Market Thoughts

We’re seeing a phenomenon where investment asset prices are rising but inflation is muted along with top line revenue.

So the fed is pumping easy money into the economy, and it’s finding its way into the stock market, the precious metals market, and speculative oil.  It’s not hitting real estate, because prices are still falling.  Agriculture prices are also flat to dropping.  Labor prices are flat.  Commercial real estate is also deflating.

So everything based on easy “credit” is deflating (real estate).  Banks aren’t lending much, so there appears to be little velocity in terms of the money supply.

What then can people speculate in?  Stocks?  Gold?  Precious metals?  Oil?  Things that are not “input” factors into the economy, but rather a thermometer of the economy.  If the US Dollar is weakening and the equity markets rising, but top line revenue flat to dropping, what does this mean?  Higher PE ratios?  Bubble atmosphere?  Can this be sustained if top line revenue and profit is not existant?

The irony is that in order for this equity bubble to continue, we have to see top line revenue increase, which means we have to see inflation kick in.  This is the only way to sustain the valuation ratio.  The rubberband can only be pulled so much before it violently pulls back.

Would I want to be a buyer of this market?  No.  It’s too risky.   Would I want to be on the short side?  That’s questionable too, as this rally can continue irrationally for sometime, and nobody knows how long.

The best thing to do at this point may be to diversify.  Diversify into precious metals, agriculture, some equity, but also keep some shorts.  The devil’s in the details…