When The Facts Are In
The U.S. stock market has been on a run of late. Corporate earning reports are over shadowing poor macro reports. The argument for higher stock prices is simple, the macro data is a lagging indicator, but the corporations are raising future profit forecasts. The end of the recession isn't just near, they say, but the V shaped recovery is in the works!
But when the facts are in, reality is going to bite. First and foremost, nearly every DOW component that has beaten expectations have done so with strong foreign sales. And even though U.S. sales are disappointing, profit margins are improving. How is the second point possible? Easy, they're raising their prices, something you and I would call inflation.
There's little doubt that with the weakening dollar over the last two weeks, the EU's new found austerity and the latest corporate earnings are a harbinger of higher inflation. I can't predict the exact amount, but 3% inflation is a thing of the past and will be missed by many Americans as their incomes will continue to fall well behind prices over the coming years.