Market Commentary

Stocks advanced again yesterday to a 17 month high
March 18, 2010

Stocks advanced again yesterday to a 17 month high as a drop in producer prices underscored the Federal Reserve’s assessment that inflation is not a threat.  Commodities rallied as the dollar fell on the prospects that an interest rate hike is not eminent in the intermediate future as per the Committee’s post meeting statement.

Many times I have referenced the gargantuan amount of bank excess reserves and the sharply sloped yield curve stating that such conditions could potentially “unanchor” inflationary expectations. 

As also noted many times, last winter the Peoples Bank of China (PBOC) mandated its banks to lend 25% of its GDP during the first six months of the year (2009).  I believe this aggressive lending permitted the Chinese economy to grow by 8.7% in 2009 and is the basis for the 9.5% expected growth rate for 2010. 

The Chinese inflation rate was nominally negative in 2009.  2010 inflation, however, is expected to rise by 3.7% up from the 2.0% expected rate in November.  Recent data is stating Chinese inflation surged by 5.4% in February.

I ask can the same type of inflationary growth occur in the US?  Fortunately the US government cannot force/mandate banks as the government can do in China, but the premise is the same.  Sometime banks in the aggregate will begin to lend and as monetary velocity begins to accelerate from almost zero, I believe inflationary pressures can begin to build.

Several years ago I wrote a gazillion times an inverted yield curve has a 100% correlation to a slowing economy.  As history now states, the yield curve had experienced its sharpest and longest inversion in history.  Today conditions are the inverse…the slope is around steepest in history, also lasting for the longest period on record.  As stated above, such conditions are closely correlated to inflationary growth.

Could I write it is never different there is just different people, a phrase that I overused three years ago commenting about the sharply inverted yield curve?  Inflationary growth is/has occurred in a state controlled/communist China. Is it logical that it can/will occur in capitalist America? 

I would like to briefly comment about the health care bill. As stated many times the events in Washington has the greatest potential to influence the markets/economy in 40 years and such comments are necessary in an attempt to discern possible direction.

In my view the current debate is the bitterest, cantankerous in recent history.  While I have no first hand recollection of the politics surrounding the implementation of LBJ’s Great Society program or the great civil rights legislation also passed in that era, my education suggests the environment was nowhere as acrimonious as it is today.

While rioting has not yet occurred as it had in the last era of major social change, but unlike yesterday the silent major majority is today mobilized.  Many news outlets—both on the left and the right—are stating the possible legislative techniques the Speaker is prepared to use to ensure passage of the health care bill as wrong.  While we Americans, as democracy dictates, might not always agree, we do expect our elected officials to act according to the law. 

I think the electorate has changed, demanding an end to the entitlement era that existed during the last 40 years, and any politician that misses this tectonic change will lose one’s office.  In general the economy expanded for about 26 consecutive years (1982-2008) and human nature suggests when times are good many are generous and benevolent.

However the events of the last 18 months have initiated a change where I believe the electorate is now demanding accountability, acting in the best interest of the franchised not the disenfranchised, the small group of society if mobilized could potentially influence/decide elections.

Most will agree the current Administration mobilized this block, a voting block that gave the President his comfortable margin of victory but was not the deciding group. I think the silent majority—those 90% of voters that are marginally on either side of the proverbial aisle—are arising stating change must occur but not the change the Administration is pursuing.  The disenfranchised block could become even more disenfranchised and perhaps jaded because its entitlement wishes were not fulfilled. 

Enough of the political diatribe which I can validate via polls from non partisan organizations, [Gallup, Pew, Quinnipiac, etc.] what will happen today?  The CPI and weekly jobless claims are released at 8:30.

Last night the foreign markets were down. London was up 0.12%, Paris down 0.06% and Frankfurt up 0.03%.  Japan was down 0.95% and Hang Sang down 0.25%.

The Dow should open little changed after a German official said Greece should turn to the IMF if it requires a bailout.  I ask rhetorically is this the first step to the end of European Monetary Union (EMU) as the once unthinkable has been thought publicly?  The 10-year is up 1/32 to yield 3.63%.