PPI-CPI: I'm Even More Bearish Now

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Includes: DIA, QQQ, SPY
by: Stock Traders Daily

I know it is hard to believe, but I am becoming even more bearish than I was before. This has nothing to do with Greenspan's comments by the way. I never pay attention to other Economists or analysts because they distort my way of thinking, and I pride myself at being independent and that allows me to think outside of the box.

Everyone knows that I am out in front of the curve in every respect, and this is a good example. I warned you 2 reports ago that the PPI prices would begin to increase quite aggressively, bringing inflationary pressures to the surface on a producer level. I also warned that the ability to pass those prices along to the consumer in the wake of the liquidity concerns was probably going to be hard to do. We'll find out just how hard on Friday.

However, I expect there to be little change from the consensus estimates for the CPI on Friday.

This creates one of the most bearish scenarios that I could imagine. I reserved the aggressive nature of these comments for after-the-process had begun, and now that it seems to have begun I will illustrate this scenario in greater detail:

The Fed is caught between two double-edged swords. They can't do anything to stop what's coming though, and the landscape is becoming very clear. Inflation is real, and inflation is rising on all levels. It will soon eat into corporate profits, corporate margins are going to diminish because they will not be able to pass higher costs along to the consumer. This is a horrible scenario for the prospects of corporate earnings going forward; if the Market is truly earnings driven, the scenario is equally as bad for the market too. If producers are able to pass along the added prices to consumers, at least margins will remain in tact in the face of a weakening economy.

However, if they are not, not only will their net growth rates decline as consumers step away from non-staples in this weakening economy, but they will not make nearly as much money from the sales they make to consumers in the United States because they will not be able to pass on the higher costs they are faced with.

A weakening Economy, higher levels of producer inflation driven by food and energy costs, no pricing power, lower margins, and a fed that can't do anything about it. I don't know if the landscape could be more obvious, or more revealing.

The Investment Rate told us this landscape was coming a long while ago. Again, I was ahead of the curve there, and my mission is to remain independent and ahead of the curve to serve you always going forward.

Most people don't see the forest for the trees, but I hope I am able to shed light on this subject.