If Not Inflation,
I don't think that Wall Street has heard our call for the stock market yet; allow us to make it loud and clear:
Dow 7000! That's 4000 points.
And it will not immediately rebound, this time. In fact, it is entirely possible that 10 years will pass before these levels are revisited, unless perhaps, Dow Jones & co. adds a gold stock component to the industrials.
Yet it is the recovery and potential breakout in U.S. stock prices that is right in the middle of the global financial debate this week. It looks like a good move, but then what bull trap doesn't?
Remember folks, despite the fire sale for dollars, it is still a bear market in the broad stock market averages, and last week's reversal in the Dow Industrials was the sole one out there. Our readers know the reason for that because they are aware of the true leadership. Part of the reason for the general disorientation, however, is that the mainstream analysis continues to be cavalier about how central the inflation debate is, to either, the bullish or bearish case. This should be an insult to you, but on the bright side, it is bullish for liberty (see Rothbard quote).
For if it seems perfectly legal for Mr. Greenspan to get up on stage and perpetuate one false story after another today, liberty cannot be far away.
Though we've noticed that his line has a subtle global unity to it this time. That is to say, its echoes have been heard overseas and its might has been felt in Forex markets. Dollar bulls have won yet another battle by pushing the trade weighted dollar index to new highs, effectively correcting your inflation expectations by adjusting the dollar price of physical things lower. How does that work? Through an adjustment in the dollar price of other currencies, even lower, the process transfers an excess of purchasing power from one paper currency to another, the dollar in this case, thereby allowing the US to export its inflation, and then some, to the rest of the world.
Recall, that officially, the international currency arrangement is to aim for stability, but to sanction instability if the objective is for global growth. Nevertheless, dollar strength continues to stress the arrangement. I don't think that any one of the global central banks lowered their interest rates this week. Still, this kind of dollar strength needs international support in order to sustain. If there is a new unity, what drives it, and is it sound? More importantly, is it as sound as the nonsense that forms the bullish case for stocks, particularly the blue chip Dow.
The Bullish Case for Stocks
Stock (market) salesmen today (everyone) say that equities can trade at a premium to fixed income investments due to the argument that stocks are the best long-term investment around, and therefore deserve a low risk premium to other assets. So, the thinking goes, if the Fed can just keep rates low, expensive stock prices will be the norm.
The dollar, of course, will take care of itself, relative to other currencies and things, because it will always be in demand, regardless of how freely available it is. The law of scarcity does not apply if dollar denominated returns are supported by high rates of labor productivity, which will always be higher in the United States because (they have the highest paid statisticians in the world working for them?) it has the world's youngest population on the planet? Or is it because the United States has the freest and most efficient market system in the world, with regard to the allocation of the nation's scarce resources and things? No, it must be attitude! They've got such good (optimistic) attitudes about profits.
At any rate, perhaps because of that, it is also the case that bulls believe declining fortunes overseas will result in rising fortunes for them here in NY, like in 1998. The bottom line is, and we all know it, that if stock prices can go up, and the dollar can go up, then inflation can be contained, or absorbed, and productivity will be easier to talk up again. This is maybe true, theoretically. After all, the whole idea of inflation is to direct it to where it produces the most sustainable gain - that would be asset prices traditionally. Profits would come back because the whole business of capital investment is driven by stock speculation, or the equivalent. A soaring dollar rate can certainly help support the marginal, or subjective-use, value of additional money supply, thereby putting pressure on some prices while letting others rise.
In reality, however, this does not cure the inflation, or its destabilizing effects. It is only a mechanism that further distorts the market process, possibly creating further malinvestment, or misdirected investment.
In this week's Issue of the GIC (Jun 8 - 14):
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