Market Observations with Rob Kirby

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Bernanke Babble Analysis

by Rob Kirby, Kirby Analytics. July 16, 2007

Last week, the esteemed chairman of the Federal Reserve – Mr. Benjamin Bernanke - dropped by the Monetary Economics Workshop of the National Bureau of Economics Research and imparted some of his wisdom upon the masses in a speech titled, Inflation Expectations and Inflation Forecasting.

A "ripping critique" of Mr. Bernanke's speech was penned this past weekend by The Prudent Bear's, Doug Noland.

In his speech, his authoritativeness [Bernanke] offered this quip - or nugget if you will - on the effect of rising oil prices on inflation,

"A one-off change in energy prices can translate into persistent inflation only if it leads to higher expected inflation and a consequent 'wage-price spiral.' With inflation expectations well anchored, a one-time increase in energy prices should not lead to a permanent increase in inflation but only to a change in relative prices."

And,

"the long-run effect on inflation of "supply shocks," such as changes in the price of oil, also appears to be lower than in the past,"

along with,

"inflation is less responsive than it used to be to changes in oil prices and other supply shocks."

Mr. Noland took issue with Mr. Bernanke's assessment of our inflationary landscape for a number of valid reasons.

While I agree whole-heartedly with everything Mr. Noland has to say – I want to point out a couple of other items that add to Mr. Noland's astute observations:

First, judging by Mr. Bernake's words – it is demonstrably IMPLICIT through his choice of words that he views [or fears, perhaps?] WAGE INFLATION disproportionately more than he does asset inflation.

Now, I'd like everyone to step – back and think about that for a moment.

The Fed Chairman – the man doing ALL the money printing – he's o.k. with the inevitable push this creates on asset prices but he's simultaneously confessing his CONCERN about this metastasizing into higher wage demands? It's like folks disadvantaged by HIS monetary debasement and subsequently trying to "keep up" through higher wages are as unwelcome as a hurricane in the Gulf.

Well folks, I feel compelled to point out how this GLARING INCONSISTENCY lays bare the true intent of the Federal Reserve and their globalist brethren.

As many of you know, much of my writing centers on the notion that the price of gold has been surreptitiously "rigged" or capped by officialdom. Something Mr. Bernake failed to mention in his speech about inflation last week is that HISTORICALLY – a rapid rise in the price of gold has been proof–positive that too much money is being printed. This is why the price of gold has been capped.

Wage Rates Have Been Capped Just Like the Price of Gold

It is now my view that what Mr. Bernake did spell out for us all last week is this: BROKEN BORDERS on the U.S.A.'s southern tier – allowing untold millions of illegal migrant workers – is and was DESIGNED to quell the very thing Mr. Bernanke so aptly pointed out concerns him the most – RISING WAGE DEMANDS.

While folks like CNN's Lou Dobbs rail on about the "failings" of U.S. immigration policy – I'd suggest to you that they've missed the mark.

U.S. immigration policy along with the threat of "outsourcing of jobs" to lower wage jurisdictions is doing EXACTLY what it was designed to do, namely, provide cover for the inflationary policies being pursued by the Federal Reserve.

Unbridled money printing and credit creation is the real culprit folks!

The real inflation that our monetary masters seek to hide from us has simply been manifesting itself in non-traditional ways like turning our Capital Markets into virtual casinos through the mushrooming growth of derivatives:

Source: Office of the Comptroller of Currency, Quarterly Derivatives Fact Sheet

The "debacle" depicted above is all or for-the-most-part housed in Fed–friendly institutions – conveniently beyond the prying eyes of regulatory oversight – like J.P. Morgan Chase. Additionally, housing prices have ballooned, financial asset prices have soared and commodity prices are ALL on the rise.

So Why Should We Care?

We all need to care because the current monetary order resembles a GIGANTIC inverted pyramid. Imbalances bourn of this excess like the sub-prime mortgage / CDO are NOW threatening to destabilize this pyramid.

Countries are beginning to abandon the dollar,

Iran Asks Japan to Pay Yen for Oil, Start Immediately (Update3)

By Megumi Yamanaka

July 13 (Bloomberg) -- Iran asked Japanese refiners to switch to the yen to pay for all crude oil purchases, after Iran's central bank said it is reducing holdings of the U.S. dollar.

Iran wants yen-based transactions "for any/all of your forthcoming Iranian crude oil liftings," according to a letter sent to Japanese refiners that was signed by Ali A. Arshi, general manager of crude oil marketing and exports in Tehran at the National Iranian Oil Co. The request is for all shipments "effective immediately," according to the letter, dated July 10 and obtained by Bloomberg News...

Instability like this – it’s the same stuff that has historically spawned depressions and wars. We all need to be aware that the seas may not always be this calm.

Today's Market

In keeping with our nautical theme, Japan's Nikkei Exchange was closed today in observance of Ocean Day. Meanwhile, North American equities were "awash" in liquidity today with the DOW up 43.70 to 13,951, the NASDAQ treading water – off 9.67 to 2,697.33 and the S & P sinking 3.00 to 1,549.50. NYMEX crude oil futures added .27 to end the day at 74.20 per barrel.

On foreign exchange markets the U.S. Dollar Index eased .05 to 80.34.

Interest rates were 6 basis points lower across the curve with the benchmark 5 yr. bond ending the day at 4.94 % while the 10 yr. bond finished the day at 5.04 %.

Precious metals were weaker across the board with COMEX gold futures giving up .70 to 665.70 per ounce while COMEX silver futures eased by .08 to 13.04 per ounce. The XAU Index dropped 1.51 to 149.57 and the HUI Index lost 4.12 to close at 352.70.

On tap for tomorrow, at 8:30 a.m. June PPI data is due. Core rate expected +.2% vs. prior +.2% Headline number expected +.2% vs. prior +.9%. At 9:00 a.m. May TIC data [Net Foreign Purchases] is due. Expected 72.0B vs. prior 84.2 B. Then at 9:15 a.m. June Capacity Utilization data is due – expected 81.5% vs. prior 81.3%. Also at 9:15 a.m. June Industrial Production data is due – expected +.4% vs. prior N/C.

Wishing you all safe sailing, happy investing and a pleasant evening!

Rob Kirby

© 2007 Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail

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