The rumors are that business is a bit better in the tech sector generally and that recent shortages of parts in Chipland continue to worsen. And nothing gets the animal spirits of Wall Street moving like firmness in the tech sector, with the chip wing especially adept at sending pulses racing.
Not that this should be the case, but it is. As I've pointed out many times over the years, the semiconductor sector is almost always leaning in the wrong direction at a turn -- i.e., building too much capacity when business is about to slow down or occasionally not building enough (as occurred last winter).
What's playing out now is a function of a phenomenon I discussed on my Web site in a column headlined "The economy -- weak, but not at full stop," way back on Jan. 13, 2008:
"Now, as bearish as I've been on the economy, I never thought it would completely stop for a prolonged period of time. Thus, to the extent that it has sort of stopped, the stage is set for an economic bounce." (Although it seemed the economy had gone from 60 mph to zero, in reality the underlying speed was, say, 25 mph.)
Easy comparisons buoy the bulls
Today, we've seen that bounce and then some. I believe the chip sector had seen orders cease and cut back capacity in response. Now, for a variety of reasons -- mostly Cash for Clunkers but also the growth of netbooks and anticipation of the release of Windows 7 -- there are shortages, and lead times are stretching out. Once that happens, you begin to get double and triple ordering, which makes business look awesome in the short run, even if it isn't sustainable. And, of course, that lays the groundwork for problems down the road.Nonetheless, most tech companies and certainly all of the chip companies will make this quarter's financial estimates. (Notice that in the past few weeks there have been zero negative pre-announcements, though there have been a few positive ones.) Management may also wax bullish about the future.
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And when tech stocks are rallying, it's hard for the market to sink unless we're at an inflection point, which I don't think we are just yet.
A trend with the wind at its back
Economy-wise, I believe we're continuing to move in the direction of stagflation, an outcome that would have different investment ramifications than what most people are set up for -- as I think that various markets have stagflation handicapped as a low-probability event.I happen to believe stagflation is the odds-on bet. And if it starts to develop and is recognized as developing, stagflation will have rather large implications for stocks, metals and bonds.
As for the first of that trio, I would not be a bit surprised to see the action become "rangy" as the market begins carving out a rather large trading range, which would frustrate a lot of people.
For those who don't know, the Dow Jones Industrial Average ($INDU) spent about 20 years (from the early 1960s to 1982) trading between 700 and 1,000. Add a zero, and that may be where we are headed.
Gold-denominated developments
Gold, meanwhile, would be the big beneficiary of stagflation. A metals trader at Goldman Sachs recently shared an observation that I hadn't considered, in terms of illuminating the fact that gold is money, not just some barbaric relic (after all, it's been money for several thousand years):"As always, the gold market generates huge emotion and polarity of views, the likes of which I cannot think of for any other product. For those who question its legitimacy as a currency/monetary asset, there are a couple of interesting developments. Market chatter is rising that one of the major futures exchanges will accept gold to be posted as initial margin across all products traded, including FX and fixed income. Also, India, which is the world's largest consumer, is rapidly growing a rupee loan market collateralized by gold."
It's my view that developments such as this, along with central-bank buying to replace central-bank selling, will create more demand for gold -- a situation that would be exacerbated by stagflation.
'No deals; no anything'
As for an example of where the inflation component of stagflation may emanate from, we can look at a recent Bloomberg story headlined "Buying a car gets pricier as GM, Ford cut inventory." According to the story, which cites J.D. Power and Associates, "U.S. automakers' vehicles sold for an average of $2,000 more in the second quarter than a year earlier."
Video: What next for techs?Inventory has been reduced -- due to the clunkers program and smaller production runs -- so there's less pressure on dealers to cut prices. (Incentives have dropped 26% since March.)
To illustrate the story's leadoff -- "Buyers who have been waiting for better deals on new cars may be disappointed" -- the writer relates the experience of teacher Doris McDaniel (of Detroit, no less), who has been frustrated at not being able to find a bargain: "With the way the economy is, I was thinking cars should be much cheaper. . . . After the clunkers thing, I thought the incentives would still be out there. But there's no incentives. No deals. No anything."
More bizarre are the stories that used-car prices also have bounced.
So, in a period where fears of deflation rage and too much capacity exists for so many products, it is possible for government policy and money printing to produce inflation here and there. The only question is, when will we finally evolve to the point where inflation is here, there and everywhere?At the time of publication, Bill Fleckenstein owned gold bullion and gold futures.
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