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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 !!!

Wednesday, April 07, 2010

Thinking Ahead

A surge in the growth of monetary liquidity by the Fed as 2008
wound down set the stage for economic and stock market recovery.
The Fed sat on monetary liquidity for over 10 years prior to the
Great Depression. This time, it sat on monetary liquidity for 4 years
(2004 - 2008) and that ushered in the Great Recession or near
depression. But, now we are in a new and large liquidity expansion

Historically, one of the early and major beneficiaries of a sharp,
positive turn in liquidity growth is corporate profits. As we now
see, profits and cash flows for business are surging, so much so,
that private sector credit demand has been slack as financing
needs are met internally.

Now, eventually, as the economy recovers, private credit demand
will grow again and, as tax receipts rise, public sector credit demand
will subside. But, the pressure to contain public sector spending will
not subside and public debt issuance will be further crimped.

However, even as credit needs come into better balance, there will
emerge another consequence of strong liquidity growth, and that
final element in the liquidity cycle is inflation.

There is "action" in the commodities pits, but it would be unusual
to see an acceleration of inflation beyond the volatile fuels and
other commodities components until 2011, when the economy is
further along and more resources are at work. Then, I think, we
could see pricing pressures exert more influence upon interest rates
and the market's p/e ratio, thus leaving the capital markets with
the next major challenges.

So, as you go forward with your investing and/or trading programs,
you will need to monitor not only how well the economy is holding
a recovery path, but emerging inflation potential as well.

Inflation almost invariably begins in the commodites pits with fuels
a primary culprit. In fact, like profits and the stock market, the
broad commodities composites are also often early beneficiaries of
a positive turn to the liquidity cycle. As rising commodities prices are
absorbed into the economy as costs, the groundwork for a broader
spread of rising prices is set.

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