A Hyperinflationary Trend Was The March Friend ~ The Risk Averse Alert

Tuesday, March 31, 2009

A Hyperinflationary Trend Was The March Friend

Back in the day GM was a company likened to a dog wagging the tail of the U.S. economy. What was the saying? As goes GM, so goes the U.S. economy. Contrary to popular opinion this relationship remains on point.

Thirty years leveraging the diminishing physical capacity of an industry whose machine tool sector once was a productivity enriching engine of growth does not transform an economy in any positive sense of the word. Rather, it simply masks the reality of economic decline, postponing an inevitable day of reckoning.

This is reality barreling down upon us all. The auto industry's pending downsizing and auctioning of physical plant and equipment might generate enough capital to service a mountain of financial claims for another few months, but then what?

My point is this. Once physical capacity sustaining life as we know it no longer exists, there's no way to paper over economic vulnerability. Absent supply of physical capacity necessary for sustaining a certain level of economic activity, credit and money supply could, indeed, shrink and conditions still would be conducive to hyperinflation.

There has been much too little discussion in the mainstream about what the collapse of credit markets has done to dramatically shrink world trade. The prospect of increasing protectionism only further threatens the supply of physical goods necessary for sustaining economic activity. Hyperinflation, therefore, is demonstrated more a physical process than a monetary one. This threat looms large and I fear the President and his advisors just don't get it.

One is left to wonder, then, where will all the trillions of dollars being thrown at the problem (because the Fed has "learned its lesson" from the Great Depression, right?) go? Surely, sophisticated minds know best. Thus, the divide between the haves and have-nots might only further grow.

Do you begin to imagine how the disconnect between the stock market and the economy might become all the more profound? What I mean to suggest is the coming period could be one where the stock market rises spectacularly while at the same time the economy virtually collapses. Seeing shades of this dichotomy over the past month, one is left to wonder what more of it will result over the next ten years?

OEX 5-min

Last week I indicated that, even if the market pulled back in a fashion thought less likely at the time (which, unfortunately, has been the outcome), higher highs off March bottom would remain in the offing. This sense persists.

Even if selling developing during today's final hour continues during Wednesday's trading, the OEX should find support not much lower than was reached yesterday. Subsequently, look for the market to turn up ... and quite possibly with a great deal of conviction.

Just how much the market might imminently extend its gains off March bottom is a bit of a question right now. The next couple weeks could see trading unfold in a narrow range. Just as likely, though, indexes might be taken another 15-20% higher. I'm on the fence for the moment.

The better part of me believes the greater portion of gains projected to be made over coming months will register sooner rather than later. The thinking here defers back to the 1970-1973 period, or more recently, post-9/11...

Fast Money
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Paul Davis said...

I echo your opine on Twitter yesterday about sham of financial "crisis" last fall. Especially when viewed in context of declining channel from 11/07 top; why did indexes plummet? It all seems too contrived now, just as the screaming rally that is about to unfold will be as well.