Industrial Insight

Think inflation is higher than reported…

November 11, 2010
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http://www.shadowstats.com/alternate_data/inflation-charts

John
Williams’
Shadow Government Statistics
Analysis Behind and Beyond Government Economic Reporting

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Interest on Reserves is the only thing holding back inflation…

November 11, 2010
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http://www.realclearmarkets.com/articles/2010/11/11/why_the_feds_qeii_will_not_work__98753.html

November 11, 2010

Why the Fed’s QEII Will Not Work

By Louis Woodhill

Imagine a bus packed with passengers. The driver has the gas pedal floored and his left foot hard on the brakes at the same time. The engine is roaring. The bus is vibrating. The transmission is overheating. And, the bus is going nowhere.

Unfortunately for America, the bus is our economy, the passengers are the 14.8 million unemployed Americans, and the bus driver is Ben Bernanke. At the same time the Fed is pouring on the monetary gas with “quantitative easing” (QE), it is pushing hard on the monetary brakes with its “interest on reserves” (IOR) program. And, the economy is going nowhere.

Now, because the market players have the alternative of buying or selling Treasury securities, the financial markets also arbitrage all other investment opportunities against the Treasury yield curve on the basis of maturity, liquidity, and credit risk. If market players (e.g., banks) saw corporate bonds or small business loans as being more attractive investments, on the margin, than Treasuries, they would sell Treasuries and buy the other investments until interest rates adjusted so that this was no longer the case. Accordingly, we can be sure that banks currently view making an incremental loan as no more (or less) attractive than buying a 90-day T-bill paying 0.12% interest.

Now, here is the problem. Under IOR, the Fed is currently paying 0.25% on what amounts to a one-day T-bill. This is far above the current Treasury yield curve. Accordingly, there is no more attractive investment available to the market than bank reserve deposits at the Fed. Therefore, as soon as a new dollar is created via QE, it goes into bank reserves and then it just sits there. No endless chain of transactions is initiated, no loans get made, no “money multiplier effect” occurs, and no new demand is created.

Just as it makes no sense for a bus driver to floor the gas pedal and the brake pedal at the same time, it makes no sense for the Fed to do QE and IOR at the same time. Unless IOR is ended, the Fed’s $600 billion of QE2 will do little to stimulate demand in the general economy.


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Gold like copper and oil lacks the capital equipment infrastructure leading to higher prices.

November 11, 2010
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http://www.fundstrategy.co.uk/features/cover-stories/golden-wonder/1021472.article

Golden wonder

8 November 2010 | By Tomas Hirst

Golden wonder

8 November 2010 | By Tomas Hirst

Supporters of the view that production fundamentals are driving the price can point to the fact that production of gold peaked in 2001 at 2,604 tonnes or 83.7m ounces. A basic understanding of supply/demand fundamentals would suggest that any fall in the supply of a commodity should result in an increase in price.
Adding to the fundamental case, there is strong evidence for chronic underinvestment in the industry over recent years, fuelled in the most part by the increasing cost of production. With so-called soft targets largely exhausted, miners are having to either drill deeper or move operations outside traditionally safe environments in search of new supply. Both scenarios entail significant additional cost.


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Inflation will support Commodity prices and finance recapitalization

November 11, 2010
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http://www.econbrowser.com/archives/2010/11/commodity_infla_2.html

November 10, 2010

Commodity inflation

Rolling-window correlation between oil prices and copper prices. Graph plots correlation between (1) change in natural log of dollar price of West Texas Intermediate over previous 5 business days and (2) change in natural log of the dollar price of copper cathodes over previous 5 business days, as estimated from the most recent 200 business days as of each indicated date, Oct 28, 1999 to Nov 5, 2010.

Actual and predicted oil prices. Solid line: actual price of West Texas Intermediate (in dollars per barrel), Sep 1, 2010 to Nov 5, 2010. Dashed line: Sept 1 price times exp(1.3 times change in natural logarithm of exchange rate since Sep 1).

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I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.

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