supply and demand

October 17th, 2005

Hello,

What’s it going to take to get this market going? The good news continues to ad up even though you would never know it.
Yes the FED frets over inflation, but you don’t have to be a Nobel prize winner to know that New Orleans is a major shipping port in USA and to take it out of service raises more than oil and natural gas prices, include coffee, and lumber and many other commodities as well as the destruction to fishing and housing, and industry in the gulf region, all increase pricing pressures. Weather this is the beginning of a sustained period of inflation remains to be seen. As anyone who buys gas a lot over the last several months knows that energy prices can be quite volatile. In the long run it may be meaningless. Productivity growth may simply absorb increased energy prices. I do think we are in a period of prolonged increase in energy prices, but as we have seen in the past, increases in efficiency of energy use, last for ever but take time to implement. The out sized profits in the energy business will sooner or later be converted into investment into the energy infrastructure. It is import to point out raising prices in themselves do not necessarily mean inflation; sometimes it is just that demand is much greater than supply. Strong demand and low supply push prices up (law of supply and demand). Supply can also be constrained, not only by a dissipating asset but by foolish policies of regulation and taxation or just plain poor business practices. To be inflationary prices must increase in excess of excess demand. I am not really sure that is currently the case, so like I said the jury is still out on inflation.

I know you have all been distracted by a potential pandemic of bird flu, energy crisis, the war on terror, pictures of Karl Rove’s garage and Monday night football. You may have simply not noticed that we are near the anniversary of the 1987 October 19th stock market crash. We also had a mini crash in 1997 on the very same date. Since that time the first 3 weeks or so of October have been very scary. There will be some kind of a catalyst that will turn this market around in a big way .What exactly the catalyst will be I am not sure, but sure as Halloween always comes at the end of October, the market turns and takes off.

Is this becoming a lost decade for stock investing? After all we are starting to look like the market will be down for the first times ever for a full 10 years? Folks as with inflation the jury is still out but if the past is any guide the last 4 years of any decade seem to be the sweet spot. After all look at the roaring 80’s and 90’s the market in both looked rather pathetic the first 5 years then as they say the rest was history.


James