If Not Inflation... then What?
In (a) libertarian society, since everyone would know that false stories are legal, there would be far more skepticism on the part of the reading or listening public, who would insist on far more proof and would believe fewer derogatory stories than they do now - Murray Rothbard, The Ethics of Liberty
I don't think that Wall Street has heard our call for the stock market yet; allow us to make it loud and clear:
Dow 7000! That's 4000 points.
And it will not immediately rebound, this time. In fact, it is entirely possible that 10 years will pass before these levels are revisited, unless perhaps, Dow Jones & co. adds a gold stock component to the industrials.
Yet it is the recovery and potential breakout in U.S. stock prices that is right in the middle of the global financial debate this week. It looks like a good move, but then what bull trap doesn't?
Remember folks, despite the fire sale for dollars, it is still a bear market in the broad stock market averages, and last week's reversal in the Dow Industrials was the sole one out there. Our readers know the reason for that because they are aware of the true leadership. Part of the reason for the general disorientation, however, is that the mainstream analysis continues to be cavalier about how central the inflation debate is, to either, the bullish or bearish case. This should be an insult to you, but on the bright side, it is bullish for liberty (see Rothbard quote).
For if it seems perfectly legal for Mr. Greenspan to get up on stage and perpetuate one false story after another today, liberty cannot be far away.
Though we've noticed that his line has a subtle global unity to it this time. That is to say, its echoes have been heard overseas and its might has been felt in Forex markets. Dollar bulls have won yet another battle by pushing the trade weighted dollar index to new highs, effectively correcting your inflation expectations by adjusting the dollar price of physical things lower. How does that work? Through an adjustment in the dollar price of other currencies, even lower, the process transfers an excess of purchasing power from one paper currency to another, the dollar in this case, thereby allowing the US to export its inflation, and then some, to the rest of the world.
Recall, that officially, the international currency arrangement is to aim for stability, but to sanction instability if the objective is for global growth. Nevertheless, dollar strength continues to stress the arrangement. I don't think that any one of the global central banks lowered their interest rates this week. Still, this kind of dollar strength needs international support in order to sustain. If there is a new unity, what drives it, and is it sound? More importantly, is it as sound as the nonsense that forms the bullish case for stocks, particularly the blue chip Dow.
Speaking of that
After trying to come up with a cogent bullish argument - presumably one that would justify a run at Dow 13000 or higher - we found none that could stand the contradiction of recent facts, and are forced to conclude that the bulls will be left wanting, again. So, in order to give them a fair shot anyhow, we have posted a (satiric) plea to Mr. Greenspan, on behalf of all shareholders of the American dream:
Listen, about this new economy. I have sincerely been trying to persuade myself to get bullish on stocks, but you persist in punishing my enthusiasm. How the hell can I buy today's leaders - Alcoa, Exxon, or 3M, for instance - at today's prices, if you're telling everybody that there is no inflation?
And if there is inflation, how can I buy IBM, Intel, or Dell, particularly if your data informs us that workers there are slacking off now, that it costs more to pay them, and that excess inventories now overhang demand? Furthermore, how can I buy Boeing or Honeywell if you insist that the government is trying to keep a budget surplus?
I'm anxious about being laid off, but the Union guys are putting pressure on us to get tougher on pay. They seem to disagree with you on the changing costs of living. I know I need to save, and that the right place to put my savings is in the safe blue chips, like the Dow Industrials, or Utilities. Utilities never go bankrupt, right? But my disposable income keeps shrinking. Still, if I can keep my job and we get the higher pay, maybe I'll be able to take a shot anyhow. Maybe I'll even get some more stock options!
Speaking of luck, I write to you in the hope that you'll send more money. Wal-Mart tends to be out of inventory often, and they won't increase prices because you tell them that they don't have any pricing power. But then I need clothes, so I have to go elsewhere, where it costs more.
And despite all of your effort (for which I am thankful) to persuade the gas station attendant to lower pump prices, he refuses to negotiate. I tried to tell him that his inventories are piling up even showed him charts and stuff, and that I can hold out, but he just laughed at me and claimed that his inventories will continue to go up because his company will make more money that way. And so will he, when he sells his stock options.
I can't sell my bond fund because it keeps losing value and I don't want to lose any more money now, so I'll wait for it to break even, which you can help simply by lowering interest rates like you have for the first half of the year! My stockbroker says that's good for bonds.
God I hope so, because otherwise, I don't think that I'll be able to afford the Dow, at 29 times earnings.
I'll tell you what though. I won't tell anyone if the next time you want to hand out cash, you let me in line first. Then I'll buy the *^@#* out of the market for you! Because frankly, where I am in line at the moment, everything is always up by the time I get your handouts. It really sucks!
Cheerleader for hire
(yes we made that all up)
The Bullish Case for Stocks
The bullish case today rests on expectations for interest rates to fall in tandem with "expected" Fed policy direction, for inflation rates to peak - in the first month that the effect of the first rate cut is supposed to grab hold - and for a recovery in capital spending to resume, after corporate coffers have been re-energized with fresh FOMC credits.
Stock (market) salesmen today (everyone) say that equities can trade at a premium to fixed income investments due to the argument that stocks are the best long-term investment around, and therefore deserve a low risk premium to other assets. So, the thinking goes, if the Fed can just keep rates low, expensive stock prices will be the norm.
The dollar, of course, will take care of itself, relative to other currencies and things, because it will always be in demand, regardless of how freely available it is. The law of scarcity does not apply if dollar denominated returns are supported by high rates of labor productivity, which will always be higher in the United States because (they have the highest paid statisticians in the world working for them?) it has the world's youngest population on the planet? Or is it because the United States has the freest and most efficient market system in the world, with regard to the allocation of the nation's scarce resources and things? No, it must be attitude! They've got such good (optimistic) attitudes about profits.
At any rate, perhaps because of that, it is also the case that bulls believe declining fortunes overseas will result in rising fortunes for them here in NY, like in 1998. The bottom line is, and we all know it, that if stock prices can go up, and the dollar can go up, then inflation can be contained, or absorbed, and productivity will be easier to talk up again. This is maybe true, theoretically. After all, the whole idea of inflation is to direct it to where it produces the most sustainable gain - that would be asset prices traditionally. Profits would come back because the whole business of capital investment is driven by stock speculation, or the equivalent. A soaring dollar rate can certainly help support the marginal, or subjective-use, value of additional money supply, thereby putting pressure on some prices while letting others rise.
In reality, however, this does not cure the inflation, or its destabilizing effects. It is only a mechanism that further distorts the market process, possibly creating further malinvestment, or misdirected investment.
In this week's Issue of the GIC (Jun 8 - 14):
- We dissect the bullish case for the Dow and the bearish case for Gold, concluding that both are ready to reverse, and that it'll be many years before the Dow sees 11000 again.
- We discuss the strategy of dollar policy behind reporting oil inventories and in exporting dollar inflation to the world.
- Will the ECB, and other global central banks, raise interest rates soon?
- Canspec Research's John Kaiser believes that the real gold marke is 10 years away, or at least did in January. What is wrong with his analysis.
- Where is the inflation breakout?
Don't wait until everyone else acts! Subscribe now and find out what we think will happen this week/month.