Tuesday, January 22, 2008

Welcome Back Stagflation.

The market never seems to make sense. The fed cuts rates, it goes down, companies come in with good earnings its down, bad news about employment and its up. Most of the time the underlying news is not the driver. Market moves can be as mysterious as the lockness monster or a UFO sighting. Everybody things they can explain the unexplainable. In the case of the stock market people get paid big money to explain the unexplainable.

Today there is a very rational explanation. Because economists still have two hands, to the dismay of Harry Truman, there are differing opinions. On the one hand economists/traders are saying its because people are putting money on the sidelines until the bigger rate cuts predicted within the week. On the other hand, this is a major sign of deep fundamental problems with the economy.

Not surprisingly I am siding with the latter. If you have read this blog in the last month you know i have been predicting doom and gloom for the economy. Why? Because of a contracted capital market. Lenders are squeezing the amount of money their willing to lend basically because they just got burned and they are low on reserves. This course was headed straight to a recession (don't pass go), but what is happening now is leading us to stagflation scenario.

At the same time companies are spending and hiring less,and financial institutions are lending less, the federal government is going to try and flood the market again with worthless dollars. The fed wants to continue to cut rates that are still historically low, and the geniuses on the hill want to send people checks indiscriminately. The result is economic slowdown combined with worthless dollars let loose: stagflation. Its not like im the only one out there saying this, but too many pundits act like reality isn't reality or they believe that the liberal media is just making this all up.

For those of us in fairyland (otherwise known as DC) it probably wont hurt too bad. For the rest of you...

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