Michael Shulman

Thursday Outlook: Commodities, Emerging Markets

You can draw all the charts you want -- markets regress to the mean, over time, based on fundamentals. Always. S+P earnings this year will be between $35-$50, the high end of the range and giving the current market a multiple of 16 plus. Multiples in non growth markets are closer to ten, in steep recessions below that number. Just do your third grade math -- and forget the noise about the S+P dividend yield being above T Bill yield as a mitigating factor. These dividends are coming down and the real comparison is corporate yields -- and the dividend yield right now is less than half the yield of corporate bonds.

Why Oil and Gold Are Headed Much Higher

The predicate of this argument is that the current reflating of the banks and financial markets is going to increase the money and lead to serious inflation and therefore debasement of the dollar. At present we are in a terrible liquidity trap and the Fed and Treasury are fighting tooth and nail to increase the money supply which they are not doing with any real success to date. The assumption is that once crdit markets calm down the money currently "trapped' will be free and rampage through the system.

That assumption is not credible on its face. At least one trillion more dollars need to be injected into the world financial system to replace lost capital. Another $5-$10 trillion in credit is being permanently withdrawn from world credit markets as de-leveraging continues -- and will do so for the foreseeable future. This absorption of liquidity to replace lost capital and the reduction in leverage will reduce the velocity of money to the point the current and potential future injections by the Fed and Treasury will not be inflationary.

Also, once the credit markets stabilize, all interest rates on T bills, short and long term, will rise, possibly dramatically, strengthening the dollar.

Bottom line: you can print as much money as you want and if it does not circulate, there is no inflationary impact and no impact on the dollar. And the capital injected into markets to date and the next trillion will simply replace lost capital and not go into circulation.