As the story goes according to the Fed, inflation is under control, productivity is improving, not withstanding Friday’s minor blip, there have been no major setbacks for the US market since March 9th, the dollar’s decline is orderly, home prices are generally on the mend and unemployment is high across the country but initial jobless claims appear to be less than toxic.  Even better, there appears to be unlimited demand for US government debt at the lowest yields on record.  


This appears to be the recipe for keeping the market rocketing ahead. 


As Keith said in today’s Early Look – “Remember, when it comes to keeping rates unreasonably low for an unsustainable amount of time, ‘to go beyond is as wrong as to fall short.’ It’s time for He Who Sees No Bubbles to pull up a price chart of gold, the Yen, or short term US Treasuries this morning and wake up.”


With the market making higher highs, I ask myself, is it me or does the market need to reset the most basic relationship between inflation and the structural/secular trends imbedded in today’s prices or does the “new normal” make the old theories and old relationships meaningless in today’s environment?


One thing that has not changed during the recent “boom-to bust” market cycle is that demand elasticity is incredibly high, even for non-discretionary items, such as gasoline and food, and prices for both are rising—that is inflationary!


One rule that will not change is that the burning buck is inflationary.  Look no further than two non-discretionary items – gas and food. 


The consumer is not dumb! 


Howard W. Penney

Managing Director




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