Wednesday, January 19, 2011

Inflation+Unemployment= Trouble

It was another interesting day on Wall St.  Stocks continue to churn and burn as the market figures out where to go next.  When the market looks confused like this I always like to go back to the fundamentals.

The bottom line here folks is we are currently seeing a nasty combination of inflation and high unemployment.  A hat tip to I-Tulip for the chart:

My Take:

As you can see above, we are starting to enter the "danger zone" from an inflationary standpoint.  The last time we saw inflation this high was early 2008 and we all know what happened next.

What's scary about our current bout of inflation it's hitting at a time in which the unemployment rate is much higher.  Making matters even worse is the fact that the mean duration of unemployment is also rising which makes rising prices that much more brutal.

So what does this mean?  The way I see it, the consumer will fold like a cheap tent much faster this go around:  Savings are more depleted, a much higher percentage of people are unemployed and can't find work, and millions more sit in underwater McMansions versus the last time we saw this a few years ago.

Folks, I don't see how this all bodes well for our economy moving forward.  It's pretty much the nightmare scenario.  

You would prefarably like to see a nice bout of deflation during times like these.  The price drops that accompany this scenario would help "soften" the blow as peoplecontinue to lose their jobs and see their wages plummet.

You can thank the Fed for throwing the deflation scenario right out the window.  As you can see in the chart above, our inflation started to rise just after the Fed dropped interest rates to zero. 

Our current bout with inflation became even more exacerbated when Ben "the beard" Bernanke started printing money via his famous QE machine.  

As you can see below, the dollar has now resumed it's path to zero after a receiving a recent reprieve thanks to the European Debt crisis:

Take Continued:

It appears the dollar is ready to race right back down to the November lows in the near term as long as Europe stays in one piece. 

All I can say is the US needs to thank their lucky stars for Europe's debt nightmare.  It's the only reason the dollar has any value IMO.  As my friend "the credit trader" likes to say:  Risk is relative so the dollar looks darn pretty when you compare it to the Euro.

I don't know how any of this ends well for any of the fiat currencies.  I guess I will keep using bucky as long as people continue to accept it! 

The Bottom Line

Extend and pretend is still in control for now.  Things are awfully quiet on the news front which I find bizarre given all of our problems.  It almost appears as if Wall St has muzzled anyone involved with the markets. 

I mean think about it:  Why is there no news????

Have the PIIGS suddenly become solvent?  Are people once again buying houses in droves?  Did Illinois miraculously cure their debt problems after finding $15 billion in Al Capone's vault?

The answer of course is NO!  I thought Goldman's earnings were a good barometer as to how slow things are out there:

"Goldman Sachs Group Inc (GS.N) fell 2.6 percent to $170.07 after it posted a 53 percent decline in profit as trading revenue tumbled, spoiling hopes that Wall Street's most influential bank might buck a volatile climate that has hurt rivals such as Citigroup Inc (C.N). "

Many were expecting much better numbers.  Their earnings showed very flat to negative growth in areas like M&A and other investment bank activity.  This tells me that Wall St is very slow.

All I can say folks is don't believe the hype.  The "silence is deafening" on Wall St and the fundamentals stink.  Its only a matter of time before the combination of rising unemployment and high inflation takes down the consumer.

It's beginning to smell a lot like early 2008 out there except this go around both the consumer and our government are broke. 

Stocks made it to September during our 2008 inflationary crisis before falling off a cliff.  I can't see us making it that far this go around because the economic fundamentals are materially worse.



Anonymous said...

sure felt the melt up this week; then today, promised snd didnt deliver the honest correction.

Anonymous said...

this will basically crash after the oil run up to 150

Jeff said...


I hear you. I thought we might rollover at one point today. There is a floor underneath the market for now thanks to the helicopter Ben.

Looks like it's running out of steam tho.

"this will basically crash after the oil run up to 150"

COuldn't agree more. Scary thing is this time there will be no money left for bailouts unless Ben wants to turn this place into Zimbabwe.

Staffing Supplier said...

Deadly combination, Administration has to take some concrete measures to curb inflation and generate jobs.

Jeff said...

Agreed Staff

Let's hope they wake up. People are hurting.