More of the Same?

The Non-Farm Payrolls just came out. The unemployment numbers came out at the higher end of expectations. So far price reaction from the markets has been muted: Gold is down a little, Crude up slightly, US$ down slightly, ES up slightly – more of the same.

But folks, if I am right, a bombshell is around the corner. On April 16, the CPI numbers come out.

It has been 8 months since the FED publicly started massive increases in the money supply. As a general rule, it takes around 9 months for the economy to start showing the effects of a loosening of the purse strings. I may be a month early, but the easing of the money supply has been so massive that the CPI increasing a month before ‘normal’ would not surprise me.

If the CPI does come out much greater than expected, what is that going to mean for the markets I trade? I expect:

  • The US$ to move up and therefore
  • Gold and Crude to drop. I also expect
  • The Grains to drop and
  • The stock market to tumble.

Interestingly, while I was watching the Cash Flow program on CNBC today, Illian Mihav, professor of economics at INSEAD, made an interesting observation: he said that the FED number 2, Rick Michigan has been, in effect, previewing FED policy in his speeches. And, his latest speech at the end of March was on the dangers of inflation. Hmm, does the FED know something we have yet to discover?

And, if the inflation numbers are going to start rising, what are the chances that the FED will continue to raise rates?In Aussie terms, ‘buckley’s’ (i.e. NIL).

Well, OK, I suppose there is some chance; but I certainly would not take the odds to a continuing rate decrease or other form of stimulus once the inflation numbers start to rise. Perhaps then we’ll break out of the market ranges we have been in.

5 thoughts on “More of the Same?”

  1. Ray,
    I’m not quite sure if I understand your train of thoughts here. I thought if CPI is higher than expected (inflation is higher than expected) then USD will be worth less. So USD will fall and Gold and Crude will go up. Therefore the stock market will tumble. Or not?

  2. Hi Jordan

    Thanks for the comment. Well, we are at least in agreement that the stock market will tumble (G).

    I think in the long run your scenario will come to pass – when the majority of traders realize that the most likely result of the recent FED actions is stagflation.

    But right now, what is driving the US$ down is the belief that Bernanke and Co will continue their rate cutting policies.

    When the inflation numbers start to rise, the immediate reaction will be: “Interest rates will stop coming down, and may even rise! Shock horror!”

    That sentiment will initially drive the US$ up.

    As a result, I expect my scenarios to come about.

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