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%.and Brinker concludes with:
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.
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.Federal reserve chairman Ben Bernanke testifying before Congress on April 3, 2008 about the Bear Sterns rescue was asked about inflation:
Question from Senator Johnson: "Are you concerned about inflation?"Back in January 2000 Brinker didn’t think 3% inflation was low and he thought a falling dollar and higher prices for imports were a problem. In fact, he wrote in his January 8, 2000 Marketimer:
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. "
"Here is our current analysis of the five root causes of a bear market:Perhaps if Brinker had remembered how he thought about inflation “approaching 3%” due to higher import prices from a weak dollar he might have taken some profits last year when the markets were at all time highs in the "high 1500s" before they corrected as much as 20.2% to the "mid 1200s!"
#3) High Inflation: The annual rate of gain in the consumer price index is approaching 3%. Higher import prices, up 5.5% during the past year, show the powerful impact of the weaker dollar on inflation. Also, the Columbia University Leading Inflation Index has deteriorated over a period of several months and shows an annual rate of change close to 5%. These are the factors that have damaged the bond market, and these same factors pose added risk to future stock market returns in a very highly priced valuation environment.”
Click the graph to see it full sized.
Brinker "got it right" back in 2000 when he correctly said higher import prices were a problem for inflation. The Fed killed economic growth back them by raising rates too high to reverse the high inflation. That gave us a recession. That was probably worth 20% of the S&P500's 50% decline. The other 30% of the decline was easily due to over valuation which Brinker also was correct on back then.
After the recession where the Fed lowered the Fed Funds rate to 1.0% to prevent deflation, they created a housing bubble by keeping the Fed Funds rate too low for too long. Of course, this is easy to see now with 20:20 hindsight.
This time, Brinker was wrong about the Fed and inflation. Thus, he missed the opportunity to take profits before the 20% decline like he did in January 2000. Fortunately, he has valuation in his favor and I doubt we will go below the 20.2% correction we've already had.
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