The Dow Jones Industrial Average surged 337 points today, rising almost 3%. When you look around you can find no good reason for the move.
It is true that unemployment rates dropped in 43 states. But the move was ever so slight and accompanied by little job growth. That couldn’t be the reason for today’s strong Dow performance.
Maybe it was the “good” news from Europe that Spain had another “successful” bond auction. But who really cares about that? More debt won’t solve the spending problem in worldwide central governance. It’s solves nothing. Europe is still in major distress.
Then there’s the US Bureau of Economic Analysis announcement that state personal income growth ranged from -.4% to +.6% and slowed to .1 percent, on average, for the third quarter of 2011. Consumers continue to fall behind.* Not exactly a Dow rally cry.
And then you stumble across these three Wall Street Journal headlines:
- Higher Costs Weigh on General Mills Profits (earnings fell 28% on higher costs)
- Sanderson Farms Posts Loss on Higher Feed Costs, Weak Market (marking their fourth straight quarter of loss, and citing a 74% increase in corn feeds)
- ConAgra ProfitFalls on Hedging Losses (earnings fell 14%)
That’s an indication of major inflation from three large food companies.
As mentioned, the three greatest threats to an advancing stock market are:
- The acknowledgment of a Recession
- The Collapse of the Euro and/or several countries within the EuroZone, and last but not least…
- The realization of Inflation
Based on the news reported above, a dramatic increase in PPI (Producer’s Price Index) should be expected in the 4th and 1st quarters. Higher production costs ultimately translate into higher consumer prices – a.k.a. CPI (Consumer Price Index). That’s called inflation.
Inflation will cause interest rates to rise. That’s not good either.—But wait a minute, in a previous blog I recommended that the Federal Reserve ought to be raising interest rates. Are higher interest rates good or bad?
That depends. High interest rates driven by Federal Reserve action are desired tenfold over higher interest rates driven by inflation. When inflation drives interest rates the Fed loses one of its most powerful monetary policy tolls. It increases price uncertainty and inflation which can easily cause interest rates to run wild.
A hostile interest rate environment will inflict additional pressure on homeowners still struggling to hang onto their homes; it’ll raise the cost of operation for many businesses which adds further pressure to unemployment; and it also causes more inflation, as companies must increase prices to cover higher interest expenses. All of this shrinks the market even more (recession), as consumers who are falling behind* have less money to spend on goods.
Like with the recession, Wall Street is living in a speculative la-la-land that disregards facts and obviousness. They make believe inflation doesn’t exist unless CPI says so, and even then will contend that price inflation for food and energy don’t count. As with the unemployment number, Wall Street will wake up some day, read the news, and hit the sell button fast and furiously.
That’s why you shouldn’t get sucked into moves like today, which are simply light volume Wall Street manipulations to cash in on their year-end bonuses.
Inflation is on the way – and it’s a game-changer!
Stay tuned…