A perfect example is the effect of ethanol requirements on food prices. Clearly ethanol is crowding out other food production, creating upward pressure on food prices. And yet this effect has nothing to do with the money supply and therefore isn't the Fed's problem.
Express all the outrage you want over the rising cost of living. As long as the Fed doesn't think it's their problem, it isn't going to influence their decisions. And if it doesn't influence their decisions, should it influence your trading? No.
The Fed will continue to be more concerned with the current recession and less concerned with inflation. Fed economists realize that it's difficult to get rising inflation without rising wages. It's simple supply and demand. If consumers don't have more money to spend, they can't bid up the price of goods. Hence, as long as wage growth remains tepid, we can conclude that food and energy price increases have to do with supply and demand in those markets and not generalized inflation.
What about M1, M2 or M3? Economists have soured on these measures in recent years, as changes in banking, as well as foreign holdings of cash, have rendered simple measures of the money supply invalid. But I'll indulge those who hang on to the classics. Let's assume the Fed prints $10,000 in new cash for every man, woman and child in the U.S. and just gives it away. But then all that cash just gets stuffed under mattresses and never sees the light of day. Do we have any inflation? Granted, this is a silly example, but it drives home the point: if consumers don't spend, we don't have any inflation. And consumers won't increase their spending unless they are seeing an increase in wages.
Investing Three Stocks Buffett Could Love 5/13/2008 1:50 PM EDT These consumer-goods companies have the right stuff, according to my Buffett-based "guru strategy."
Investing Insiders Tip Off Three Private-Equity Plays 5/13/2008 1:03 PM EDT The industry has seen a lot of bad headlines this year, but that isn't stopping executives from investing in their companies.
At the time of publication, Graff had no positions in the stocks mentioned, although positions may change at any time.Tom Graff is a Managing Director of Cavanaugh Capital Management, a registered investment advisor in Baltimore Maryland. The opinions expressed here are Graff's own and in no way are the statements of Cavanaugh Capital Management, and may or may not reflect the strategies being pursued for clients of Cavanaugh Capital Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Graff appreciates your feedback; click here to send him an email.
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