The Big 3: Correlations, A Stock to Stick With, and Thanks for the Update Mainstream Media

August 4, 2008 Dow 20,000 & Trillion Dollar Market Caps by MrArbitrage http://tableofwisdom.com/Dow_20_000.html Raw material prices are up, producer prices are up, retail prices are up and wages will go up. There will be some downward pressure on wages as most of the employed are too fearful of losing their jobs to demand higher salaries. However, unless the USA ceases to exist, wages will eventually go up. Wages have already started to go up among the elite entertainers, a profession that has historically been recession proof. When you read seemingly ridiculous news stories about people like Hannah Montana or the “Olson Twins” being BILLIONAIRES, it isn't because they have crossed some unprecedented threshold; it's because of inflation. Stories like theirs and those of athletes making record salaries or Rush Limbaugh's $400 million contract a few weeks ago are often misinterpreted. Not to take away from their success but it isn't that these people are outdoing mega-stars from the 1970’s, 80's and 90's. These are the portents of inflation. In real dollars these highly successful entertainers are keeping pace. The average income will follow when the economy turns around. Congress has already helped to push along the wage inflation by raising the minimum wage. This move may actually accelerate unemployment in the short term but will buttress inflation in wages in the long run. Very few people earn minimum wage but it is a new “water mark” against which skilled workers and white collar employees gauge their earnings. For their expertise, they demand a spread between their wage and the minimum wage – so when the minimum goes up – their wages go up. We will first see higher unemployment before things begin to stabilize but the new stock market highs will either come just before the rise in wages in anticipation of higher wages and a better employment picture – or- right after that time as investors see corporate earnings go higher as a result of the better employment picture. The duration of unemployment will depend on the result of the November elections. If we have an administration that punishes corporations, raises taxes and keeps oil high by undermining supply; we will likely see a long period of unemployment and economic attrition. If we have an administration that allows the cycle to run it’s course by cutting taxes, cuts wasteful spending and increases oil supply, this period will be much shorter (recession at worst). One of the last pieces of the inflation cycle will be the inevitable rise in market caps. This may seem like a strange time to claim that the market is going to be hitting all time highs but it will. Doom & gloomers like to verbally assault the market in times like this but the market has always been the best investment of any asset class over the long term and the #1 hedge against inflation. Most people don’t want to embrace that fact and that is why most people cannot build wealth. The best time to own equities is usually counter-intuitive. The caveat is that in order for this whole scenario to work, SOMEONE will have to hold the bag for everyone else to deal in the new larger numbers. The people who will pick up the tab will be those who hold debt, because of course, the debt is not inflation adjusted. This will help those who are in the debt as they are earning larger dollars (that have the same old purchasing power) yet are still paying the older, more diminutive balances. This "benefit" also applies to the US Government as they receive larger amounts of tax revenue resulting from higher consumer prices, wages and capital gains, while they pay down the national debt that remained the same. In the short term the inverse volatility will remain between oil and the stock market until the oil bubble bursts. However, the longer term trend will be higher stock prices when oil finds equilibrium around $50-$70 per barrel. We will adjust our perception of prices, wages, securities and stock valuations as we get used to TRILLION dollar market caps and as the 99 cent stores change their signs to “$1.99 - Adjusted for Inflation” stores. In the end, after a time of fear and suffering for some, everything will feel the same for most of us. The moral of the story is: Don't get punked. Own equities, own some assets like gold but don't own debt, at least not YET. More at www.tableofwisdom.com