Wednesday, April 15, 2009

The Deflation Boogieman, Oil and Intel

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The PPI report yesterday and CPI report this morning both indicated deflation - at least in the headline numbers. PPI was down 1.2% and CPI down 0.1%. The core rates were flat and up 0.2% respectively. Falling energy prices, and falling food prices as well this month, are responsible for the "deflation" that is being reported by the government. NYMEX oil prices meanwhile closed yesterday in New York at $49.41, but were once again above $50 again in European trading this morning (the weekly storage report is out today at 10:30AM New York time). Oil is well off the $33 low being reflected in recent inflation statistics. Tech bellweather Intel released earnings last night and there was actually some good news in the numbers. The CEO also blatantly stated the PC market had bottomed. Apparently traders don't believe him though since the stock had a big drop in the aftermarket.

We have covered many times in this blog how the U.S. government manipulates the inflation statistics to lower the reported inflation rate, so you should always add a few percent to whatever numbers it releases. We have also demonstrated several times how falling oil prices are almost solely responsible for the recent drop in U.S. inflation rates (falling oil along with drops in other commodity prices were the key components of the deflation that took place in Japan in the late 1990s and early 2000s as well, but you will never see this mentioned in media reports). The U.S. government reported this morning that year over year headline CPI is down 0.4% - the first annual decline since 1955 - but the core rate is up 1.8%. Yesterday, the headline PPI was reported down 3.5% since last year, the largest decline since 1950. Gasoline and food prices were down over 13% and even food prices supposedly dropped (something I haven't noticed in the real world).

Considering the light sweet crude oil is already around 50% above its February low, the days of the current "deflation" may be numbered (and of course the U.S. is printing new money at an outstanding rate to make sure they are). During the entire time that oil prices have rallied, the mainstream media has continually stated that the price can't go up until the economy recovers and demand for oil increases (neither has occurred, yet prices have risen) . A quote from an article this morning, "Demand will have to come back before you see the oil price move up from $50 in a sustained way." You can find very similar statements when oil was at $40 and yet the price rose to $50. My guess is you will see similar statements at $60 and probably $70 as well. Interestingly, the people being quoted in the articles today are different from the people that have been quoted, and who have been continually wrong, during the last few months. Is the mainstream financial press actually starting to realize that their credibility is damaged when they continue to quote a source that has been wrong a few dozen times in a row? Perhaps, although you should note that the quotes themselves that contain the inaccurate information are not changing, just the people they are attributed to.

Finally, Intel earnings last night were significant. While they don't exactly indicate that the global economy is running on all cylinders, they do indicate that tech spending is not collapsing. It is also unusual for a CEO of a major company to state so blatantly an opinion of overall market conditions. So why isn't the market giving his bullish comments any credibility? My feeling is that it is because tech spending in the U.S. may not have bottomed. However, the U.S. is not the center of world when it comes to technology spending (and many American traders have yet to realize this). The market for computers in East Asia became twice as big as the market in North America long ago. If demand for tech is picking up in Asia, the market could have indeed be turning around.

NEXT: Economic Statistics are Yesterday, Stock Prices are Tomorrow

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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