Kudlow - Golden stocks unwind market
By Money Politic$
Today's stock market drubbing seemed based on $51 oil and a gold rise to $435. The dollar,gold's flip-side, declined across-the-board. I doubt very much whether S. Korea's threat to diversify out of dollars had much to do with it. Just like China and Taiwan, S. Korea needs dollars to support new won creation in a quasi currency board system. Trade flows with commodity-producing Australia may prompt some won payment flows into the A-dollar, perhaps into the yen as well. But that's about the extent of it
The real reason for the market hammering was renewed inflation fears prompted by the strong PPI release late last week. Should core consumer and producer inflation flare-ups continue for a few months-- and we have not yet seen any evidence of this in the core consumer spending deflator-- then the Fed's quasi-inflation targeting discipline will force a step-up in Fed restaining moves to at least a couple of 50 basis point moves in the period ahead. This is unsettling stocks, which fear a slowdown from the torrid 23% fourth quarter gain in reporting S&P companies.
Should gold break through $450, with a concurrent rise in gold shares, then the near-term market bearishness and a more aggressive Fed outlook might be realized. But this scenario is still pure conjecture. Gold has failed several timesw to bust through upper band trading targets, as have gold shares. Until there is a breakout, bond rates will hold their historically low range. Should gold prices and bond yields bounce significantly higher, then a near-term market pessimism would be warranted.
Another problem for inflation fears is the Bush trial balloon to raise the Social Security wage cap, which could be a major drag on future economic growth and employment. Such an outcome is still distant, but it is a threat to prosperity. In the unlikely event, money demands would shrink and even a slower growth rate of the monetary base would be excessive and inflationary. This threat has been articulated by Mike Darda, and I agree it is a threat. Higher tax-rates would almost surely be inflationary, just as lower tax-rates since June 2003 have been counter-inflationary
Fortunately, House Majority leader Tom Delay has ruled out any sort of payroll tax hike ever passing the House. So speculation on this is premature. However, Bush's mistake did shock financial markets last week, and the effects are still working to drive stock and bond prices lower.
My take? Let's wait and see. It's way too soon to conjure up worst case scenarios amidst a fundamentally healthy and profitable economy that is still benefitting from lower tax-rates on income and capital formation. Higher taxes still seem unlikely from Mr. Bush or the Republican Congress, despite the Texan's recent miscue. |
