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Monday, July 24, 2006

Ben's Balancing Act

We have already proven ourselves correct in trying to decipher what Ben is trying to do... he's just keeping the sinking boat afloat, trying to keep economic growth sputtering along without inciting further inflation, keeping the financial markets in range with his flip-flopping comments. His intentions are clear in his words: "The economy should continue to expand at a solid and sustainable pace and core inflation should decline from its recent level." He's trying to avoid a faster than expected economic slowdown while just letting the slowdown handle inflation.

The question right now is will he succeed? The ramifications will be big. If he succeeds then we might have seen the market bottoms already and we will just be waiting for the consolidation to finish. If he fails (inflation runs away and he would need to hike rates more aggressively and once again face the possiblity of overshooting and a recession), who knows what depths the markets will reach.

Greenspan created the housing bubble to patch up the mess that was the stock market bubble... what solution will Ben try to conjure to patch up the holes left to him by his predecessor? The likelihood that Ben might fail lies in the fact that despite his dovish comments inflation is still there and just starting to gain momentum based on the latest June data. Annual headline inflation for the last 12 months is at 4.3%, and even more terrifying is the annual rate of 5.1% the last 3 months. Core inflation is up a scary 3.6%!!!

We still have to see wheter Ben's moves will be correct. In the meantime keep some gold ETFs like GLD in the portfolio, it wouldn't be a bad bet.

TERENCE

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