Beware: Higher Inflation and a
Global Recession are Now a Reality
By Dennis Slothower
Editor, Stealth Stocks
Stocks were hit hard on Thursday following a series of extremely poor economic reports suggesting that, indeed, our economy is falling into recessionary conditions.
The stock market was caught off guard at how absolutely horrid the economic data is becoming, clearly confirming what we had feared — the economy is falling into an “oil shock” recession as inflation heads skyward and the global economy falters.
The economic news was very ugly on Thursday, with the Philly Fed Index crashing, the CPI soaring, existing home sales falling again and a worrisome speculation that Europe’s banks are beginning to suffer the contagion of Europe’s sovereign debt crisis.
Philly Fed Crashes to
a “Catastrophic” Number
On Thursday, we had a truly “shocking” report from the Philly Fed. I figured it was going to be bad but this takes your breath away.
The Philly Fed Index crashed to -30.7. This is being reported as a “catastrophic” number, which no one saw coming, particularly to those who pay little attention to oil prices.
Wall Street economists had forecasted the Philly Fed Index to slip just a bit to 1.0 from the previous month at 3.2. Remember, their line of bull is that we are going through just a “soft patch”, nothing to worry about.
Does this chart look like just a soft patch to you?
Companies are seeing sales drop with new orders taking the biggest hit, falling from 0.1 in July to -26.8 in August.
Unfilled orders followed suit and declined from -16.3 to -20.9. Given these two readings, there was no way for shipments to expand; the sector fell from 4.3 in July to -13.9 in August. For those who are not familiar with this report, this represents an incredible collapse.
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I just want to remind you of what we talked about last June, concerning Stephen Kopits’ “oil shock” analytical work.
“Stephen Kopits, Oil analyst of Douglas-Westwood explains:
“In every case when oil consumption breeched 4% of GDP, the US has suffered a recession, and indeed, the current US recession (2008) began within two months of oil hitting the 4% threshold, that is, when oil reached $80/bbl.”
In 2010, Mr. Kopits pegged that price as $84 a barrel.
When oil prices hit $115 (WTI) on May 2nd we had more than breeched the 4% of GDP level and now three months later we are seeing crashing economic numbers.
More Bad News:
Prices are Killing Consumers
It gets worse! Inflation at the consumer price level is soaring!
The headline CPI report came in at 0.5%, or annualized at 6.2%, far above the economists’ expectations, as usual. This was the strongest monthly increase since March.
Thursday’s CPI number is really a scary number, especially when you consider the Fed could announce another massive POMO injection / QE3 program to prop up the commodity market which in turn, props up the equity market, while killing the consumer from inflation.
Will the Fed Move for QE3?
With inflation running this hot there is steep opposition at the Fed to continue to be this loose with money infusions.
There are now three Fed governors in open opposition to Bernanke’s decision to cap interest rates and one more dissenting vote could bring on full mutiny at the Fed.
Three dissents from the FOMC’s ten voting members is highly unusual. The last time it happened was October 1992 under former Fed chief Alan Greenspan, but that opposition was split between inflation hawks and doves, unlike last week’s hawk-led resistance.
The Fed’s annual Board of Governors meeting in Jackson Hole, Wyoming takes place a week from Saturday, on August 27th. Another dissent vote from this meeting would essentially be a “no-confidence” vote, as too many Fed Governors begin splitting from Bernanke’s Keynesian economic approach.
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I hate to be such a cynic but I firmly believe the Fed knew ahead of time how long and how much stimulus they needed in order to drive up commodity prices in order to induce a global recession. Come on, didn’t we just see this scenario in 2008?
Ben Bernanke is no idiot. The man is an authority on “oil shock” recessions, having authored scholarly papers on what causes oil shocks and what the Fed’s response should be in the aftermath of one.
I don’t believe the Fed did this out of stupidity or just overshot the mark. I believe it is related to putting pressure on China and their currency peg to the dollar and towards driving up commodity prices to ignite the Arab Spring revolts. Is this conspiracy? Let’s call it economic warfare and financial global positioning and just leave it at that.
Some argue the Fed will soon announce QE3 and others are convinced the Fed will not fuel more inflation now.
This is why gold has gone parabolic as of late. But just remember, gold is no different than any other commodity when it comes to buying the rumor and selling the facts – and is highly vulnerable to a strong correction, too.
Beware: The Market is Now Oversold
on an Intermediate Basis
Check out the intermediate-term charts as we go into the Fed’s meeting.
This chart argues for two very important points. The market is now in bear market territory and it is also highly oversold.
The stock market is also oversold on an intermediate-term basis, as well now. It doesn’t mean there won’t be any more decline here but it does mean that if the Fed announces QE3 or a stimulus program of some version you don’t want to be caught short in an intermediate-term reversal (advance). This market is truly a puppet of the Fed masters at the moment – at least until we get the Fed’s Jackson Hole discussions and decisions out of the way.
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