understanding the psychology of behavior

I have been thinking about the economy and general health of the markets since the recent PPI and CPI numbers. The numbers came in as expected, even when gasoline has been averaging the low/mid 2s. Then the news that China will have to increase rates as they can not control their growth. Even Germany and other European countries are picking up.

If the ROW (rest of world) was not growing, and growing nicely, I think the US economy would be in a real deflationary threat.

With inflation subsided and global economic growth still present, the US equity market looks cheap. I try to keep thinking about this when I have the itch to short the market after our recent run. The market may very well keep rising until there is a fundamental shift in economic sentament. This is another reason why I think Oil is still a good play here. Because of this inflation (or underlining deflation) situation we have, oil prices can go much higher before it really starts acting like a tax onto the economy.

Do not get me wrong, high gasoline prices is obviously having an affect on retail and will continue to affect the individual. But, if incomes keeps rising, the economy can tolerate it.

If inflation begins to rear its head, and gas prices being where they are, the US markets have a big problem on its hands…. and will look not so undervalued. As of now, investors should be in a wait and see mode, or at least closely follow the inflation indicators.

This entry was posted on Thursday, April 26th, 2007 at 11:51 pm and is filed under markets, economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.