“My Two Cents”
By Andy Sutton

6/17/2006

Anyone who has been paying attention to the stock market the past few weeks has undoubtedly seen a plethora of charts, analysis, research and ponderings. I watched with great interest as people pointed to Elliott waves, head and shoulders patterns and similar extemporania and tried to guess what exactly would happen next.. We’re bulls, we’re bears, we don’t know, but when it all comes down to it, we seem to fall back on the steady premise that the best way to go forward is to look back.

I don’t know about you, but my crystal ball is broken. And it appears that common sense is gone from the markets as well. One day the market sheds 200 points because of inflation fears, the next day, it gains 199 of them back because inflation isn’t as bad as we think (although it may well be much worse). This tells me one of two things: either the market is completely devoid of intellect or else speculation is still running rampant. Either case is bad, but in the case of the latter, it is especially frightening considering the beating that speculators have taken across all asset classes over the past month or so.

Much of the blame for the recent rash of volatility and unrest has been laid squarely at the feet of the Fed, and rightly so. From a policy standpoint, the point is a simple one. The Fed once again has been caught driving the car with the rear view mirror. Perhaps a good secondary definition for inflation would be the future manifestation of both past and current policy. In other words, there’s a substantial delay between an interest rate hike and the actual results associated with that hike. This makes it very hard to gauge when to hike, when to pause and when to cut. However, that said, Fed governors continue to repeat previous mistakes. Wacky May CPI ensures a June 25 basis point hike. An out of favor June CPI/Core/PCE will most likely elicit another hike and so forth.

Unfortunately, there are two problems here. The first is that the hikes take 9-18 months to work their way through the economy. The second is that inflation’s true effects are understated by data which is so skewed and fraudulent that the very fact that it can be purported as truth borders on criminal. A true inflation-fighting stance would abruptly slaughter the US housing market and the credit bubble that accompanies it. And we all know that we simply cannot kill the goose that lays the golden eggs. A strong inflation fighting stance would be good for the dollar no doubt, as increased returns would bring investors back.

So it would appear that we’ve reached the crossroads. Do we sacrifice the economy or the currency? Without massive reforms in spending and debt accumulation at all levels (which there is no will to do) this will be our choice. Let’s just hope that the Fed doesn’t totally bungle this one and sacrifice both.

Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

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