Ever since the global financial crisis struck in 2008, there has been a lively debate between those who have been expecting a prolonged deflation and those who have been predicting a rapid transition to inflation. In certain respects, both sides of this debate have been correct in their arguments, if not entirely consistent. Recent data indicate, however, that the terms of debate are now shifting decisively in favor of those anticipating inflation. Within a period of months, financial markets will begin to adjust accordingly, indicating that an important inflation “tipping point” has been reached. Once this occurs, there is a risk that economic behavior changes in ways that can damage economies. Investors need to prepare accordingly.
If you live in the western world you never have to think about it. Flip a switch and the lights go on. Turn the faucet and the water flows freely for either your morning coffee or a shower.
Technical Analysis of the Financial Markets
We appear to have a 'rolling top' with broad based weakening analytics and cascading warning signals. This behavior is often seen near major tops. The Friday 01-28-11 sell-off is the initiation of a short term correction and consolidation before we put in a final new high as part of this final topping formation and long term right shoulder construction pattern.
It has been widely remarked that world conventional crude seems to have reached a plateau of production in 2005, at a time when oil prices were ascendant. Since one would expect producers to respond to higher prices with higher production, this has struck many as strange. Since Saudi Arabia is the ‘king’ of conventional oil producers, it is logical to examine their production record during this period. One finds the same story – a strange inelasticity in their response to higher prices.
The current La Niña and several long-term natural climate factors will worsen potential drought for the ten US cities that are running out of water. For investors, this can present tremendous opportunities or potential unexpected losses.
I know what you’re probably thinking. How can stocks keep going up when things look so terrible? The U.S. is running trillion dollar deficits, ( $1.5 trillion for 2011), the unemployment rate is stuck over over 9%, ( double that figure if you look at U6 and count discouraged workers), capacity utilization and business investment is below normal, housing prices have fallen, vacancies are high, consumer credit remains anemic, and there are riots in the streets. Under these circumstances stocks must be in a bubble.
Thoughts from the Frontline Weekly Newsletter
This week I had the privilege of being on the same panel with former Comptroller General David Walker and former Majority Leader (and presidential candidate) Richard Gephardt. A Democrat to the left of me and a self-declared nonpartisan to the right, stuck in the middle and not knowing where the unrehearsed conversation would take us. As it turned out, to a very interesting conclusion, which is the topic of this week’s letter.