Economist and CNBC commentator Larry Kudlow published a column reversing his thinking that the economy was not in recovery mode but merely marking time. Based on recent employment and retail sales numbers, he now believes corporate earnings will be strong and push the market higher. I am not convinced. He is the guy on TV, I am the unknown blogger, but I think the numbers are misleading. Earnings have been good, but those results are based more on cost cutting rather than revenue growth. Bull markets are born of optimism, loose money and low interest rates. We have had loose money and low rates. We have had a tremendous rally off the lows. It is time to take profits or raise stops to protect profits. World debt levels are worrisome, government spending is going to force tax increases. Interest rates must rise to sell bonds. This is not a bullish environment. Investor beware.

The problem may well be one of definition. Since technical definitions have been watered down over time by commentators who overuse them,  there is some doubt about what they all mean.

So herewith a fast review. Inflation is defined by monetarists as too much money chasing too few goods prompting producers to raise prices to recover their costs. Deflation conversly is too little money chasing too many goods, driving producers to cut pricing to move goods. Think Wal-Mart’s price roll back marketing campaign. Hyperinflation is a rapid loss of confidence in the currency driving citizens to dump it as fast as they get it.

There are other terms bandied about such as Stagflation which is inflation coupled with a weak economy. Think back to the late 70′s for a case in point. Disinflation is a contortion that fits many meanings but may be viewed as deflation light, or a gentle unwinding of inflation.

Currently, a hot topic in the news is deflation is causing a double dip recession. Deflation in this context is used as a symptom of a weak economy, that the Fed or the government at large needs to do something about, rather than the disease. Forgetting for now the philosophical question of what role government can and should play in the economy, lets look at the reality.

What can the Federal Reserve do to fight this declining economy? The tool of choice is Quantitative Easing which means the Fed is using its magic checkbook (creating money) to buy treasury paper, treasury guaranteed mortgages, or other sovereign debt instruments. When the Fed does this they put huge sums of money into the hands of money center banks and broker dealers. These proceeds are counted in the monetary base, hence money.

Inflation comes when this money is put into the system and used (multiplied) by banks or spent by consumers or corporations. The speed with which this money is spent (changes hands) is called Velocity of  Money. The faster the money changes hands the higher the risk of inflation. Too much money chasing too few goods. If the money does not change hands, if it stays with the banks/broker dealers (in many cases the same folks these days) there is no velocity of money, and no inflation.

That is the case today. Money is not changing hands. Banks are content to take a small return from the Fed on their reserves (free income) rather than lend. Big business is in many cases flush with cash that they are not spending. Hence discussions in the financial press about dividends, stock buybacks, etc. Consumers are not spending because a) they can’t, b) they don’t want to.

So our economy which is driven by consumer spending is stuck in neutral. Inflation is not a problem because no money is chasing ‘goods’. Deflation is a problem because producers can’t sell their goods, so they cut prices hoping to draw sales so they can make more goods and maybe hire workers.

So the Keynesian stimulus tool with the trillions of dollars in debt creation and dollars flooding the banking system does no good. There is no ‘stimulus’. Putting more money in the system via more quantitive easing does not change the dynamic, rather illustrates the definition of insanity. If you are the Fed and your only tool is a hammer, all problems look like a nail.

What about hyperinflation? That is not yet a problem as investors around the world still have some confidence in the dollar. This is due in some immeasurable way to the lack of an alternative. Eurodollars? Can you say Greece? Gold? There is not enough of the stuff to be a medium of exchange at current price levels, AND it does not pay interest.

Until the world wakes up one morning and decides the dollar is going to zero, hyperinflation is not a threat. In the meantime, keep an eye on the price of dollars in the currency of your choice.

Today’s close over 83 raises the possibility of a more extensive rally. Reports of economic distress in Greece raise questions about the Euro and the viability of the Greek rescue by the European governments and central banks. This Greek fire could cause another flight to the Dollar, which changes the dynamics. The weekly Dollar chart shows no worries for now as to the longer term Dollar trend. So let us await developments over the weekend and early next week.

Perry et al v. Schwarzenegger et al, sought an injunction against implementation of Proposition 8 under federal law, including alleged violations of the Due Process Clause of the 5th Amendment to the U.S. Constitution and the Equal Protection Clause of the 14th Amendment. Judge Walker’s conclusion is that Proposition 8 fails to advance any rational basis in singling out gay men and lesbians for denial of a marriage license, hence a violation of the US Constitution.

On the legal level, Judge Walker turns facts upside down with a view that the state failed to justify discrimination against gays, and assumed the state had no interest in said discrimination therefore the proposition fails the Constitutional test. The judge confuses regulation with discrimination.

Sovereign states may pass law, and regulate their societies as they see fit within the confines of their social contract as set forth in the state constitution. If the state wishes to regulate marriage on the basis of thousands of years of custom and tradition it is within their purview to do so. The common law of England and the legal tradition in America is based on custom and tradition.

If the state wishes to regulate medical doctors, police officers, or teachers in a certain way it may do so. The fact that these regulations may work against the wishes of a political interest group is unfortunate, but inevitable. The same holds true for marriage. The state has a right to regulate marriage. Citizens of the state have a right to pass law through initiative at the ballot box.

We have laws against sodomy which is viewed as a sin by Christians and Muslims alike. Homosexuality is viewed as a sin by Christians and Muslims. The federal courts are telling the sovereign state of California and it’s people they are unable to regulate their societies based on moral conviction and tradition because at some point there may be discrimination. This is a legal absurdity.

Perhaps legal scholars have pushed to far by including sexual orientation as a legally protected behavior?

On a social level, we have a judge overruling the wishes of the people as reflected by the passage of Proposition 8 in a legal and legitimate manner.  A proposition that passed muster of the California Supreme Court. One judge cannot arbitrarily over rule the will of the people. This sort of elitism leads to disrespect for the law, and takes California and the nation down a path to ungovernability where every law opposed by a special interest group must be adjudicated up to the Supreme Court.

The founders created the judicial branch to guard against abuses of power and law by the executive. To arbitrarily overturn law passed by the people, in whom the federal constitution vests all power, is a capricious abuse of power and must not stand.

The Dollar has since dropped into my target range of 82.50 so it is probably time to take profits and enjoy your week while waiting for the next opportunity to arrive.

The list you see below is not warranted to be complete or accurate to the last dime. Anyone wishing to be fully informed should make their own inquiries. This list does say a great deal about Obama, his ideology and intentions. Whether you wish to call him incompetant, a socialist, or pick your label, these folks are marching to his command and he cannot disown them unless you let him.

Read on, and remember in November.

These are three words that summarize as succinctly and elegantly as can be done the central glory and tenents of America. God from whom the blessing of inalienable rights of life, liberty, and the pursuit of happiness flow. Bless, the bestowing of the Lord’s favor and America the land of the free and the home of the brave.

We live in grave and perilous times. By focusing on me, myself, and I and allowing ourselves to be finessed by leaders whose self interest is attained at the cost of our own we have empowered collectivists who honestly believe they know better than mere mortals, or our immortal founding fathers what is good for us.

We are at a crossroads. We can continue down the road to collectivism, where the will of the many as interpreted by corrupt, self serving politicians, or we can recapture the America of our forefathers. We can show Ben Franklin that we have a republic and we are are going to keep it.

I am not one of those skeptics, or fatalists, that believe the best days of America are behind us. I believe Americans will retake their country not by force of Arms as Jefferson said might be needed, but by the ballot box. Come November America will speak. Come 2012 America will speak again.

We are not all on the same page. We Americans will disagree about this and that. What we do agree on is America the land of the free and the home of the brave where all have the opportunity to pursue their dreams, hold property, speak their minds, and protect their lives with arms where needed.

Happy Independence Day, and

GOD BLESS AMERICA

Nothing has changed as to the fundamentals of the Dollar. Debt increases into the misty future, world diversification out of the greenback into heaven knows what. The emergence (again) of the BRIC block.

As you can see from the chart, the orchestrated defense of the Euro by the central banks and the US Fed is working. The Euro is having a nice bounce, and the Dollar is headed lower. The brave can short with a target of 82 to 81 with a stop close above 86. Should another Greek, Portuguese, Spanish, English drama hit, close out fast for the Dollar will be a big beneficiary.

The old saying Jack be Nimble, Jack be Quick applies. But then profits go to the bold.

If most investors believe the economy is growing, then stocks should do well because the companies are doing well. If most participants feel the economy is doing poorly, their positions will reflect that view. through it all there will be stocks that run against the main market trend based on their own fundamentals.

The great bull market of 1982 – 2007 ended with the banking crisis of 2008. We are now in a cyclical bear market. One that will take years to unfold and is not measured in one day breaks like yesterday or 1987. From the March 2008 low of 6500 on the DJIA to the rally peak of 11000 the market retraced about 75% of the break. Right on the Fibonacci retracement numbers.

However the rally masked a weak underlying economy Wall Street pundits withstanding. Unemployment is horrible and not getting much better. Housing prices which backstop American’s consumer spending rare week with minimal regional improvement driven by tax subsidies and easy money. Companies have been showing better earnings by bottom line cost cutting rather than top line growth.

The debt situation, both government and consumer is horrible with no signs of improvement. Americans are borrowed out, as are state and local governments. Greece, Spain, Italy, Portugal, and others are borrowed out. Our federal government is spending money, in deference to drunken sailors, like there is no tomorrow. Markets see all of this. They build fundamentals into price.

Prices are in the process of adjusting to the new fundamentals. The market is looking through managed news and looking at reality. The reality is not pretty and the adjustment is not over.

Bear moves can happen with great speed as we saw in 2008 and again yesterday. Stocks are pricing the
fundamentals. This is what free markets do. More regulation will not solve the problem of volatility which will be
with us. As long as there are markets.

Absent major philosophical changes in government both elected and administrative branches of government the future is at best a question mark.

There is a solution. This is the American Solution. Let the people go. Let business do business. Cut taxes, cut regulation, cut spending. Like the flu, things get worse before they get better. When we go back to basic American economics the market will turn overnight. Absent that, it will be a long year.