Friday, March 13, 2009

More Upside?

It looks like these markets are determined to push higher. What are the markets really telling us? Are they telling us that they are still a leading indicator and we are poised for economic recovery during the last half of this year? Are they telling us that they were just so oversold that they became truly a great value? Are they telling us that they now have confidence in the TALF and the stimulus bill?

While all of the above are definitely possible, I think we are seeing the markets prepare us for inflation. This call is undoubtedly a little early as we are still seeing layoffs around the country, but I think we could be in for a period of stagflation. I go back to one of our interviews with Jim Rogers---I was frustrated that my short of the SPY was not working. He explained that in times of inflation, stocks may rise, but if the dollar is falling you are really losing wealth. I think we may have seen the inflection point for the dollar this week. Look at the price of oil, it seems to be telling us that it has found a bottom. The markets have a very short term memory and seem to have forgotten all of the misery that oil dealt us this time last year. If oil has bottomed, I would argue that the dollar has topped and gold has much more room on the upside. I have been arguing that when the dollar does begin to fall we are going to see a spiral that will surprise many traders. The dollar down oil up spiral that we saw last year will be back and I believe that it will be worse than ever.

Credit market improvements could be the silver lining---but they will contribute to inflation as well. I argued several months ago that when the money multiplier started to increase, inflation would really take hold as the money supply had already grown to alarming levels. Now we are seeing more banks attempt to return their TARP money to the government. Does that weaken Mish Shedlock's argument that we are not in danger of inflation in the near term because most of the increased money supply will be used simply to rebuild the balance sheets of the banks? I think it could.

It will be interesting to see how the market acts the final hour of trading today. Will traders book profits and be reluctant to go into the weekend long---or is there enough "real" confidence that we will get stronger into the weekend in anticipation of that much talked about "capital on the sidelines" flowing into the market in the near term.

Stay tuned!!!
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