Hyperinflation ahead? Not.

In this post I explained why I thought that fears of imminent high inflation resulting from the Fed's quantitative easing policy were misplaced.

Here is a post by Mark Perry which reports the latest estimate by the Federal Reserve Bank of Cleveland of expected inflation. Their number is an average of 1.53% annual inflation over the next 10 years. This is what they come up with after examining both bond market data as well as survey data from investors and consumers.

Of course expectations can always change. But this survey tells us that that there is no reason to think inflation will increase in any significant way base on the evidence at hand which includes the Fed's current QE policy.

Buy ? Maybe not.

Thanks to Paul Montgomery and Elliott Wave International for bringing my attention to the latest cover of a special, February 18 issue, of Maclean's magazine. Maclean's is the Canadian equivalent of Time magazine here in the US. But the cover story is all about the US stock market.

The cover story quotes Ralph Acampora, a noted US market technician, as asserting that the current bull market is climbing a classic wall of worry. He further more observes that since the public has yet to return to stocks in any significant way (as measured, say, by mutual fund money net inflows) there is a lot of upside potential even from current levels. To be fair, he also says that a "correction" now would be healthy and help to repair any cracks which have developed in the worry wall.

Frankly I am in more or less agreement with Acampora as far as the long term prospects for the US stock market go. However shorter term cracks (like this cover story) have started to appear. This is another piece of evidence which suggests that the US stock market is vulnerable to a correction which easily could take it below its November 2012 and even below its June 2012 low point.

At this juncture I think it makes sense for aggressive contrarian traders to move their stock market exposure down to below average levels. The plan would be to restore average or above average levels of stock market exposure after a drop of 5-10% (or more) in the averages, a drop which I think is coming sooner rather than later.

Doom and Gloom about the US economy

A few days ago I received an e-mail from a friend of mine which asked my opinion about the prospects for the US dollar and the US economy. Below is his e-mail (in italics) and my reply.

Carl,

I have been reading more and more about the currency wars and getting concerned. 

Many people say that between the Fed printing USD and oil being priced in Chinese yuan the US dollar is doomed. This will eventually lead to hyperinflation here in the US as the USD loses its global currency reserve status.

I personally have no idea if this will actually happen.  I have read about Russia & China coming to an agreement where China will buy oil from Russia paying in Yuan and the views that other oil producing countries will begin selling oil in currencies other than the USD.

Do you have any thoughts on this? There is no shortage of websites pushing this end of the US dollar and USA coming soon but of course each website is also selling something to profit from this coming doom!

Otto:

There will be no hyperinflation without the Fed's cooperation. They seem very reluctant to let the inflation rate move much above 2%. The 10 year Tips - note spread predicts 2.6% annual inflation for the next 10 years so the market has a lot of confidence in the Fed's commitment to keep inflation low.

That said I think the Fed is much more concerned about domestic economic conditions than about the value of the dollar. But notice how they have dragged the Bank of Japan and the Swiss along in the QE compaign. The rest of Europe will soon follow or fall into the economic abyss. Since all the big powers will evntually embrace some version of QE and follow the Fed I don't see how the dollar is going to drop much in the long run because of monetary expansion.

The US is the strongest economic power in the world. Soon it will be the biggest oil producer and is already the biggest natural gas producer. It has the  freest market system and is home to the  most innovative business entrepreneurs. And you say that there is a danger that people might prefer to trade in yuan, not dollars?

  Apparently the message has not gotten through to the world's criminal classes - who spit on payments denominated in any restricted currency like the yuan. Free traders trade in dollars or euros or yen and trade in dollars is the biggest by far in volume.

China looks strong because they are getting up to speed after being impoverished by the 1949- 1984 experiment with central planning and communist repression. Russia looked strong in the 1950's because they were starting from a very low base, just like China today.

But if history offers any lessons it is that government controlled economies (of which China is an example even now) eventually hit a ceiling beyond which progress is no longer possible. This led to the collapse of the Soviet Union. It also happened in China starting around 1400 when the combination of the European Renaissance and Chinese imperial repression of  creative thought and action started China's long slide into poverty from which she is only just emerging.

The doomsters always have something to worry about and this has been true as long as I have been active in markets, a period of nearly 50 years now. Experience teaches that in the long run the doomsters are always wrong and are either forgotten or become a laughing stock for sensible people. I don't see any reason for thinking the fate of the current crop of doom predictors will be different.

I had a friend once who thought that the doomsters were all secretly financed by the Trilateral commission to scare the little guy into making stupid choices. I don't share his cynicism but it is certainly consistent with the facts.

Carl

more reasons for concern

Here is an image of the Chicago Tribune's front page today. It is really about the stock market, not the economy. The graph to the right shows the Dow industrials for the past 7 years.

This article also observes that stock market mutual fund inflows for US base funds were the highest ever in January 2013. This after actually being negative for a good part of 2011 and 2012.

Another interesting fact is that the weekly survey National Association of Active Investment Managers (NAAIM) shows a commitment to the stock market of over 100%, the first time this number has been over 100% since January 2007 (at which point the 2002-2007 bull market still had 9 months to go).

I think these observations adds to a growing body of evidence that this 47 month old bull market is getting close to its end. But I don't think this end is here just yet.Typically the maximum bullish sentiment occurs a few months before the highs in the market averages.