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Stagflating?

02/25/2011

Remember the late 1970’s days of stagflation, when the economy was stagnant at the same time prices were inflating. (By the way, under Keynesian economics, this should not happen.)

Today’s news that growth in the fourth quarter was less than expected, while inflation was higher than expected. As I’ve said repeatedly, this will be a long, slow recovery, because we are de-leveraging. Recoveries from financial crisis are different than recoveries from normal recessions. And, as I’ve said repeatedly, you cannot have this level of deficit spending, plus increases in money supply, without creating inflation. I still think we face stagflation in the short term, before becoming inflation in the long term.

You would expect the combination of this, plus the potential for oil supply disruption in the Middle East, would have a big impact on the market. While the stock market has declined 2.4% since the beginning of the current Middle East crisis, it is still up 2.6% so far this year, and futures indicate the market will open up strongly again this morning.

If the market is up, what could be wrong? The answer is . . . a lot could be wrong.

If the volume of trading was heavy, I would be more inclined to believe that the market is right, that everything is okay. Well, the trading is not heavy, and I’m not inclined to believe that!

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