Grinding Higher

The economy continues to expand, and as winter gives way to spring, it seems that unless there is some shock, employment and growth will continue, albeit at a modest pace and with some headwinds in the form of high prices...


Until there is some confirmation of that the expansion has stalled - or  some external shock, it appears that the equities markets seem destined to move higher, although from a valuation perspective they are quite high already and with the run from Q3 2010 would seem to be prime for a correction.


With high food prices, the probabilities for external shocks in the form of unrest in significant exporting countries, appears to be higher than it was in the recent past - indeed Libyan protests, Bahrain, etc. and now even Madison Wisconson!


So, now is the time to be modestly long, with a sharp eye on the door....


At some point the Fed will have to stop the money printing and at some point the general public will realize that purchasing power has declined and that perhaps this modest growth was not enough to offset rising real costs (have to wait for the data to see if this is the case)...


Longs:
Gold
CAD
CHF
SEK
Cheap Tech Stocks


Shorts:
JPY
GBP
AUD
Expensive Tech Stock


Some further comments:


Two points worth mentioning in the AG Capita monthly letter, posted on the Business Insider (you rarely see the effects of inflation being related to taxes):
AG Capita Monthly Letter at the Business Insider


"For politicians, printing money is desirable for two reasons.  Firstly, it acts as an unseen tax.  One which few voters understand and for which even fewer are likely to blame the political class, at least in the beginning. Secondly, by reducing the value of the currency, the measuring stick I mentioned above, politicians are able to fool many of the voters that their wealth has increased, but of course no such thing has happened."

Funny but true commentary from Caroline Baum:

Referring to the Fed:
"It’s this kind of stuff that makes former first lady Nancy Reagan’s reliance on astrology look sound."
Fat Lady Wanted as Guide to Fed Rate Setters (Caroline Baum - Bloomberg)

Has the Yen Finally Cracked?

At some point, the perception of the Japanese yen as a safe haven will be tested - and perhaps this test is starting now.  A move lower in the yen is implied in the chart below; it has been a long time coming.


With commodity prices at all time highs, interest rates worldwide on a higher path, and a seemingly paralyzed sitting government, Japan faces the unpleasant prospect of lower growth combined with higher debt financing costs should interest rates increase....  


As long as China booms, Japan will do well, however, a strong currency and high commodity import prices definitely hurts profits and growth.  Better to allocate to countries less reliant on imports....