The Dow is up over 13,000. The Nasdaq broke 3,000. Emerging markets are going gangbusters. But we all know why that is. On balance, it is a massive liquidity pump from the Long Term Repo Operations, aka LTRO and now the LTRO2 facilities in Europe; more greasing of the gears at the Bank of Japan, the Bank of England, and of course the historically low interest rates here at the Federal Reserve. For many investors, you can't argue with the flow. But until this market pulls back, and it will obviously pull back, here are five essential big picture items worth reminding yourself as we start to wrap up the first quarter.
1. Inflation Is Being Hidden
Some form of Fed QE will continue indefinitely as trouble persists to such high degree in the global economy, namely in Europe. I would argue that QE3 is upon us in the U.S. LTRO2 is a form of QE in Europe, no doubt. Gold is telling me still that we are headed for hyper-inflation, as I believe we are now fast approaching the point of no return in reference to the dollar. Note how Kellogg (K) has reduced the sugar content of its cereal boxes by 15 percent and Snickers reduced the size of its candy bars by 11 percent last year. Haagen-Dazs also reduced its contents by 12.5 percent, and Heinz Ketchup (HNZ) has also reduced its content by 11 percent. I mention this because rather than raising prices companies are simply cutting back the size of the product to mask price increases. Nonetheless, this dollar driven inflation we are experiencing grows more intense every day.
2. Don't Give Up On Gold
The idea that gold is an ancient relic is about to be put to the test in 2012. Look for physical gold & silver to become the ultimate bank account for many across the globe. Gold (GLD) is clearly now a much more respected asset class than it was 40 years ago. This could mean the age of fiat currency all over the world is coming to an end. The current precious metals bull market began in 2001. Today it is meeting more skepticism than when it began when gold was trading at $255.00 and silver at $4.00 per ounce. This market still has legs for the precious metals.
3. Developed World Still Levered
The developed economies are still drowning in debt. In my humble opinion, Greece has now entered a depression, and things are about to get a lot worse for the European Union (VGK) over the next two years as they continue to delever. Meanwhile, if Greece does decide to leave the eurozone, then I believe you will see reinvigorated problems with Italy (EWI), Portugal, and Spain (EWP). It won't take long before these countries will have to begin radical monetary reform. With the simple and often overlooked irrefutable fact of how gold has outperformed both the S&P 500 Index and the Dow Jones Industrial Average over the last 11 years, what do you think will form the basis of such reform? It won't be more of the same, I'll tell you that. Could gold figure in the equation?
4. U.S. Incomes Flatlined
Real wages continue to remain flat on balance, as prices continue to rise. We don't just need to see better jobs data from Washington, we need to see better income data. A penny here and a penny there is not enough. In the early 1970's President Richard Nixon imposed wage/price controls as the economy spiraled out of control from the money printing to finance the Vietnam War. The wars in Iraq and Afghanistan have done every bit as much damage to the U.S. economy as the Vietnam War ever did. The difference then was we had a very strong manufacturing base, decent paying jobs, personal savings, and low consumer debt. Those days are gone. The U.S. cannot rely solely on its wealthy citizens to fire up the national economy. It needs a strong middle class, that's feeling like a middle class, not like second class citizens working two jobs, or earning less than they did a couple years back. (SDS)
5. The Oil Factor
Geopolitics and easy money is keeping oil prices high. Prices can drop $5 in a day, or go the other way on some news item as we saw this week with the Saudi pipeline breakdown. Until geopolitics gets out of the way in the case of Iran, and until the Central Banks stop throwing money around, then oil should remain at these levels or higher in the months ahead. If rising oil prices are an early warning of what is ahead, I believe at some point we will witness a repeat of what we saw unfold in 1973-74. In 1973, stocks lost 18 percent and gold went up 75 percent. In 1974, U.S. stocks lost 27 percent, but gold was up 70
Watching the moving averages
The largest gains of this oil bull market are not behind us. We've got some ways to go yet, technically. The current 200 day moving average of price is at the $94.62 level, and the 50 day moving average of prices is in the $100.51 area.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.