Less Negativity, More Inflation

by: Dan Schmeidler November 16, 2008 | about stocks: DIA / QQQQ / SPY / XLE / XLF    

Dan Schmeidler

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So what can we take away from some interesting two-day market action? Well for once we could finally confirm, at least on Thursday, that a (much anticipated) surge in U.S related equities could indeed occur at the expense of both a weaker dollar and a weaker treasury offering. Add to that a rally in gold, and here we go: Inflation, waiting at the doorsteps. We were even beating out our yen counterpart. Just to emphasize where our greenback really stands.

Okay, not withstanding Friday’s reversal in the bond market, crude, equities (though late-day), and just about everything else, we could have looked pretty good selling an environment of higher interest rates and (possibly even) hints of economic growth a la Wal-Mart. It’s hard to believe that equities could even rise in such an environment. And sure enough, they could not hold on today. But when you find yourself in a recessionary/deflationary tailspin, even (slight expectations of) higher interest rates will lift the markets.

But the overall bad economic data just ruins it all And of course, the credit crisis, (believe it, or not) still lingers. Credit is still not (so) secure. No worries. Hank Paulson strongly believes that the Treasury and (remnants of) Wall Street, will equally (and positively) impact credit conditions. Really? Well then, Lehman was just an old adversary, I guess.

Come on. Let’s not be so negative. After all, the (much anticipated) new era of economic growth, will more than likely be challenged by increased inflation (expectations). And a relieved Fed will eagerly waltz in to (oh so gingerly) steer any such trend reversals. That era will (first, foremost and this time for real) drive up (something like) the cost of energy. But, hold it. Until then, let’s deal with these poor economic indicators. That is what the equity markets understood quite well today as they fought so hard. Inflation is hardly (ever) going to happen without some sort of signs of economic life. And just about anything (alive) should do. So, for now, the equities will just have to fight it out. Just so that they can be around for a brighter (and inflationary) future.

Disclosure: no positions

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This article has 9 comments:

  •  
    Nov 16 07:23 AM
    Inflation or deflation do not stimulate or supress a market. What the Fed is suppose to do is create an environment of price stability so people in the economy can make rational choices. By them participating in manipulating the market for economic growth regardless of inflation/deflation they set a very dangerous course. You can not really call that free market economics.

    Although everyone is a Keynsian right now, economic stimulus only works after the deleveraging takes place. Otherwise you just prolong the deleveraging and delay the recovery. This is a job to be determined by our elected officials, not the Fed or even the Treasury. Especially when they choose to operate without adequate transparency or disclosure and refuse to do what they have been authorized by congress to do. If they were any other branch, they would be indicted for fraud (misappropriating of public assets). Perhaps congress should consider it. After all Paulson basically spit in the face of those who voted for the bailout.

    Personally, as a fiscal conservative, I was always against it. You prime the pump only after the economy reaches the bottom and there is not adequate natural simulus to get it moving again. Hopefully, the Democrats will be more fiscally prudent that spend and spend Bush Republicans. That's why they deserve to get booted out of office for good.
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  •  
    Nov 16 07:57 AM
    Many good points raised particularly the timing of stimulus. Stimulate after deleveraging not to prevent deleveraging.
    Reply | Link to Comment
  •  
    Nov 16 08:58 AM
    IF THIS ARTICLE IS TRUE,,,,then why is gold not more than $1,000 per oz. and to give a stimulus package with a possible multi-billion dollar deficit in the USA IS PURELY LUDICROUS.
    Reply | Link to Comment
  •  
    Nov 16 11:51 AM
    As Jim Roger said last week, the IMF is selling gold to suppress the price, and he isn't buying. If Trimtabs is right and hedge fund redemptions will be $250 Billion
    between now and year end (after $100Bil in Oct), they will be selling resource
    positions to raise cash, so gold could be pressured, still, right?
    Likewise, the Dollar is being goosed up, not by fundamentals, but flight into
    short-term Treasuries by all this fund liquidation money, and Soverign Wealth
    Funds reportedly are selling US equities into Treasuries also, figuring the gov't
    will always pay it back, even if they print it.
    Reply | Link to Comment
  •  
    Nov 16 11:51 AM
    What the Fed is attempting to do right now id save the banking system from outright collapse. IMO they have suceeded. Their next job is to induce the banks to make good loans to credit worthy borrowers. Confidence is still fragile and a strong fiscal stimulous package will go a long way toward restoring it. As consumer confidence stabilizes and sound lending resumes in ernest the depth and duration of the recession will be quantified and there will be a lasting stock market advance. Early signs should include a narrowing in yield spreads in corporate bonds to treasuries and falling interest rates on lower grade corporate bonds.
    Reply | Link to Comment
  •  
    Nov 16 05:51 PM
    Trying to keep the party going indefinitely puts everyone at risk, particularly those who had nothing to do with our present state of over-leverage. This nonsense of privatizing gains and socializing losses inequitably rewards risk takers and punishes the prudent.

    The government should let reality sink in for those who put themselves at risk and enable the prudent to allocate savings in ways they feel make sense, such as buying distressed assets that hold promise. Government seizure and allocation of resources operates on the assumption that public officials are better capable of allocating savings than the savers.

    Government bailout programs, and fiscal stimulus packages effectively redirect private resources in ways that public officials deem appropriate. Why is this assumed to be more efficient than allowing those who have demonstrated the capability to execute productive activities (earn money) and save (demonstrate prudence) the freedom to allocate their own resources in ways that make sense to them?

    In this way savers are rewarded for their prudence when markets crumble. They can pick up discounted assets imprudent risk-takers are forced to liquidate. This natural bail-out mechanism.is the only equitable option, and is far more efficient. Enabling the productive and prudent of society to make decisions with their own resources for which they, alone, must bear the consequences ensures significantly greater circumspection. It also means that society is making lots of smaller investment decisions, versus massive, unilateral decisions from the top down. One mistake can bring us all down!
    Reply | Link to Comment
  •  
    Nov 16 06:23 PM
    > What the Fed is attempting to do right now id save the banking system from outright collapse. IMO they have suceeded. Their next job is to induce the banks to make good loans to credit worthy borrowers

    Credit worthy borrowers don't need anymore money, they are leveraged enough. You don't fix credit insolvency by pushing more credit on everybody.
    Reply | Link to Comment
  •  
    Nov 16 11:02 PM
    i still cannot understand how there are predictions of economic recovery when consumer credit is max'd. there needs to be a period of time for credit to work its way out of the system. without recovery there is no inflation.
    Reply | Link to Comment
  •  
    Nov 17 07:11 AM
    I really don’t understand what we are trying to accomplish here? We allowed a very small group of individuals to destroy our confidence in the muni bond system, then we allowed them to destroy our confidence in the mortgage system, then we allowed them to destroy our confidence in the investment banking system, then we allowed them to destroy our confidence in the commercial banking system, then we allowed them to destroy our confidence in the insurance system, then we allowed them to destroy our confidence in our financial markets, and now we’re allowing them to destroy what little confidence we have left in OURSELVES! Yeah, we all stopped spending in October, what do you expect when all the pundits, media, and so-called financial experts keep telling us a depression is coming. Well, be very careful what you wish for! I said well over a year ago that all the negativity back then would make things end very badly – well we’re there. Oh yeah it can get a lot worse, but what’s the point. IT DOESN’T HAVE TO BE THIS WAY!!!!!!!!!!!!

    “The future has not been written. There is no fate but what we make for ourselves.”
    www.youtube.com/watch?...


    BUILD.. BUILD.. BUILD.

    DRILL.. DRILL.. DRILL.
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