Saturday, March 17, 2012

Inflation worries resurface as stocks rise into Jupiter alignment

Inflation seems to be back on the radar. Despite a generally upbeat economic assessment by Fed Chair Ben Bernanke on Tuesday, he did note that inflation and rising fuel prices are becoming more of a concern. It's interesting that such an official recognition of the inflation problem should come in the same week that Jupiter formed a strong alignment with Mars and Pluto. Jupiter is all about optimism and expansion, which are the foundation for inflation. A little inflation is good and reflects faith in the future. But when inflation becomes excessive and threatens sustainable economic growth, the optimism quickly turns to pessimism. We may have had a glimpse of the transition from good inflation to bad inflation just as Jupiter's influence has apparently peaked with that rare grand trine aspect.

Of course as most people know, inflation has been a problem for several years now ever since the Fed reduced interest rates to zero and began its quantitative easing policy. In an effort to prevent a deflationary spiral and a deeper recession, Mr Bernanke and his enablers at the White House decided to avoid the short term pain and delay the inevitable de-leveraging of assets. The resulting pumping up of the monetary system created significant inflationary effects all around the world, most clearly seen in price of commodities like food, gold and oil. "Official" inflation (as opposed to the real kind) has remained low enough over the past three years since QE1 was launched that it could be regarded as fairly benign. Those days may be coming to an end as recent central bank money printing efforts have helped to push up oil and food prices to ever higher levels. Now even Bernanke cannot ignore the effects of his pump priming efforts as crude oil remains stubbornly above $100 with US gasoline prices now pushing towards the politically damaging $5 a gallon threshold.

The problem for the Fed is that they can't have it both ways. You can't have inflation and a sustainable recovery. Rising oil and food prices will push up treasury yields and this will cut off the recovery in its tracks as borrowing will slow. The recovery is largely artificially induced by the Fed's free money policy but this is now creating inflation. Interest rates on US treasuries have already started to rise in the past two weeks as the inflation risk is now being factored in by bond buyers. Bernanke cannot afford to have interest rates rise in this way since it will reduce spending and further weaken the already fragile housing market. Therefore, he is likely keeping a close eye on those bond yields. If interest rates on bonds rise enough they will become more attractive investments and put pressure on stocks as investors take money out of the stock market and stick it into bonds.

Markets generally rose in the first half of the week during the time of the closest Jupiter aspects. The Dow punched above the 13K level eclipsing its 2011 high and finished at 13,232. Indian stocks were more sensitive to the inflation bugaboo as prices crested on Wednesday and then fell after the absence of any RBI rate cut and Friday's underwhelming Union Budget. The Sensex actually slipped a bit closing at 17,466. Interestingly, Tuesday's strong gain coincided almost exactly with the Venus-Jupiter conjunction. This was in keeping with expectations as both planets are considered natural benefics that can generate optimism and confidence in the future.

This week could be an interesting test of the post-Jupiter alignment energy. Usually markets fall in the wake of such Jupiter alignments, so it would not be surprising if the market had a bearish bias here. The short term aspects are more mixed, however. There is a disruptive and bearish-looking Mars-Rahu (North Node) square aspect through much of the week that could create some problems. This is especially close in the beginning of the week. However, there is a potentially offsetting Sun-Mercury-Uranus conjunction this week also that may be able to keep some prices aloft. This is arguably going to be stronger in its effects after midweek. The Sun approaches its conjunction with Uranus on Friday so that may boost risk taking towards the end of the week.