Daily Investment Interpretations

August 23, 2010

2010-8-23:   The NASDAQ Composite, down 20.13 points (0.92%) to finish at 2,159.63, took quite a hit. The Dow dwindled 39.21 points (-0.38%) to close  at 10,174.41, and the S&P 500 declined 4.33 points (-0.4%) to end at 1,067.36. Oil closed at $72.82 a barrel, while Gold moved down to $1,227. The VIX rose slightly to 25.66.
    I said last night that I would discuss the article, Inflation, not deflation, Mr. Bernanke, this morning. This morning had other plans for me, but here's what I was planning to say. (Once again, it's 11 p. m. and I haven't had time to write more than this.)
    The article's author, Andy Xie, explains that enough of the 2009 Western stimulus money played through to emerging market economies to stimulate them mightily. For example, U. S. consumers, looking for ways to cut expenses, bought more goods from East Asia, and "U. S." global corporations, looking for ways to boost productivity, outsourced more jobs to East Asia. As a result, emerging market countries are grappling with inflation, while developed countries are girding for possible deflation. Mr. Xie says that 10-year U. S. Treasuries are at 2.8% (??? This article is date-lined August 22, when 10-year Treasuries were yielding 2.62%. However, 10-year Treasuries would have yielded 2.8% ten days ago.) "Oil has climbed above $80 per barrel again. Copper is back above $7,000 per ton, closing in on the pre-crisis peak." (Oil closed tonight at $72.82 a barrel.)
Point is: The Western stimulus money didn't much stimulate the West as was intended. Instead, it was spent in emerging nations, where it supercharged some emerging market economies, leading to future financial bubbles. Some of these nations are already experiencing 5% inflation rates, and are raising interest rates to cool their economies. (Historically, in the U. S., there's been a two-year lag between the raising of interest rates and the inflation peak. By that time, inflation rates could reach 8%-9%.) Andy Xie argues that this overheating of emerging nations' economies will lead to inflation in the West, imported from the emerging nations. And as for the West, he says, "The temporary deflation due to suppliers cutting costs at the expense of profit margins will not last."  
    I'll have to try again tomorrow to find time to finish this material.