The Dow fell back 178 points Friday. The dollar rose to 1.44/euro. Gold dropped below US$800.
In the battle between inflation and deflation, the latter had the upper hand. It is still too early to know which way this fight will go. Inflation looks unstoppable. Deflation seems to be immoveable. We’ll have to wait to see what happens… perhaps stagflation?
Our guess is that it is a fight that will become known as a bout of “stagflation”. The economy will slump. Assets will fall in price. But consumer items -especially those dependent on energy and food – will rise.
This has been our guess for sometime. But it was given a setback this morning when we saw a headline from Reuters: “Greenspan sees early signs of stagflation.”
Uh oh. If the former Fed man sees the same thing we see, we must both be wrong. But who knows? Greenspan’s record, so far, is practically unblemished by honest observation…the only major exception was when he saw stocks rising in a frenzy of ‘irrational exuberance’. Then, he was wrong about the phenomenon he was looking at; but at least he wasn’t lying. And now? Maybe he’ll be right…stranger things have happened.
On the ‘stag’ side of the coming economic equation is one headline from the Financial Times:
“Mortgage pain starts to hit spending .”
On the ‘flation’ side are two more:
“World food prices rise set to hit consumers.” And, “US inflation surges to 4.3%.” Four and three-tenths of a percent doesn’t seem like much to us. But it’s a start.
USA Today tells us that 2008 will be a “bumpy ride” for investors.
The paper asked a group of Wall Street pros. Naturally, they said the year ahead would be full of “challenges” but that it is still a Win-Win system. Stocks may go down in early ’08, says Dan Chung of Alger Funds, but this will only set the stage for a “significant recover rally” later in the year, in which investors could get “double-digit plus gains.” Or they could lose their shirts; but he didn’t mention it. In the new Win-Win Capitalism there is only upside.
One of the analysts showed some sense, however. Richard Bernstein took up our theme: that it was all very well for the feds to come riding to the rescue, but they may be no more effective than a group of parking lot attendants trying to land the space shuttle. They can make money available to member banks, he points out, but “the Fed can’t force financial institutions to lend.”
Why wouldn’t they want to lend? Because they’re not sure it really is a win-win system after all. Lately, the financial industry has been taking losses. It has found itself on the wrong side of trades that were supposed to be safe. But then, so has the entire nation…
Markets and Money