Peter,
Can you spin out what you're talking about in the form of possible scenarios?
Lets see if I can summarize my 2 cents worth in a short post.
The bulls had been using no inflation and low interest rate environment as the foundation of their opinion.
Inflation can be demand pulled or cost pushed. For the past few years, we enjoyed the best of all worlds. By that I mean while demand in the US and some European countries are skyrocketing, the rest of the world is suffering from an over supply crisis, keeping the cost at record lows. Furthermore, our labor costs is holding, because of the shift from straight salary to stock options and 401Ks. I have no proof but I think DOL is miscalculating labor costs today by not taking this change of compensation into account.
Can this low inflation rate last indefinitely? Yes, but it will not be without consequences. Using the trade imbalance as an example. Much attention is paid to this number but most investors do not understand we are having the worst kind of trade imbalance, where both imports and exports are dropping. This results in a shrinking global economy which, in the end, will have no winner. Just think how this is going to impact Japan? The Japanese consumers have decided they are not going to consume and Japanese companies will continue to try to export their way to recovery. This is going to lead to the mother of all trade wars.
As for low interest rates, again we can look to Japan for the answer. They are going to be financing an unbelievable amount of debt while their tax revenues are going to be at record lows. Despite of what BOJ says, I don't see how this is not going to put upward pressure with such huge demand for money. The yen also needs to go down in value, possibly giving China an excuse to devalue the RMB.
Timing wise, this week is filled with the joys of Chinese New Year so nothing is going to happen. Starting the middle of next week, reality will take over and will set the tone for the rest of the year.
Ramsey |
