Gold, Inflation, and the Markets

The market keeps rising but the fear of inflation is still embedded in investor's minds. The weakness of the dollar has oil, gold, and other commodities rising again. The federal Reserve and its brethren around the world are focused on curbing future inflation but the fight will be arduous if not impossible over time. Governments continue to spend on stimulus plans while also printing plenty of money to jump start the global economy. We find it hard to believe that in two years, inflation won't start to inch up or even climb higher.

The good news these days is the increase in merger activity. Companies can't seem to grow revenues in this environment so it is a good time to acquire revenues through acquisitions. Valuations are still low if one has a long term horizon and most CEO's make strategic acquisitions with an eye on short term synergies and long term strategic value. We expect Wall street to garner a bigger stream of revenues as well capitalized companies pursue growth through M&A.

Stock prices could benefit with merger activity as the supply of stock is reduced when the acquired company is no longer trading. Incrementally this is a positive for the markets but we still believe a weak economy, high leverage, rising unemployment, and a weakened consumer will make this economic recession last longer than most expect. If we are wrong, the government debt, the corporate debt, the consumer debt, and the real estate debt will create roadblocks to a sustained recovery. We will need to see many more bankruptcies and defaults in order to equitize the system and allow businesses to grow again.