It has been four months now since my call in this newsletter to move to cash or the short side and there is no light at the end of that tunnel. In fact, at this point in time, there may be maximum obtuseness. Here’s what to look for. 

While a U.S. recession is now a near certainty, it remains unclear as to whether the rest of the world will decouple. So watch Europe and China particularly carefully.

In addition, it is still unclear whether a stagflation scenario will manifest. Yes, oil prices continue to spiral upward, BUT it is important to understand that MOST of the movement in oil prices is related to the falling dollar – not the fundamentals of oil supply and demand. That means the “oil price shock” the U.S. is experiencing is contained largely to the U.S. and those countries that peg to the dollar. That’s good news on the global stagflation front. HOWEVER, balancing that is the fact that food prices are trending sharply upward, with no end yet in sight. To parse all of this, watch the long end of the yield curve. If it starts to move sharply up, it is likely to be signaling stagflation rather than renewed expansion. 

Bottom line: be patient with your money and don’t succumb to the siren song of “this is a buying opportunity.” If you must trade, trade biotech, which is immune to the business cycle.

QUICK TAKES

1. If Obama were a stock, it might be time to short him. Yes, he’s got the delegate lead and Obama mania is still out there, but the Clinton message that he lacks experience to be president is now gaining traction. 

2. The ideal Dem ticket to resolve the current deadlock is Clinton-Obama. It’s got the appropriate blend of attraction for old and young, Latinos and Blacks, women and men, suburban/rural and urban, and war pragmatism and war idealism. 

3. The prospect of the Fed slashing rates again is bizarre, given the dollar’s weakness and the dangers of stagflation. Bernanke is a one-termer and the next likely Fed chair is Martin Feldstein regardless of who captures the White House. Feldstein would never run the kind of printing press that Helicopter Ben is running – mixed metaphors aside. 

4. Look for political activity related to the Beijing 2008 Olympics to begin to accelerate now – and watch how the Great Wall Stone Walls. 

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

The Market Edge Market Summary from www.marketedge.com 

CONTACT INFORMATION
Peter Navarro
Irvine, California USA
Email  |  Website

DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.