Last week global capital markets gyrated in a fashion I’ve never seen before. Intra-day business-cycle-in-a-day movements in equity markets included disparaging collapses as well as stunning “flagpole” rallies.
As I have watched many of the mainstream financial shows over the last week or so it is obvious that confusion reigns at even the highest levels in regard to the state of the financial markets. Yet, the answer is very clear and I have been warning about this for some time.
Last week’s WrapUp put forth the case for stagflation and used the U.S. Misery Index (unemployment rate + inflation rate, %) as a measure of stagflation.
The Japanese yen has started rising against all of the world's major currencies as the yen carry trade may be unwinding. Traders have for years borrowed cheap yen at interest rates near 0% to reinvest those funds throughout the world.
Tomorrow, January 15, 2008, the Bureau of Labor Statistics [BLS] is due to release their report for December Producer Price Inflation [PPI]. Last month at this time the BLS reported a steep rise in prices for November led by stiff increases in prices of crude oil.
In spite of its criticisms, the Dow theory is once again proving correct. The one thing that the advance up out of the 2002 low has proven is that the single most important aspect of Dow theory is the concept of joint price confirmation above and below previous secondary high and low points.
Last January I penned a piece supporting the out-performance of the health care sector starting out with the bright long term fundamental picture for the sector with the retirement of the baby boom generation, with the following comments:
The markets sold off in early morning trading after the Institute for Supply Management (ISM) released their manufacturing report. The index fell 3.1 points in December to 47.7, putting it below the expansionary threshold of 50.0 for the first time since January of last year. December’s decline also marked the sixth consecutive decline in the overall manufacturing index, something that hasn’t happened since late 2000 into 2001 just prior to the last recession.
A previous WrapUp on October 10th looked at a potential rebound for refinery stocks based upon historical price relationships between crude oil prices and refinery margins, 3-2-1 crack spread.
This will likely be the shortest WrapUp I'll do for the year and by shortest I mean by length of text. A well known maxim is that a picture is worth a thousand words and with that being the case, I will put forth two arguments for why gold should remain strong despite short-term price swings.