when it comes to inflation risk because they, after all, all they get is the interest on their bond and therefore inflation robs them of the only return they are going to get on a security that is held to maturity. So the bottom line in all of this is bond-vigilantes, bond-holders in here are pricing in a today a 2.1 implied inflation for 5-year Treasuries and a 2.4% implied inflation rate for the 10-year Treasuries.

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What that means is that bond holders are telling us they’re not expecting to see an acceleration in the inflation rate based on their assessment of the economy and how that plays out in triple-A Treasury Securities. And I have to agree. And of course, this has been our position. It has not changed that inflation is not the problem.

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Now if you are a Moneytalk listener, you know that I was really critical, even though being critical is not in my nature, any Moneytalk listener knows that. Rarely, if ever have I been critical. But you may recall that I have been critical in the past year on some of the Federal Reserve officials who’ve been out there talking up inflation..........I do understand that some of the Federal Reserve members made a mistake. And the mistake that they made was that they equated high oil prices with inflation. Now we’ve seen – the proof is in the pudding – look at the numbers. Inflation in the last 52 weeks, 3.4 – core inflation 2.0, energy 19. So obviously, equating inflation to energy prices is a fool’s errand. And I think there were some – I don’t want to embarrass them, so I’m not going to name them..........in the Federal Reserve that made this error, thinking that higher oil prices equaled higher inflation. As we explained on our broadcast many times, the reason that is false logic is because consumers get strained when energy prices go up..........it makes it more difficult for them to spend money on other things.

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As a result you do not get demand-pull inflation. By the way, you don’t get demand-pull inflation in an economy like this one anyway..........Gross Domestic Product adjusted for inflation in the 4^th quarter increased at an annual rate of only 0.6%..........And here in the 1^st quarter, it’s going to be flat to down. And the second quarter looks dicey also, depending on how the stimulus package plays in..........Well, the only other kind of inflation there is isn’t happening either – and that is cost-push inflation..........We are not getting cost-push inflation because it’s impossible for sellers to command sharply higher prices for their goods in an economy that is in the state that this economy is in, which is in the doldrums. You can’t push your prices ever higher when consumers are counting their consumer discretionary income dollars after they leave the gas station or pay their heating oil bill...........You just have to price in a competitive way. So you don’t get cost-push inflation -- even with the weak dollar which could have provided an umbrella for domestic producers to raise prices, given the fact that foreign were coming in with upward price pressure because of the lower dollar. But the reality is that they couldn’t do it..........The domestic producers couldn’t push through big price hikes, and even the companies importing products into the United States had to take a hit on their profit margins because they just don’t have the pricing flexibility in an economy that’s dead in the water like the one that we’ve been looking at here really since the 4^th quarter.

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So the bottom line on all of this, if you’re not going to get demand-pull inflation, if you’re not going to get cost-push inflation, that’s the reason that we have been right here on the program discussing inflation for so long. How did it turn out that so many people, including members of the Federal Reserve, were wrong when they said higher oil prices would create an inflation problem? How is it that here on Moneytalk, we were able to correctly assess the situation by saying over and over again that this is not inflationary. In fact, it’s contractionary..........That’s what it’s all about. This is Moneytalk.........."

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Honeybee in edit (Friday, April 4th). Jeffchristie sent a comment that I think is very important so will add it here. He wrote:
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"There is another aspect to the Bear Stearns story that Jim Rogers pointed out in a recent interview with Bloomberg. Bear Stearns paid out billions of dollars in bonuses to it's executives and top traders in January. If Bear Stearns had declared bankruptcy, the recipients would have been forced to give that money back since they were paid less than 90 days prior to declaring bankruptcy. So the CEO isn't the only person who benefited by the Fed's action."

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Honeybee here: Kirk Lindstrom also wrote an interesting response to this item, which are available under "comments." He posted the following information on his Bob Brinker Fan Club Blog:

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"Federal reserve chairman Ben Bernanke testifying before Congress on April 3, 2008 about the Bear Sterns rescue was asked about inflation:
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Question from Senator Johnson: "Are you concerned about inflation?"
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Answer by Chairman Bernanke: "Of course, we are concerned about inflation. Inflation has been too high. Over the last year, it has been about three and a half percent instead of a little over two percent in the previous year. The primary reason for the high inflation is rapidly increases in prices of globally traded commodities including crude oil and food, among others. It is our expectation, which is consistent with prices seen in futures markets, and that these prices will moderate in the coming year…. Therefore, overall inflation will tend to slow. However, we are aware of the uncertainties with that. ""
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http://bobbrinkerfanclub.blogspot.com/2008/04/bob-brinker-ben-bernanke-on-high.html


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