FEBRUARY 23, 2005

Not to much to say about yesterday, an oversold rally. If oil stays over $50, a definite dead cat bounce. The rally retraced 50% of the selloff in the S&P and promptly turned. Because of the president's holiday we get the oil inventories today, if they don't turn oil lower, look for a down day. As most everything was ralling, Walmart broke $52 a long standing support level. It being a leading indicator of the low end consumer< I think it's sending a message.

South Korea reminded me of a Gilder Radner skit, in that when apprised of what the market would do because of its statement on reserves, it said "never mind". That is one central banker that ought to be canned. Funny though, the dollar did not gain back what it lost even after their retraction, because the cat was out of the bag. This might also get many of the smaller central banks around the world thinking, they might want to get through the dollar diversification door before the big boys start. They used to say higher oil prices were good for the dollar as countries had to scramble and buy more dollars as oil went up. Not true anymore, if George Soros is right and the recipients of those dollars, middle east producers and Russia, are diversifying their reserves.

The bonds stay range bound. Bill Gross said he is convinced yields are 100 basis points too low along the yield curve. As I have enumerated many times, there are a long list of reasons this year and last to have expected yields to rise, and they have not. Huge budget deficits, trade deficits, a weak dollar, fed tightening, higher inflation have not done the job. Central bank buying, pension and mortgage buying, and economic fears have kept yields low. In the ongoing debate between inflationists and deflationists I am starting to favor the deflation scenario. This debate could take pages to do justice to, which I won't do now. To begin though, 70% of business expenses are wages and benefits. It is hard to get ingrained, escalating inflation without wage inflation. Globalization and the indutrialization of China and India with the accomanying labor arbitrage and outsourcing, make wage inflation unlikely. The huge debt to GDP ratio that the U.S. now has is very deflationary, and its effect will be exacerbated in any economic downturn.