Vince Farrell of Scotsman Capital-Verbatim

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From: vince farrell
Sent: Thursday, February 21, 2008 3:52 PM

The Philidelphia Fed Index, a manufacturing measurement, was "shockingly poor" says Merrill Lynch, and we are in a recession now. The unemployment claims say otherwise. Claims were down a bit this week and the four week average moved up the fourth week in a row to 360,500. That is still below the 400,000 or so that would indicate no growth and we drop off a big number next week (378,000), so chances are this statistic will tick down. Who knows?

There is a growing level of noise about stagflation (sluggish growth and rising inflation.) The last time we had stagflation was the late 1970's when inflation was 15% and unemployment was 9%. Headline CPI inflation is now 4.3% and core (ex food and energy) is 2.5%. Unemployment is 4.9%. We need to be aware of the potential for bad news, but let's keep a perspective. If Merrill is right and we are in recession, inflation will ebb. The last commodity boom we had was in the 1970's and headline inflation was 14.8% and the core was 13.6%. At the start of the 1990 recession the core inflationary measurement was 5%, and at the start of the 2001 recession 2.7%. Remember, inflation is a lagging indicator. The Fed knows that and that's why they will continue to cut interest rates especially since we are at such a low level to start.

That doesn't mean the Fed won't be concened about inflation. The Fed doesn't use the Consumer Price Index prefering a different measure, but for simplicities sake, let's interpret the Fed's targeted rate of core inflation to be 1.5-2%. We are at 2.5%. Inflation falling in a slowdown/recession will take care of that difference. If it doesn't correct, the Fed will err on the side of stimulating the economy and attack inflation later.

On to politics for a second. McCain has a new issue with a lobbyist, but Clinton is in some trouble at home. She trashed bankers and hedge fund managers as people that don't do real work (damn, she found out!) Last I checked daughter Chelsea works for a NY based hedge fund, Avenue Capital Group (Motherrrrr, Really!!!)

On this day in 1903, Anais Nin was born. I have no idea who she/he was, but the name is in the New York Times crossword puzzle a lot, so make note. It was also this day in 1975 that Mitchell, Haldeman, and Erlichman were sentenced to prison. That brings back memories.