What If America Becomes China
America this is your life. Americans received a sneak peak from China this week at what life will be like in 10 years if policy makers continue on the path we are on.
Unrealistic deficits and the destruction of the base currency by the way of increased money supply can, and will, result in inflation over time. Over the past five years the U.S. money supply has increased to record levels. The increase has not corresponded to goods inflation yet since much of the newly printed money stayed in reserves. However many fear that once the economy begins a stable recovery, money will rush into the system and bring massive price increases.
Earlier this week, China reported that in the first 10 days of November the price of a basket of 18 vegetables rose 62.4% year over year. China, as well as other Asian countries, are high growth economies, and as a result attract foreign capital. Since money is being printed at record paces in the U.S., speculative investment has increased in emerging economies. But emerging economies cannot absorb such massive money influxes and it resulted in price increases.
The U.S. is a much larger marketplace, but the scenario is the same. There will come a point in time when our economy cannot absorb excess capital, and when it does happen policy makers must react rapidly to prevent goods inflation.
Indices overseas were decimated this week and U.S. indices have followed suit. After an amazing rally from August, the decline last week showed their are cracks in the ice. At this point, they are only cracks but with a few more negative economic reports the indices could collapse through support levels. While declines are expected, I do not believe a major decline will ensue. Additionally, so long as 1155 holds, I expect new highs this year. Let's not confuse a market top with a needed consolidation after the market rallied 15% without a pull back over the past two months.
We closed one of our many short positions initiated earlier in the month. Shares of LDK Solar were closed at $10.90 for a 20% gain in just one week. We have not closed our remaining short positions, but we increased all stops today. I expect the bulls to emerge again.
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