A massive drop in Producer Price Index shows interesting correlation between inflation, eonomy, bonds, stocks and gold
Alan Hershey
Oct. 17, 2006

A massive drop in Producer Price Index shows interesting correlation between inflation, eonomy, bonds, stocks and gold The Producer Price Index measures prices of goods at the wholesale level. Bureau of Labor statistics, U.S. Department of Labor will announce the measure on Tuesday morning at 8.30 AM. Analytic models are predicting a drop of 0.8% for the whole index. That includes food and energy.

Te bond market has already rallied based on the expected drop in PPI. The gold is holding a sigh of relief because this helps Fed to pause for some more. A correlation model is showing something very interesting. The recent run up in stock prices actually is caused by the drop in expected PPI measures for September.

The problem in the model comes from the bond market. The bond market does not trust the expected data. It is actually bearish on the PPI outlook.

The bigger question is what made this massive drop in PPI happen. You may think that the energy price drop caused it. But that is what people in the main street are saying. To understand the real story we need to look at the components that make up the PPI measure.

The three broad subcategories within PPI: crude, intermediate, and finished determines the final measure. The drop in crude prices is already built in the CRB index of commodities. Something beyond that is happening. The most interesting signal and clue come from the trend of finished goods trend. It is dropping steadily for a long time even though the crude material prices are actually increasing sharply.

The analytic model forecasts a major recession and that matches the massive drop in PPI. The economy and stocks are all ready to move down. Most interestingly, bonds are not ready to move up. Long bond yields are staying stubbornly staying higher. The upper end of the range in Ten Year Note (5.2%) is actually controlled by the Asian Central Banks and their investments.

The model shows the vulnerability of the stock market and the economy. The gold market interestingly has decoupled itself from dollar. That happens when smart money decides to part from the “Fed controlled” economy. The fact that Gold has no effect from PPI measures, the economy may have reached the stage when Fed or other central banks cannot do much.

A massive drop in Producer Price Index shows interesting correlation between inflation, eonomy, bonds, stocks and gold
Alan Hershey
The model shows the vulnerability of the stock market and the economy. The gold market interestingly has decoupled itself from dollar.
READ MORE>>

Investor craze over Industrial and Commercial Bank of China’s initial public offering manifests the bubble in global stock markets – the bust can be nasty
Fred Day
The closest case of such craze was in NTT DoCoMo IPO in Japan. The 1998 craze ended up in a massive Japanese equity bear market that took the the Nikkei down tens of thousands of points.
READ MORE>>

More than a trillion dollar Chinese foreign exchange reserve – what does it say for economy, bond and stock market?
Marla Guthrie
The abrupt withdrawal of all the money in the tune of trillions of dollars – a real run is what can happen. The bond market can collapse. The yields all on a sudden can shoot up to 10% or higher. The stocks will crash instantaneously.
READ MORE>>

MORE ARTICLES >>