Inflation Fear

Having just recently conceded that recession is either already here or coming very soon, stock market investors are now persuading themselves that there is already light at the end of the tunnel. The Fed's interest-rate cuts, combined with economic stimulus from Washington, will ensure a soft landing and restore America's corporations to their rightful profitability. It is only a matter of time. So goes the story, at least.

We are reminded of several inconvenient facts. The light at the end of the tunnel is not necessarily benevolent; it may just be an oncoming freight train named "Inflation." Artificially low interest rates - which the Fed is doing its best to create - lead to inflationary pressure. The recent surge in precious metals supports this possibility. As for the governmental "stimulus plan," today the U.S. Senate said "Not so fast" to the agreement the Bush Administration had made with House Democrats. The plan could be bogged down for weeks at the rate it is going. Ironically, this might actually be a good thing for the economy. The federal government can't give money to anyone unless it also takes money from someone else.

It may be that the forthcoming inflation can be contained and a new stock market boom will follow. If so, it is likely to be a different kind of bull market, with a different type of leadership. The ability to rotate between sectors could become critical over the next year.