Friday, October 15, 2010

The Rosy Crystal Ball

I've been too busy to publicly express my perspective on the economy lately but several items are making me curious as to how much manipulation the markets can handle before they correct themselves. The future, as presented by the US government and its monetary master, the Federal Reserve, appears quite well, and "market analysts" seem to be predicting a gradual strengthening which supposedly began when the "recession" ended over a year ago.

I have often spoken out against the use of statistical correlation with regard to attempting proof of a concept. Correlation, however, allows visualization of a composite picture of events. Such correlation helps to avoid tunnel vision, where fixation on a particular goal blinds the observer to other inputs. The analysis of correlated events will then provide a view with more depth perspective, and add "color" to a "black and white" picture.

The Fed has embarked on a course of Quantitative Easing (QE). QE is another term for printing money without increasing its backing. It "eases" the ability of member banks to lend money at low interest rates, and consequently, devalues the currency in which the money is issued.

I have a question for the wizards : if interest rates are at a historic low, and yet the lenders are having difficulty interesting businesses in borrowing more (because the businesses appear wary of overextending themselves), what are the banks going to do with the additional currency? Will they, themselves, take the opportunity to purchase additional assets at low interest rates?

A related area is the trend in consumer prices. If the Consumer Price Index has risen for the past 3 months at only fractions of a percent, this is perceived as a sign that inflation of the currency is under control. However, when the index rate for July and August combined was only 0.3 percent, yet the increase in August alone for fruits and vegetables (at the peak of harvest when prices should fall) was 0.4 percent, does this indicate that the composite index is understating the inflation of the core items which affect the largest numbers of consumers?

Another area being watched is the trend in retail sales. One prediction which I saw, credited to JP Morgan Chase, was that retail sales would be up 0.6 percent in September, but if autos are excluded, would be up only 0.4 percent. Question : if retail sales are measured by dollar expenditures, and they roughly parallel the rise in consumer prices, does this indicate that they are in reality flat or even slightly negative?

A third area being considered is the report on business inventories. The prediction (again attributed to JP Morgan Chase) is that the government will announce business inventories up 0.6 percent in August. This has been interpreted to mean that confidence is increasing. In view of the rise in consumer prices, coupled with the increase in retail sales roughly paralleling the price increases, could it also mean that perhaps people have stopped or slowed their buying?

I don't know. I confess to being an amateur in matters of complex macrofinances. Nevertheless, there is something smelly that the newspaper has been wrapped around. Looking at only one part of the data could make me hopeful. Correlating the data makes me skeptical.

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