June 25, 2010 One or Two Scoops?

 

In the monopoly game of currencies, it is either “trust” or “make believe.” China loudly restated the rules this week for all to hear by “agreeing” to float their currency. China owns Boardwalk, Park Place, the railroads and, lest we forget, they are our banker.

 

Chairman Bernanke maintains his growth forecast and standing watch for resurging inflation. Meanwhile, official US economic growth has been revised downward again. This week’s updated sales from Bed, Bath & Beyond, Best Buy, FedEx and Toll Brothers were not good. This is more confirmation that the decline in discretionary consumer sales reported at www.consumerindexes.com is real. The stocks of these four companies have declined below what we look at for justification to keep in any portfolio.

 

Market sectors that indicate growth, industrials, consumer discretionary and financials have ended the week continuing downtrends. Traditional stimulus for this environment is lower rates. It is difficult to lower from 0.25%. The Fed has no ammunition.

 

Interest rates for the 2-year Treasury are at historic lows. Today’s Bloomberg.com reports the 5-year Inflation Indexed Treasury yielding 0.23% and the 10-year yielding 1.15%. That is not inflationary, and it is certainly not very growth like.Markets seem to disagree with the Chairman.

 

New home sales collapsed in May to record lows. California’s home buyer credit is another futile attempt to create buyers where none naturally exist. Demographic demand cannot be created. Government can accelerate activity with bribes – tax credits. The large shadow inventory of mortgage defaults and pending foreclosures will increase supply in coming months driving prices even lower. This is not a positive for home builders and ancillary industries or the general economy.

 

In general, analysts, politicians and the population at large cannot yet accept lower home prices. When denial passes, the double dip recession will be easier to grasp.

 

This is deflationary. Adapt.