What Came First: Inflation or the Egg?

Jun 3rd, 2008 | By Bill Bonner | Category: Politics & Economics

Of course, many people expect a repeat of the story. They see inflation rising…oil over $125…and gold over $900 (it closed yesterday at $897)…and it makes them feel 30 years younger; they think they see “Mary Hartman, Mary Hartman” on TV again and Jimmy Carter in the White House. Soon, they believe, the Fed will begin raising rates; oil will fall back to $70; gold will crash back below $500; and inflation will go back to sleep.

And maybe it will happen. But we’re a long way from it, in our opinion. We haven’t really had the run up in consumer price inflation yet. Forget the eggs, say the feds. According to their numbers, the CPI is only increasing at 4% per year. Not too bad. Nothing to get excited about. And certainly no reason to renegotiate a union contract.

Nor has there been a big sell-off in the bond market. Only very recently have yields on the 10 year note crept up over 4%. And yesterday, they sank back under the 4% mark. Wait until they’re over 8% – then, we’ll talk!

And as for the stock market – what’s the problem? Stocks got killed in the ’70s…they were down 75% to 90% in inflation-adjusted terms. But what has happened in the stock market recently? The Dow is still within 10% of its all time high. And over the last 10 years, in nominal terms, it is up 2.5%.

No, dear reader, we have a long way to go before we can have a genuine recovery. First, we need something to recover from. We need an egg. Then, we can have a chicken.

More on this subject in today’s guest essay from Kevin Kerr. In the meantime, check out the major gains Mr. Kerr and his Resource Trader Alert subscribers has been making from the epic boom in commodities (and find out how easy it is for you to make some of the money you’ve been dishing out on groceries and gas back) here:

Turn the Rising Price of Commodities Into Extra Cash in Your Wallet

*** Bad news is beginning to seep into the British press. Mortgage approvals just hit a record low. And the Guardian reports that more and more people have “negative equity” in their houses. The Financial Times says that the United Kingdom is “near recession,” and that foreign investors are “losing faith” in the island’s economy.

*** The simplest way to invest was to buy the indices. Don’t worry about chasing alpha (beating the market). Besides, says Warren Buffett, you probably won’t be able to do it very well anyway. So just buy the ETF. Especially when you’re entering a foreign market.

Then, along came a ‘better way’ to buy an ETF. Instead of just putting all the leading stocks into the ETF, the managers decided to run them through a few basic screens – eliminating or reducing exposure to those companies with poor measures on such things as growth, dividends, earnings, sales or book value. This was expected to give ETF investors a little taste of “alpha” – above market performance.

Well, don’t bother, says a new study. According to professors Richard Roll of UCLA and Moshe Levy of Hebrew University, so-called “fundamentally-weighted indexes” do no better than the traditional ones.