Tuesday, November 10, 2009

Inflation... Inflation... Everywhere...

Inflation... Inflation... Everywhere...

My children have a kiddie pool. When we are not at the community pool, we fill the kiddie pool with the hose, and let them play. We will the pool with toys, squirt guns, and sponge balls. One time my daughter turned the hose back on and filled the pool to the rim. The pool filled so high that water started running over the sides, but it was such a slight over-flow that all the toys rose to the rim of the pool.

I think the equities market is a lot like that pool. The government has turned on the spigot and allowed Treasury to continue pumping money into the economy to avoid a depression. Loans are cheap, money is readily available (to those who qualify), and Obama et al. have parlayed a recovery to easy money and government spending. Trading volume of this "rally" is still low compared to 2007. And it would appear to any outsider that Wall Street has utilized the easy Fed. money to create a rally in which they have been the primary beneficiary. All that money flowing through the economy has also created an effect just like the kiddie pool. Equities have risen right along with inflation. However, one must note the continued deterioration of the U.S. Dollar and conversely the rise in metal prices in general, and gold in particular. When there was a gold standard this could never happen... Benton Woods has opened up Pandora's Box.

While the auto industry has reported signs of life with quarterly profits from Toyota and Ford, neither are willing to say that the red ink is over. Sure Cash for Clunkers gave them a profits jolt, let us understand that adrenalin injection is over. Sure reports are trickling out that Ford and Toyota are revamping plants to meet the anticipated recession end, most experts agree that non e of the manufacturers are out of the woods yet. Tom Libby who is President of the Society of Automobile Analysts believes that "even though the auto companies have done a good job cutting costs, that won't be enough to produce sustained profits unless there is a significant increase in demand for vehicles worldwide." http://money.cnn.com/2009/11/10/news/companies/auto_turnaround/index.htm It might be a good time to consider a short position on one of the automakers like Hyundai which saw record numbers during Cash for Clunkers.

John Williams makes a few assumption on the "real" state of the economy, and it is not good. His site entitled Shadow Government Statistics paints a rather grim picture of the real employment picture. According to one of the charts he has created, Williams suggests that "real" unemployment should be rolled into a number based on a collection of those who are 1. currently unemployed, 2. those who are unemployed and benefits have run out and 3. the under-employed. Williams' number reflect a 22.3% figure which even if moderately accurate belies a more troubling figure. That being said, it appears as though Williams' opinion is not important when it comes to rolling with this market. No news has been bad enough to derail this rally. However, should the inflation-equities factor through a tightening of rates, or a sopping up of dollars by Treasury, or a slower than expected recovery, they John Williams will be able to say "I told you so."

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