Investors appear to have a bit between their teeth. Following a good earnings
season, the Dow Jones industrial average is rising (up 13%, in the last three
weeks), with broad support from the S&P 500 (up 12.7%), and from large cap
stocks on the Nasdaq (up 17%).
Apparently, led by the Dow, investors are re-allocating cash to stock markets,
not just in the U.S., but also in most major market centers.
This probably pulled more Republicans and independents out to vote in
yesterday's mid-term election, making a couple of key senate races still too
close to call this morning.
Arguments abound as to whether a "hung" Congress is good for stock markets, but
markets apparently feel that, with reduced government influence, the outlook
will be bullish.
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U.S. long-term Treasuries are also attracting investors. The yield curve is
becoming yet more inverted with the 10-year Treasury currently yielding ten
basis points less than the 2-year Treasury.
All looks fine, except for the outlook for inflation and interest rates.
[Editor's Note: The government is manipulating inflation data.
Read this free report.]
We feel things look better for the election. We note with interest, the Dow can
be influenced relatively easily, and we wonder if today's market roar will be
backed by real economic teeth.
Readers of FIR and MoneyNews will know that we see
inflation looming and an increase in interest rates now that the election is
over.
We also note that key central bankers are now preparing the ground for an
increase in their rates, inspired by their own expectations of inflation.
Yesterday, according to Bloomberg, Bank of Japan Governor Toshihiko Fukui
indicated that policy-makers are preparing to raise (yen) interest rates.
Today, Bloomberg speculated that tomorrow the Reserve Bank of Australia would
raise its overnight cash rate by 0.25%, for the third time this year. At 6.25%,
this will be 1% above the U.S. Fed funds rate; 3% above the E.U.'s Central Bank
rate; and 6% above the yen rate.
In addition, yesterday San Francisco Fed President Janet Yellen, on Bloomberg
reportedly, "Countries may decide to channel less of it [their exchange
reserves] into dollar assets."
[Editor's Note: Clearly home prices across the board are in the midst of
a serious correction, one which our sister publication, Financial
Intelligence Report, told readers about months ago. Both
Sir John Templeton
and Yale professor and real estate expert
Robert Shiller told
FIR readers that they expected the housing market correction to
result in prices plunging up to 40 percent. And, unfortunately, it looks like
their predictions will be on the spot.]
It appears that foreign exchange forces will soon begin renewed downward
pressure on the U.S. dollar. A weak dollar is in itself inflationary. There will
come a time when the U.S. Fed will have to hike U.S. interest rates, in order to
stem inflation.
As we have said for some time, now that the election is over, we expect the Fed
to raise rates soon, most probably at its next Federal Open Market Committe (FOMC)
meeting on Dec. 12.
Meantime, bold investors may continue to make profits in the stock and long-term
bond markets. We feel they should remain cautious and be quick to take profits.
Our conservative readers should not be tempted and should remain in cash and
short-term quality bonds. They should also accumulate gold. Any new equity
investments should be heavily weighted towards overseas equities.
Editor's Notes:
