There continues to be a big gap between headline inflation and core inflation. Of course, core inflation is the only number that is actively touted. So, all of this talk about inflation being in check is nothing more than a mirage.
When we look at headline inflation however, we continue to see similarities to the 1970's.
High energy prices eventually influence economic activity negatively. But like most interest rate increases, the full effect is not usually felt until months after the rate hike. I think you'll see a similar reaction as energy prices remain high. Since core inflation does not include important components like food and energy, core inflation does not correspond well with reality.
Here is an article from the New York Times; read the comments by Steven Roach from Morgan Stanley.
In the 1970's, gold rose to $800/ ounce, Syria and Egypt attacked Israel, and Arab Oil exporters imposed an oil embargo that reduced supply and drastically increased the price of oil.
Today, gold has more than doubled from a few years ago, there is war in the Middle East, and there are rumblings of an attack by Israel on Iran. The supply of oil has been reduced by worldwide demand, and the prices of energy and commodities are fluctuating like internet stocks.
I don't know how all of this is going to shake out, but I am betting that the cyclical bull market that we are currently experiencing will end abruptly in the weeks ahead.
Today, commodity prices continued to rise, and silver hit another all-time high. Crude oil and gasoline jumped again, and the Wall Street mirage machine drove the stock market higher.
Like the mania that occurred on the NASDAQ in early 2000, investors woke up to a March bloodbath that lasted for more than 2 years.
The market seems determined to hit the upper end of the technical targets we spoke about in past journal posts.
Once again, here is Peter Lee's technical outlook for the markets for first half of 2006:
DOW 12,000
S&P 1350
NASDAQ 2500-2600
