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Thursday May 28, 2009 - 12:36:09 GMT
Black Swan Capital -

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Bring on the Inflation

Key News
• The leading Bank of England official who accurately predicted the recession warns today against complacency that the worst of the slump is over and predicts a further surge of more than a million in unemployment this year. (The Times)

Key Reports Due (WSJ):
8:30 a.m. Initial Jobless Claims For May 23 Week: Expected: +4K. Previous: -12K.
8:30 a.m. Apr Durable Goods Orders: Expected: +0.6%. Previous: -0.8%.
10:00 a.m. Apr New Home Sales: Expected: +2.5%. Previous: -0.6%.
10:00 a.m. DJ-BTMU Business Barometer For May 16: Previous: unch.
1:00 p.m. May 22 U.S. Energy Dept Oil Inventories

“There are two things which cannot be attacked in front: ignorance and narrow-mindedness. They can only be shaken by the simple development of the contrary qualities. They will not bear discussion.”

Lord Acton

FX Trading –  Bring on the Inflation

“Markets are going to increasingly demand that there be some real green shoots” of an economic recovery, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York. “They are going to have to step in at some point and put some more easing in.”
If only it were as certain as Mr. Harris here makes it sound. I figured the demand for real green shoots would have come about by now. It hasn’t.

Granted, the stock market hasn’t hit a new intermediate-term high in what, like 14 days? So maybe this means it’ll start heading lower if these real green shoots don’t start poking out of the ground soon.

But maybe not.

Short, sideways price action has become the extent of corrections these days. They’re just consolidations I guess. The S&P 500 is leaving open the potential for a move in either direction – up or down:

 (Chart unavailable in text format.)

So what’s up with the dollar? Am I just going to say it’s stuck to stocks; whatever stocks do the dollar will do the opposite?

No. The negative correlation has loosened up between currencies and stocks. Now that risk appetite has taken a breather, the buck has been re-subjected to a different threat. It’s now vulnerable to inevitable inflation.

Despite a small recovery so far this week, this buck has been whacked:

 (Chart unavailable in text format.)

So are consumer and producer prices rising now? With the exception of the recent uptick in some commodities, no. But the inflation-apes are banging on their chests again. And it’s likely not going unnoticed. The boomer, doomer and gloomer that is Marc Faber made sure his pounding was heard ...

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

100 percent?? Hyperinflation?? And apparently he also used the word “Zimbabwe” during his interview with Bloomberg. Hmmm… maybe subscription sales to his report are slumping.

Ok, forget the sound-bite for now. The second part of the above quote is something that’s legitimately beginning to worry people. I discussed it in more detail in yesterday’s Currency Strategist, but to summarize:

To the extent they have the capability of deciding between inflation and deflation, the Fed will choose inflation any day of the week. That belief is based around the idea that only inflation will allow us to cover our growing debts.

Yes, it’s an old story – one that played largely into the US dollar’s multi-year bear market till the middle of 2008. But thanks to the D-word – deficit – this story is once again prying its way into the minds of the market.

[Note: From the Financial Times today… “German inflation has turned negative for the first time in more than 20 years, fueling fears of a fall I prices across the Eurozone that will add pressures facing the European Central Bank as it grapples with Europe’s sever recession.”]

When will prices begin to rise? Shoot – I would imagine we’d need to see some real green shoots first. Because without some hard evidence for those on Main Street, as opposed to those happy-go-lucky soles on Wall Street, money simply isn’t going to be circulating at anywhere near a rate conducive to hyperinflation.

So let’s not panic ... unless of course everyone else starts panicking. In which case the market will move in whichever direction it’s pushed. And believe me: you don’t want to be on the other side when a herd of stampeding buffalo starts pushing against you.

 (Charts unavailable in text format.)

Just try to keep your wits about you, whichever way the market ends up taking you.

John Ross Crooks
Black Swan Capital LLC


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