asset inflation

Option expiration week -- who knows what will happen this week. On the one hand there is big open interest around 1000 -- otherwise known as straddles. That could pull us lower -- not to mention the fact that the market has gone up for several days in a row without any break. 1035 was a fibonacci area and was expected to lead to consolidation -- so far its sort of working in that the futures can't get much past it. That said, besides Cramer what talking head is bullish? I probably don't watch enough CNBC to really say that but it just seems like everywhere you turn you find doubting thomas' about this rally.

I saw an analysis this morning that said the market was discounting 3-3.5% growth for 2010 in GDP and the analyst thought that rate was probably 2x what was likely. Based on ECRI, I would argue the growth for next year is likely to be faster than most expect -- is that faster than 3.5%? don't know because I'm not sure how many people expect that rate of growth.

But while there are fundamental reasons for the rally -- recovery -- there is also a huge driver known as liquidity -- the fed and every other central bank is pumping out money like crazy and it has to go somewhere -- almost every asset class is gaining in value. its called asset inflation and it happens when excess money needs to find a home and goods inflation isn't possible. I would say excess supply is a good reason why we won't see goods inflation at least for awhile.

The central banks pumping in money is leading to risk trades being put on all over the world -- especially financed by carry trades like taking advantage of the zero rates within the US. As long as the Fed keeps short rates near zero, you should assume the 10 year and 30 year won't get too far above where we are now -- too many arbitrageurs will prevent that -- people will borrow short to lend long and that might be stupid longer term but its very profitable as long as it lasts.

The biggest risk now is that the Chinese change the dollar peg because that is the source of greatest imbalance in the market -- the chinese currency is not being allowed to reach its true value and that causes imbalances to build in the market as everyone tries to find a way around the chinese currency's inability to rise. think of it like water trying to get into a basement -- it will search all around for a weak point and won't stop until the pressure is relieved. the pressure in the currency markets can build for years and then explode. I have a quarter of my assets in asian funds that invest in companies seeking local growth -- i.e. not exporters who will get crushed by the chinese currency soaring.

big question will be will my currency gains from being in non-dollar assets offset the losses that might come from asian stocks selling off figuring the export boom is over. who knows.


FLIR -- ugh! stock is up huge in the last week. I forgot that FLIR is a company that does one warning and is done -- they generally give conservative guidance and usually don't have to adjust lower but when they do its usually the end of the problems -- going forward they generally start beating again. looking around in late august this stock was too cheap compared to others -- their secular growth is huge but the gov business held me back because of all the talk of no growth. guessing someone decided it was too cheap compared to other industrials and that with the economy recovering their results would jump too. on the other hand it could be merger rumors too. not sure. I'm hoping for a pull back to increase my stake a bit.

more to come