Insights & Advice

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Weak GDP + Higher PPI + Problem Banks = Market Rout

When the head of the bank of banks tells you that he is expecting some small U.S. banks to fail but he doesn’t “. . . anticipate any serious problems of that sort among the large, internationally active banks,” well, heck that just comforts me to no end unless of course I have my money in one of those local banks. And most of us do.

Once again the bearded bard of finance, Federal Reserve Chief Benny Bernanke gave investors cold comfort as he responded to questions during semi-annual congressional testimony Thursday. Yes, he said the economy is worse off than it was in July. And yes, inflation is higher as well but in both cases he thinks it is manageable and that the economy will emerge stronger than ever while prices stabilize. Then there was that off-hand comment about the banks but Bernanke made it clear that the Fed will lower rates again in March if necessary.

The dollar immediately hit all time lows against the Euro. Since most commodities are priced in dollars, global investors saw this as an opportunity to snatch up even more sought- after commodities at a cheaper price. The bond market, facing the specter of rising commodity prices and more inflation, reacted by sending interest rates higher and bond prices lower.

The stock market wasn’t having any of that. After three days of up markets, which had given the Perma-bulls some hope we had reached a bottom, stocks retreated with a vengeance. The financial sector led the retreat and those who had chased the markets at the beginning of the week were nursing burnt fingers by Friday.

For the past month, I have been recommending gold, oil, natural gas, copper, and agricultural stocks, ETFs and mutual funds. Last week, I warned investors that bond prices were in for a correction. That is now unfolding. Once again I implore readers not to chase stocks since I expect we will re-test the January lows (S&P 500 1280-1290 range) before putting in a bottom.

The historical highs in commodities, as diverse as wheat, oil and gold, are telling me that a much higher inflation rate is in the offing. Higher then many investors (including the Fed) expect. The Producer Price Index’s latest monthly advance was 7.7%, the largest gain in over 25 years. As a survivor of the inflationary cycle of the 1970s, I learned that inflation has a momentum of its own. So I can easily see the PPI at 9-10% before Bernanke’s bead grows much longer.

Posted in A Few Dollars More, At the Market