Monday, May 22, 2006


'A Mild Dose Of Stagflation'?

Some reports on what is shaping up to be an interesting week. "Conditions in the financial markets are eerily similar to those that precipitated the 'Black Monday' stock market crash of October 1987, according to leading City analysts. A report by Barclays Capital says the run-up to the 1987 crash was characterised by a widening US current-account deficit, weak dollar, fears of rising inflation, a fading boom in American house prices, and the appointment of a new chairman of the Federal Reserve Board."

"'We are very uncomfortable about predicting financial crises, but we cannot help but see a certain similarity between the current economic and market conditions and the environment that led to the stock-market crash of October 1987,' said David Woo, head of global foreign-exchange strategy at Barclays Capital."

"Federal Reserve Chairman Ben S. Bernanke may be facing a central banker's nightmare this year: what (economist) Allen Sinai terms 'a mild dose of stagflation.'"

"Surging oil and commodity prices, a falling dollar and mounting doubts about the Fed's willingness to keep price pressures in check are all increasing the risks that inflation will quicken. At the same time, the Fed's two-year credit- tightening campaign is beginning to bite; with the housing market sagging and consumer confidence wavering, the result may be slowing growth."

"'The danger is the Fed loses its inflation-fighting credibility,' says Bill Healey.
Some investors wonder whether the Fed has let price pressures build by concentrating too much on core inflation, rather than focusing on overall numbers that include food and energy costs. 'People will lose patience that the core is the right measure if energy prices keep going up,' says David Hensley, an economist at JPMorgan Chase."

From CNN Money. "Indian police are watching out for possible suicides by brokers and investors after a steep market slide wiped out billions of dollars in share values, officials said on Monday."

"Indian shares clawed back to close nearly 4 percent lower on Monday, helped by buying from state-run mutual funds and financial institutions, after the biggest one-day points drop that halted trading for an hour."

"The Bombay Stock Exchange Ltd. and National Stock Exchange suspended trading for an hour after the market fell more than 10 percent at one point. The Bombay exchange which had a market value of $657 billion last week after falling 10 percent in the previous two sessions, slid as much as another 10 percent in early trade on Monday following sales of stocks held by brokers as security on behalf of their clients."

"'Gold has turned into brass. We are finished,' said S.S. Gupta, a middle-aged Mumbai broker who said he had lost millions of rupees in two hours of trading on Monday morning. With over five million retail investors, the city is one of India's main trading hubs where people have put in millions of dollars of their disposable income into the stock market."

"'I borrowed money to trade in the market. I lost it all in the past two days,' said 37-year-old Sanjay Joshi, a small investor. 'I don't know how will I repay my loans.'"

"In the 1990s, a stock market meltdown led to several bankrupt brokers and small investors committing suicide across India, some of them drowning in rivers or throwing themselves off highrises."

It is kind of hard to take
India seriously when their currency is a rupee.
There's still an interesting dynamic going on with metals today. Again, given all the data, this should be a favorable environment for metals prices.

We're still seeing some odd parallel moves between equities (Dow and Nas are down), dollars (Down against Euro and Yen) and metals (PoG and PoS are down).
It seems that people are moving money from commodities and stocks into bonds. I am suspecting that part of the financial system is failing or about to fail and people are running for cover en masse.

Are we having an imminent crash?
so people are moving into the saftey of bonds, but then will go back into commodities when they realize the dollar is tanking?

I remember even prechter said their could be a flight to quality. but if the dollar is what they're in part fleeing from, that doesn't make sense for foreigners long-term.
johnlaw --

Exactly what I'm struggling with here. Bonds may, or may not be a good move depending on both dollar stability, and Bernanke's decisions to raise the FF rate -- which contrary to expectation, I think are from from guaranteed.

Seems to me metals are still looking strong, but the market seems to strongly disagree.

... watching and waiting...
IMHO, old habits die hard. It's still difficult for anyone imagine any safer, stronger place than the U.S.

Also, the world is awash in dollar-denominated debt. You need dollars to pay it off.

p.s.: Bonds will suffer, too, as rates are only going higher.
"'I borrowed money to trade in the market. I lost it all in the past two days,' said 37-year-old Sanjay Joshi, a small investor. 'I don't know how will I repay my loans.'"

Looks like the proverbial cab drivers and shoeshine boys have arrived.
"'I borrowed money to trade in the market. I lost it all in the past two days,' said 37-year-old Sanjay Joshi, a small investor. 'I don't know how will I repay my loans.'"

For every one of these guys, there are tens of thousands of Americans in a similar situation with oversized mortgages. Essentially, they "borrowed money to trade in the market" too.
Last place I'd put money is bonds.
Fed will have to raise rates several more times and Wall Street is just now getting hip to it..although smart money knew it was a no brainer.

I predicted this would happen in back in March and went into 95% cash. I was a couple months early anmd ended up missing out on some big gains. Very difficult to time.

I'm still 70% in cash but I recently got back into gold, 20% and 10% Euros via FXE. Besides cash I think gold is the safest investment going now.

I do not think gold will fall much more...maybe down to $630 but that is bottom. I think it trades mostly sideways for a spell, before resuming it's climb. $810 by year end.
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agree JDog, gold looks like its turning around this afternoon.

just hope they are finished selling, I bought some shares last week thinking we were at a bottom, only for it to drop further.

Sometimes I get the urge to sell all my shares during these times, but for me, its just easier to stay long and weather the downturns and buy more when possible.
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