Bill Bonner is one of my favorite columnists. On Friday he was discussing The Last Bear.

As they say on Wall Street, a rally ends when the last bear gives up. An old friend had been a source of inspiration for tech bears for many years. He suddenly saw the light and gave up in 1999. Shares he had formerly scorned – often dotcoms with no revenue and no business plans – were suddenly added to his own portfolio. This also heralded a big change – the end of the tech bubble. Tech stocks collapsed. Most disappeared. Then, Stephen Roach became vaguely bullish in 2007, after a long period of doubt and misgivings.

Now it is Jim Grant who has changed his mind. A generation of investors has gotten used to Grant’s ‘doom is nigh’ warnings. Now, he says, it’s a boom that is nigh.

What is remarkable about the Grant conversion is that his vision gives off so little heat and light. His WSJ article shillyshallies around; rehearses the history of previous recessions and comes to rest in front of a flickering match: “The deeper the slump, the zippier the recovery.”

But facts are survivors. They will tell whatever tale their interrogators want to hear. As for opinions, after six months of a stock market rally, the once half empty glass has become half full. We predicted it ourselves. But we’ll let Robert Prechter say, ‘I told you so.’ Even before the rally began, Prechter foretold its story:

“Regardless of extent, it should generate feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the fed will appear to have saved the banking system and investors will be convinced that the bear market is behind us.”

As to Mr. Obama’s popularity, Prechter was wrong. But 4 out of 5 ain’t bad.

What will happen next, we don’t know. But if we turn bullish on this economy and urge you to buy stocks, it will surely be time to sell them.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

From Deflation to Inflation

With the above in mind I note with interest Martin Weiss, a prominent deflationist has changed his stance. Please consider From Deflation to Inflation.

Step by step, with little fanfare and great complacency, we are witnessing a fundamental, global shift that’s rapidly transforming the investment scene:

The forces of deflation are temporarily receding; and in the meantime, the forces of inflation threaten to roar back with a vengeance.

They are everywhere. They could be overwhelming. They must NOT be ignored …

Inflationary Forces

Weiss lists four Inflationary Forces

  • Inflationary Force #1: Never-Ending, Out-of-Control U.S. Federal Deficits
  • Inflationary Force #2: New Lows in the U.S. Dollar
  • Inflationary Force #3: U.S. Household Wealth Now Expanding Again
  • Inflationary Force #4: Exploding U.S. Money Supply

I suspect we will do through periods of inflation-deflation for a decade, with painfully slow growth followed by recessionary and deflationary relapases. Those expecting the CPI to go soaring anytime soon are likely very mistaken.

Deflation will end with a whimper, not a bang.

What Weiss is doing is extrapolating the recent past into the foreseeable future. He is overlooking the fact that the number of dollar bears is now extreme. Only 3% are bullish on the dollar. I am in that group, not perpetually, just right now.

The same goes for expanding household wealth. Yes there was a huge stock market bounce, but as I have pointed out there was a similarly huge bounce in early 1930.

In regards to exploding money supply, Weiss is late to the party. This happened some time ago. More recently the rate of many measures is falling. But also note that in the early 1930’s money supply soared and it did not help.

Yes this was a spectacular rally by any measure. Enough so as to change Weiss’ mind. How many more dollar bulls and stock market bears are left in the house?

Not many. Even Rosenberg is discussing decoupling. Sheesh.

The next wave down could be a doozy.

Mike “Mish” Shedlock
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