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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, September 29, 2009

Inflation Potential

My inflation pressure gauge rose at a good clip over the first half
of this year on the strength of a rally in the commodities market.
In tune, the CPI, not seasonally adjusted, increased by 2.7% for the
year through Aug. However, the pressure gauge has flattened out
in recent months as the rally in commodities has stalled. In fact,
the uptrend in the commodities market for ' 09 is being tested
presently (chart).

There could well be several reasons for the stall out in the upturn
in commodities. The obvious one is that with a global economic
recovery just starting from low levels, supplies are ample. But I
suspect players are also being influenced by the CFTC inquiry into
the trading structure of these markets as well as the recent weak-
ness of China's stock market and concerns about how strongly its
credit driven business recovery may proceed.

The quick moderation of inflation thrust has helped the bond
market in recent months, and it may also account for the more
stable US dollar seen in the last couple of weeks. Normally, the
prospect of a moderation of inflation pressure as economic
recovery commences would be cheered by stock players, and
we have seen that, although there could be some backlash
potential if players begin to worry again about deflation. that is
why some traders are concerned that a rising dollar would be
bad for stocks in that it would signify a flight to quality in
anticipation of a failed economic recovery. Fancy stuff, but
interesting nonetheless.

When inflation is commodities - driven as it has been so far in
this decade, you have to be prepared for volatility, and this
means keeping a careful eye on the the commodities composites.

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