22 Oct 2004 Eleven Days and Counting
Aside from the ugliest political climate in recent American history, inflation worries of are beginning to rival those of oil concerns among those who are paid to prognosticate and pontificate. The Consumer Price Index with volatile food and energy removed from the calculations was three times higher in September than in August. The year-over-year measure was up 2.0%. Record high oil prices are working their way into the prices of more goods and services. The longer they remain high the more damage they can do. Higher gasoline prices are almost a given at this point.
But the Federal Reserve seems to be less concerned about the rise than the noise in the media might indicate. According to Forbes magazine, Alan Greenspan has given two recent speeches in which he has said he is not particularly concerned about oil prices, or record consumer debt, or inflation, or a recession. Nor is he worried about high home prices, a surge in personal bankruptcies or the prospect of inflation.
Bond buyers don’t seem all that concerned either. Investors in long-term government bonds are the most skittish of all when it comes to inflation. So far they are in Mr. Greenspan’s camp – inflation is not a concern. Since the first of October, the average price of U.S. Treasury bonds maturing 20 years and longer is up 2.3%. That means market interest rates for these bonds have actually declined over the past month, in the face new highs in oil prices and amid dire warnings of “looming inflation” by some economists and politicians. So far they are just not buying it.
The bond market and Mr. Greenspan are suggesting to us that the economy is not going to grow at a rate that will cause significant inflation. High energy prices have already had the effect of dampening the economy’s growth. The government’s index of Leading Indicators fell for the fourth straight month in September. If they remain high further damage could occur, but energy experts believe the speculative premium (bubble) will soon fall out of oil prices returning it to the mid 30’s to low 40’s. At that level, prospects for continued global economic growth improve.
Housing continues to be a strong engine of growth for the economy. An index of optimism amongU.S.homebuilders, the NAHB, soared in October due to near four decade low mortgage rates. Their measure of confidence in the next six months of single family housing demand was the highest in a year.
Finally, the Philadelphia Fed surpassed expectations with a jump in October manufacturing activity. But expectations for the next six months dimmed. It was widely reported across the region that the pessimistic outlook was largely due to the rising cost of oil and the impact it will have on manufacturers who cannot pass the cost increases along to customers.
Please note that much of the negative reports of late involve opinions rather than facts. In previous Briefs we have highlighted that the pervasive negative mood of investors is largely due to conditions that will pass in time. The most significant of which is the election. On November the 2nd, 3rd, or 30th we should know who will lead this country for the next four years. The rancor of the political ads and posters will fade into the past and moods will likely improve. The premium in oil prices will eventually dissipate and Iraqi violence may settle somewhat after our elections and theirs. The point is, investors are fixated on several areas of uncertainty that will be answered in the coming few months, lifting some significant pressures from stocks.