Tuesday, May 25, 2010

FLASH It is different today


It is 4:30 in the morning on Tuesday May 25, 2010. Today is my 42nd wedding anniversary and the world if waking up to a different place.  The advantages and disadvantages of writing a blog is you have a public record of what you predict. Some time ago I suggested that I felt the S&P500 could fall to the 950 levels, As of this morning we could break the 1044 level and if we do then I think 950 is a certainty. I suggested last fall that the dollar would rally and it has and I also felt that the yield on the 10-year T Bond would break 3%. This morning the yield stands at 3.12%. The yield on the 10-year is now lower than the prime rate. I predicted that the price of crude oil would fall to $50 as of this morning it is at $68 and at a major inflection point. As you will see in a moment you will understand why I think $50 is still viable as a target.

What is all this movement is the stock and bond markets telling us about the outlook for the US and global economy? I think we are setting up for a period of global deflation. We along with the majority of the world have already experienced deflation in the in our real-estate markets, decline in prices. The return for the last 10 years in the S&P 500 is negative. Is there a difference between deflation and price declines?The last shoe to drop is the flatting in the yield curve. I do not expect short rates to fall any further, it is hard to fall below zero we did for a short time in 2008, but as the world sees the idea of global deflation as a reality the long end of the yield curve will fall.

As we finally understand that as I said in my last blog that the Fed is on hold for and extended extended period of time, then income assets will be in great demand over growth assets. For my clients the short position in the S&P 500 has helped dampen the decline. It is possible that we may hit the 950 levels within the week and then I would expect a bounce. 

We must be cognizant that the chickens are coming home to roost all over the world and we as a nation and a world are going to have to make some serious decisions about our economies and what is important to us and what we can afford. I’m not saying that it will be easy but many things will have to change.


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