Fundamentally Speaking
In digging through the data available from the government I
came across the Consumer Price Index report. Most of the time individual
investors are used to getting this information from one of the major news
services and they can do quite a number on the data when they present it. Lets
try and have a stripped down look at the most recent release.
The CPI rose 3.0% in 2011 (12/2010 to 12/20). This is a
twice the rate of growth from 2010. Food and Energy were a significant part of
the number, accounting for .8% of the gain. To give that some perspective, food
and energy were 26.67% of the total increase. When we take out F/E the CPI
number looks fairly tame, actually giving back .4% in the last 3 months of the
year.
While for the average person food and energy are the pieces
of the CPI that are felt the most, economists tend to focus on core inflation
as this is where the underlying trends can be seen. There are various measures
of core inflation in use, and all of them rose in 2011. Granted the 2010 levels
were extremely low almost guaranteeing a rise short of a depression. The Fed watches
a measure know as core
PCE. This of all the various measures rose by the smallest amount in 2011.
When the Fed began QE2 in 2010 there were voices murmuring
about deflation. This was never really felt by the general populace other than
in housing prices. Looking at the inflation from 2011 they seem to have managed
that piece with no troubles, as well as containing inflation in the core
segments.
The 2012 view of inflation would seem to be fairly low.
There is still a good bit of slack in the economy. If we approximate based off
the spread from TIPS to regular treasury yield on the 10 year we are around
2%. If the slack is pulled out of the
economy we may see inflation start to rise, but this almost has to be quite a
gradual process due to the current labor market (union decline) structure. There
is something to watch in terms of geopolitical uncertainty around Iran which could lead to
nearly instantaneous oil price increases.
At its core, the loose policy from the fed must at some
point lead to a significant increase in inflation. This increase likely will
manifest itself when the economy is much closer to recovery than it is now, and
should be seen far enough on the horizon that it can be dealt with prior to
having a negative impact on US or global financial markets.
Technically Speaking
The S&P 500 closed above the 1294 area that we have been
watching for a few weeks now. The week was not particulary strong, but we are
building a base here. This is the second consecutive close above the range. It
is looking again that Greece may have a plan coming together on its debt. This
combined with the potential for a facebook IPO this week may have some
explosive upside moves on tap for the bulls. If we can use these events as a
catapult into a new trading range rather than a pop and chop the implication
would be that the uptrend is going to continue. If on the other hand, the
events are both completed and there is not response by the market, we would
probably seriously consider taking in some risk.
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