fog lifting a bit

The market recovered 150 points today. However, there were more signs that the clock is ticking on liquidity. For one thing, the trade deficit was down 6.8%. Imports of cars, and clothing led a 1.9% monthly decline. Deficit with OPEC was down, but China's was up. Another sign of a weakening economy is that consumer confidence came in at a 10 month low.

A bad economy is good for stocks. Inflation is good for stocks. A falling dollar is good for stocks. We have all three right now. For the time being, the market will continue to do well.

The reason that the market is so confused is the size of the conflict in the global picture. Will rates go up or down? On the up side, we have global growth. Growth is feeding global inflation. Inflation is causing foreign central banks (FCB's) to raise rates and break dollar pegs. This causes a declining dollar and causes inflation here in the US.

On the other hand, the US is the focal point of the world economy, and our economy is a stone's throw from recession. Housing has not gotten better, despite a dozen predictions of a recovery. Instead it's gotten worse. For the past three months now, we've had weakening consumer sentiment and poor retail numbers. Rates will fall, but the question is when.

In the meantime, the market should be ecstatic when sentiment swings back in favor of rate cuts. That is, until they realize that the rate cuts are coming too late (they usually are). This last part is pretty much pure conjecture. I'm just assuming that market sentiment will stay the same. "Rates are coming down! Let's buy!" instead of "Uh, oh. Things must be really bad if they're going to lower rates."

There are many perils along the way as we approach the turning point from credit expansion to the coming credit contraction.