Thursday, December 25, 2008

Friday's Trade

Certainly we can expect light trade tomorrow. I will be looking to take advantage of anything the market gives. I think the after-hours trade in the USO on Wednesday was laughable. Sometimes the herd mentality is so hilarious. Back in the summer--everyone was calling for $200 barrel oil. Now that the tide has turned, many want to talk about $20 oil. It has overshot to the downside, but I have been very clear--that does not mean that it can't go lower in the short run.

Lets talk about unemployment and the inflation rate. I keep getting comments and emails saying that my theories are wrong because we can't have rising unemployment and inflation at the same time. WRONG. This global economy and the inflation that it is certain to produce is going to fool a lot of people--and they are going to lose a lot of money. Sectors and regions are going to act differently during the course of this cycle. We are going to see unemployment in the auto related sectors for sure--and yes I know that it will produce some other negative effects. But China and the rest of the world are going to grow. India is going to continue to grow and become more industrialized. Our companies are going to have to become more efficient to compete---and the falling dollar will produce some of that needed efficiency in the short term. Simply put, you can't look at our domestic short term unemployment rate (when you know we are participating in a truly global economy) and declare inflation an non-issue. To do so would be ridiculous.

For those of you that ask how we can have rising unemployment and inflation---I would ask you how we can have an expanding money supply and deflation? You have to realize that the rising money supply will have its effects---it just takes time. Think of this over the past three months the M-1 Money Supply has grown at a 37% annualized rate and M2 has grown by 14%. The M2 which is a broader measure is 10% greater than it was at this time last year. That is a huge statement 10% greater than it was it this time last year. We will have stimulus and other things to get the economy growing and you have your 10% increase sitting there like gasoline on wood just waiting for a spark. We will get the spark and those of you arguing deflation will be SHOCKED at how quickly inflation will rise.

This time things are different because the entire world was in recession. And for the first time in history, the entire world is printing money at rates never before seen. We have witnessed the greatest kick start of the global economy in history. How long it takes to see the effects are the only unknown. We will see inflation. Yes we have pockets of unemployment, yes the domestic consumer has been hurt by the credit crisis, yes it will take months for things to normalize, and yes we may see price declines in the short run. I am not worried about these things because I know that in the near future the global economy will grow and commodities will soar.

Many are getting fooled by the headline personal consumption numbers. Everyone was so happy to see declines in the headline number and was so quick to declare inflation dead. But when you drill down you see that November personal consumption was up on an inflation adjusted basis for the first time in six months. Falling gasoline prices are leading many to wishfully misinterpret the headline number. Don't stick your head in the sand. You can't hide from the printing presses that are causing inflation.