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Slice and dice baby, because there is no inflation (part 2)

Written by A Forex View From Afar on Wednesday, January 16, 2008

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CPI came in at 0.3%, higher than the market expectations, of 0.2%, but like the recent PPI release, the numbers are mot impressing, even if they are month over month. Last month the CPI release came 0.8%, a large of a number as seen for a long time; so even if it sounds small in comparison to last month, 0.3% is a big number.

On a 12 month view, inflation is now at 4.1%. Remember the interest rate is now at 4.25%, with Fed Fund Futures seeing a rate cut of 0.50 or 0.75 as likely.

If the above charts run true to form, it would take the Interest Rate to below the Inflation numbers. This measure is taken usually when the economy is recovering from a trough. As the Fed cuts Rates the US Dollar loses more value, and so Commodities become more expensive. It's an inflationist spiral, and this is what Mr. Trichet the Head of the ECB referred to in the recent Press Conference after they held Rates last week.

Are we in a trough right now, or is the FED acting aggressively, by reducing 0.5%, so that the Wall Street Guys won't push the US into a recession? To reach the trough we need to pass first through a recession, and I didn't hear about one officially recently, or is this a State-of-Mind Recession?

We have to think that sub-prime problems, credit crises, stock markets falling, are by definition deflationist, but until now it didn't show. Probably deflation is too shy to show itself...

Inflation is a Central Bank's ultimate nightmare(except if you are the Bank of Japan), they all try to pre-empt it. Mr. Bernanke is adept in his Inflation Targeting policy, so letting it run wild, it seems, would not be his style.(If you want to read more about Central Bank and how they work, click here)

We have a bubble that just collapsed on its own, nobody burst it, and cutting Rates too far, for too long will eventually create another bubble. The Cycle of Boom and Bust is getting closer and closer together. This cost that is being paid right now is from the consequences of Tax and Interest Rate cuts from 2002, the last time the economy needed to be jump-started. Big cuts now will equate to another dose of Bust in 2012 maybe. That may just be far enough away for the public to not worry too much about it.

Giving the Markets all that they want is a bad thing to do, create a dangerous precursor. The liquidity will not suddenly appear in lower Mortgages and easier credit, and in reality the US economy is just starting to pay for Sub-Prime (the lending of money to those not qualified to receive it), do they really want to start that over again? The Fed needs to take a good hard look at the period from July 2006 when Rate increases stopped, through to late 2007 when the first cuts came, and say; "What REALLY was the delay in acting", if for no other reason than to not repeat the same mistakes next time.

The US will eventually recover and start growing like in the old days, and when the smallest problem will appear, Markets will start yelling "CUTS MORE CUTS". We can only hope that somebody is there to hear the screams.

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There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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