Stagflation?
Research for Online Investors

by John Dalt

3/26/09

So you think you have it rough.  There was a great article in SI yesterday about professional athletes and money.  Within two years of retirement, 78% of NFL players are broke.  Read about NBA and MLB players here.

I have written in strong terms the danger of inflation and the danger of falling prices on U.S. Bonds.  Bloomberg quoted Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets, as saying, “This is a historic moment-the start of debasement of the world’s reserve currency.    It feels to many participants that in the grand sweep of history we are witnessing the end of ‘Rome’ on the Potomac.”

What does the future hold?  There is much speculation of inflation.  I tend to think in terms of hyperinflation, dogs and cats mating in the streets, that sort of thing.  However, what if we get something even worse than inflation, how about a redo of the 1970’s and ‘stagflation’?

Inflation would mark an end to the recession; unemployment would go down as people went back to work.  Everyone would be happy, OH! Bama could claim credit for solving our problems and the Democrats run for the TV cameras to crow about their success.  Of course, everything will cost a little more, but who cares we all have jobs.

What will Bernanke do if inflation takes off and he cannot take away the punch bowl?  What if nobody shows up at treasury auctions, entrepreneurs do not borrow money, and businesses do not hire new people?  The Fed will have to keep buying treasury bonds, to keep the interest rates from spiking.  The cry will go out “We need more ‘liquidity’ in the banks”, but it does not matter if no one wants to borrow.  Does Bernanke watch congressional hearings?  Does he wake up in a sweat at night, dreaming of Barney Frank grilling him when inflation is at 12%, unemployment at 11%, and economic growth is negative?  These nightmares make a bureaucrat loose sleep.  I have noticed a hint of bags under his eyes.  I wonder, has he seen the devil in his dreams?

The market gave us a wild ride today.  Up, down, and then up.  You could not script this any better to drive traders nuts that were trying to predict the next move.  We broke through the resistance of 829 on the SP500 to close at 832.  We are in a rally, but how high will it go.  The financials lagged the gains today.  This scares me, so I am playing defensively.  We opened a position in the swing trade service today; it looks good for over 10% in three weeks.  Sounds almost too good to be true, we do have a looser occasionally, but we are 69 winners out of 81 recommendations.   I like those odds.  If you want to learn more about the Swing Trade service, check it out here.

The SEC Chairwoman told the Senate today she is ready to introduce a modified ‘uptick’ rule next week.  It is a little late.  Naked short selling is the larger problem, but who wants to short stocks when they are sitting on 52 week lows already?  Last fall I read about one company that had twice as many shares shorted against it as were in the float!  If that will not destroy a stock price, nothing will.

Mark to Market accounting rules should be modified next week.  The end of the third quarter is next week.  I talked to a couple of traders on the floor; they feel the funds are buying to make their portfolios look better for the end of quarter reports.  This is called ‘window dressing’.  We may lose some large buyers next week and we have news on two issues that have been hanging in the air for over six months.  How will the market react?  I do not pretend to know.  However, I am cautious.

What is missing, our Heritage?

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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