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Five Things You Need to Know: Vigilance, 25 or 50, Metaphorical Responsibility, Immaturity, Errors and Omissions

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What you need to know (and what it means)!

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Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Word of the Day: Vigilance

Central banks will have to move faster to raise interest rates because global inflationary pressures are rising and the economy remains vulnerable to a "bang" of market turbulence, the Bank for International Settlements (BIS) warned yesterday, according to the Financial Times.

  • In its annual report, the BIS warned that in the coming year central banks will need to "act tough" to "stamp out" inflation without going too far.
  • The risks highlighted by the BIS report point to what we discussed last week in Five Things - stagflation; slower economic growth and potential recession accompanied by higher inflation.
  • According to the BIS, today's problems are related to extremely low levels of inflation related to globalization. Cheap imports helped mask problems in advanced economies.
  • The further charge is that central bankers kept rates too low for too long, allowing asset prices to surge.
  • Malcolm Knight, BIS general manager, warned that central banks must be ever-vigilant (more on that in a moment): "It would be imprudent to count on the happy combination of strong growth and low inflation lasting indefinitely. At some point, central banks may well have to act more forcefully on policy rates than they have needed to do in the past few years."

2. 25 or 50?

Fed funds futures have fully priced in a 25 basis point rate hike from the FOMC on Thursday. Some are suggesting the Fed could go further, taking the overnight lending rate higher by 50 basis points to 5.5%.

  • Bloomberg columnist and Fed-watcher John Berry suggests not getting carried away by the 50 bps hype.
  • "The major concern among officials at this point is the small rise in inflation expectations shown by a variety of measures the Fed follows. Officials want to keep expectations capped so that businesses facing cost pressures, especially from higher energy prices, won't be encouraged to pass them on to their customers," he writes.
  • Barry notes that the origins of rising core inflation are still unclear. "Some of it undoubtedly is energy related," he says. He also notes the Owners' equivalent rent, which we looked at in Five Things a couple of weeks ago, and which accounts for nearly a third of the CPI.
  • Also, labor cost increases remain muted. "The behavior of unit labor costs continues to be a bright spot in the inflation picture, as far as Fed officials are concerned," he says.
  • The bottom line according to Berry, and we agree, is that the FOMC will most likely raise 25 basis points on Thursday, and continue to signal that more tightening may be needed, maintaining the bias toward an August 8 25 basis point rate hike, which Fed Funds futures now are pricing in at a better than 80% chance.

3. Shirking Our Metaphorical Responsibility? Never!

Speaking of vigilance, in a recent interview on the growing risks of runaway inflation, European Central Bank President Jean-Claude Trichet was asked if he was "continuously as vigilant as a hawk seeking its prey?" His answer was simple and concise: "I leave the responsibility for this metaphor to you," he said. Never one to shirk our metaphorical responsibility, we say, "sweet!"

  • In a wide-ranging joint interview with four reporters, ECB President Jean-Claude Trichet discussed criticism in a recent report from the Bank for International Settlements (BIS) that "monetary policy should have been tightened more, and earlier."
  • "To say that the ECB has been too complacent would be very paradoxical!," Trichet replied. "I would say the Governing Council is permanently alert."
  • Permanently alert? Talk about paradoxical.
  • Easy there, President Jean-Claude Zeno, your dialectic is showing.
  • Be that as it may, we don't like the "vigilant as a hawk seeking its prey" metaphor anyway. Too cliched.
  • Since it is, after all, our metaphorical responsibility, below are five responsible ECB inflation-fighting metaphors we would use:
    1) The ECB is vigilant as an undertaker at a seance... on inflation.
    2) The ECB is vigilant as an airport luggage handler at the Inflation International Airport.
    3) The ECB is vigilant as a bowling ball return machine, always making sure your ball comes back to you at the same price. Always.
    4) The ECB is vigilant as a ball-peen hammer, permanently spinning around and periodically smashing inflation expectations like so many rivets in a large piece of sheet metal called inflation
    5) The ECB is vigilant as a vigilant-e; like Charles Bronson but for Europe, randomly killing would-be muggers and street punks in the name of fighting inflation.

4. Immaturity Levels Rising

New research suggests grown-ups are more immature than ever, according to Discovery News. After reading Number Three, above, surely you would agree.
"Would not."
Yes you would.
"Would not."
Would too.
"Not."
Too.
"Not."
Too.
"I know you are but what am I."
I know you are but what am I.
"Don't repeat everything I say."
Don't repeat everything I say.
"Stop it."
Stop it.
"I am a nitwit."
You are a nitwit.
"I hate you."

  • A growing number of people are retaining the behaviors and attitudes associated with youth, and many older people never achieve mental adulthood, according to a leading expert on evolutionary psychiatry, Discovery News reported.
  • Bruce Charlton, a professor in the School of Biology at the University of Newcastle upon Tyne, England, has studied the phenomenon, known as psychological neoteny, and concluded that a "child-like flexibility of attitudes, behaviors and knowledge" is probably adaptive to the increased instability of the modern world.
  • Charlton argues that past physical environments were more stable and allowed for a state of psychological maturity, whereas modern cultures now favor cognitive flexibility, allowing immature people to thrive and succeed.
  • Of course there is no free lunch. Charlton notes that the faults of youth are also retained; namely, short attention span, sensation and novelty-seeking, short cycles of arbitrary fashion and a sense of cultural shallowness.
  • From a Socionomic standpoint, this illustrates perfectly where we are in the cycle of social mood and wave structure of financial markets; short attention span, sensation-seeking, novelty-seeking, short-cycles of seemingly arbitrary fashion and cultural shallowness.
  • Social mood drives social actions and events, not the other way around, so what I believe Charlton's study inadvertently shows are simply the characteristics that accompany an excess of secular bullishness and optimism in social mood.
  • Immaturity, a refusal to grow up, is a hallmark of denial; plastic surgery, the popularity of "makeover" shows for example, the denial of aging, all play into the excess of bullishness and of denial that precedes the point of recognition that accompanies the most extreme transition from bull trends to bear trends.

5. Errors and Omissions

Our eagle-eyed attorney caught a rather grievous error and omission in yesterday's Five Things: In Number 4. "Love, Exciting and New!" we inadvertently left out the identity of Capt. Stubing's daughter, Vicki, in the caption below:

Brought to you by the Realty Team of
Stubing, Doc, Gopher, Isaac and Julie.

"We don't just sell the American Dream,
we sail the American Dream!"




To make amends for this unfortunate omission, below are Five Things You Need to Know about Vicki Stubing:

  • The character of Vicki Stubing first appeared on the Love Boat in season three.
  • In that episode, Capt. Stubing receives a letter from his daughter, Vicki, who has run away after learning from her mother's diary that Capt. Stubing is her real father.
  • Vicki's aunt, with whom she has been living, is getting a divorce and wants to send Vicki away during the divorce proceedings
  • That's how Vicki came to live on The Love Boat.
  • Vicki Stubing was played by actress Jill Whelan
No positions in stocks mentioned.

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