I have a few topics that I would like to discuss. One of them will not be Egypt. It's too early to see how this situation will play out. All I have to say is good luck to the Egyptian people. I hope Mubarak goes down ASAP.
OK, Let's talk a little economics. Let's start with today's blowout ISM report:
"Manufacturing continued to grow in January as the PMI registered 60.8 percent, an increase of 2.3 percentage points when compared to December's seasonally adjusted reading of 58.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
A PMI in excess of 42.5 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the 20th consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 18th consecutive month. Ore stated, "The past relationship between the PMI and the overall economy indicates that the PMI for January (60.8 percent) corresponds to a 6.4 percent increase in real gross domestic product (GDP) on an annual basis."
Great news right? We saw our 20 straight month of economic expansion. CNBC and the rest of the retards on Wall St couldn't wait to Ponzi up the market after seeing such a great number.
What the market conveniently ignored was the cost of doing business that was explained later on in the report:
"The ISM Prices Index registered 81.5 percent in January, 9 percentage points higher than the 72.5 percent reported in December and the highest reading since July 2008. This is the 19th consecutive month the Prices Index has registered above 50 percent. While 64 percent of respondents reported paying higher prices and 1 percent reported paying lower prices, 35 percent of supply executives reported paying the same prices as in December. A Prices Index above 49.4 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices.
The 16 industries reporting paying increased prices during the month of January — listed in order — are: Textile Mills; Plastics & Rubber Products; Primary Metals; Food, Beverage & Tobacco Products; Fabricated Metal Products; Nonmetallic Mineral Products; Paper Products; Machinery; Transportation Equipment; Miscellaneous Manufacturing; Chemical Products; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Wood Products; Printing & Related Support Activities; and Computer & Electronic Products. Furniture & Related Products is the only manufacturing industry reporting paying lower prices on average during January."
Ummmm...Helllooo...Inflation anyone? The reality here is sales are up but so are costs. In fact, companies are facing their worst inflation since the inflationary crisis of 2008 where we saw oil Ponzi up to $140+ per barrel.
We all know how that ended.
You would think that the most logical thing for the Fed to do would be to tighten interest rates in order to quell the inflation that clearly showed up in this report. At the very least you would expect them to stop buying treasuries in an attempt to start balancing out our outrageous spending.
Afterall, the economy is growing strongly. Any policy maker with a brain would ask themselves: Why keep flooding the market with liquidity after 20 straight months of economic growth?
As you can see below.the Fed has other ideas:
"Feb 1 (Reuters) - The Federal Reserve could debate extending its bond-buying program beyond June if U.S. economic data proves weaker than expected, Kansas City Fed President Thomas Hoenig said.
Another round of bond buying "may get discussed" if the numbers look "disappointing," Hoenig told Market News International in an interview published on Tuesday.
Hoenig, an inflation hawk who vocally opposed the Fed's commitment to purchase an additional $600 billion in government bonds, reiterated his call for the central bank to reverse course, according to Market News.
He called for the U.S. central bank to "normalize" policy by shrinking its balance sheet and raising interest rates.
Hoenig has argued the Fed should raise rates to 1 percent and potentially higher depending on the economy's performance.
The Fed has kept interest rates near zero percent since December 2008."
The dollar continued it's decline following the news:
Folks, when we see extreme political instability in the Middle East the dollar should be soaring. After all, we are the supposed safe haven of the world. Perhaps the world is no longer seeing it this way as we continue to dig ourselves deeper and deeper into debt thanks to ridiculous spending policies?
The reality here is there is no economic recovery. If there was one than the Fed would not take such an enourmous risk with QE3. They understand that if the bond market blows it's over.
The Bottom Line
I was surprised at the markets reaction today. Egypt falls, inflation soars, the rest of the "governments" in Middle East start to panic and the DOW rises 148. All I can say is LOL. So much for the market hating uncertainty.
I guess the trading robots of Wall St don't have the ability "feel" anything so this rule no longer applies. I can't help but think of the Terminator movies where the young boy tries to explain to the Terminator why killing innocent people is bad and forces Arnold to stop.
The way I see it, Wall St is going to continue and do anything it can to keep the rally going at all costs. It's the only thing they have. The economy is in shambles which makes them even more desperate to stabilize the market.
They realize that they have no chance to get out of this unless people feel wealthier and start spending. This is a fantasy of course because Americans our jobless and saddled with trillions in mortgage debt.
This won't stop the pigmen. In fact, they appear to be willing to risk the dollar in the process of trying to dig out of the massive hole they created for themselves following the crash of 2008.
I think we will see an inflationary crisis before the end of the year. That is of things are status quo. If the events going on overseas begin to spiral out of control it might force the Fed to reign things in as the governments of the world demand tighter fiscal policies from the US.
If the Fed is allowed to continue down their inflationary path then you can expect it to start showing up in lower earnings by Q3 thanks to higher input costs.
IMO, the bull stampede is running out of fumes and I still stick to my early year prediction that the ending of QE in June will be the inflection point that decides where we go next.
Until then, I wouldn't be surprised to see equities rise into the March/April time frame. At this point it will be time to take profits because the big money will sell realizing the Fed's decision in June will potentially wreak havoc in the stock market.
The risk reward ratio for stocks is rapidly declining because the Fed has painted themselves into a corner. If they attempt a QE3 then they risk the currency. If they end QE then they risk higher bond yields as the demand for treasury collapses. This would tank the housing market and the banks.
Good luck with this one Mr. Bernanke. You are going to need it.
Disclosure: No new positions taken at the time of publication.