Reflation Rally Stalls: The Key Now Is Second Quarter Guidance

The twin engines of monetary and fiscal stimulus are stalling, and so is the reflation rally they created. Since March, stocks, commodities, and gold all benefited from a liquidity boom, but the long-awaited pullback is at hand.

How long will it last? Second-quarter guidance is now the key, especially sales guidance, since investors won't reward firms that hit the numbers with cost-cutting or other forms of inorganic growth. Sales guidance will tell me if monetary and fiscal stimulus is creating a reflation rally with some legs. Otherwise, the forces of private deleveraging and unemployment will carry the day. Right now, I am betting companies will meet earnings expectations, but will offer disappointing guidance.

Reflation Rally Stalls

$787 billion isn't what it used to be. In yesterday's Wall Street Journal, Ed Lazear opined that the stimulus plan was a flawed concept. That's the same reason I believe inflation relief won't last: Fiscal stimulus introduces structural deficits that will be virtually impossible to unwind after the recession (a nod here to Donald Marron for the same observation). Also, the WSJ reported that states are using the stimulus payments to close budget gaps. No stimulus there.

Not only is fiscal stimulus stalling, but monetary policy is getting overwhelmed by sluggish bank lending and private deleveraging. I am positioned for a short-fall in second-quarter guidance, which would hurt stocks and oil prices, and cause inflation concerns to temporarily recede. This pullback should provide an opportunity to add to stocks, TIPS, and USO (I sold USO in June, and I am waiting for oil to bottom out at $45-$55 this summer.)

Disclosure: Long GLD, IVV, TIP.

Comments

[cyclingscholar:]

Well, perhaps if we get some REPUBLICANS, instead of R.I.N.O.s in the 2010 and 2012 elections to point out that the [democrat] stimulus record is 0-3; it didn't stop the first depression; didn't stop the 2nd after 1937; and now hasn't stopped the 3rd in 2009.

Nah...gimme John McCain and my barf bag.

Jul 10 03:27 PM

[Michael Clark:]

REPUBLICANS? D.I.N.O.s?
Sorry, the Greed Era's over. Easy Money destroyed our economy and turned us in to a race of credit-slaves. These problems are not Obama's creation. His solution won't work. But more bubbles won't work either. And that's the only philosophy the Republicans know.


On Jul 10 03:27 PM cyclingscholar wrote:

> Well, perhaps if we get some REPUBLICANS, instead of R.I.N.O.s in
> the 2010 and 2012 elections to point out that the [democrat] stimulus
> record is 0-3; it didn't stop the first depression; didn't stop the
> 2nd after 1937; and now hasn't stopped the 3rd in 2009.
>
> Nah...gimme John McCain and my barf bag.

Jul 11 03:40 AM