Equities are seeing a summer stock surge

I want to explain the markets in really simple language, since there are some very basic problems in the largest securities market in the world and the projections associated with what is going on.

Fed chair Janet Yellen is in a tough spot. Yellen & Co. wants to raise rates but the rate of inflation is not growing. The Fed’s tools for the economy are to control inflation from getting too high, by raising rates.

Late last week Yellen gave the markets all they need to know by intimating that a pause in rate rises is on the table after seeing prices stagnating and retail prices are falling fast.

On Monday morning the 30-year US bond is 2.9% yield and the 2-year US paper is 1.35%. The difference between the two rates is too tight for the 28 years of duration. That is called flattening of the yield curve. Bank stocks hate tightening since that squeezes the profits on loans.

When there is little inflation — like now — raising rates can cause deflation. Deflation or stagflation (a less sever form of deflation) is when prices fall because too few dollars chasing goods.

The Fed was said to be raising rates quicker recently in order to have the ability to lower rates later in the event of economic slowdown like a deflationary hiccup.

So what does the stock market see? A celebration.

As I have often said here, capital goes where it is treated best. So look for stock indices to set all-time highs on just about a daily basis, since little cash will go into debt with the diminished returns.

Another factor in the summer stock surge is equities are buoyed by low inflation. Shares always move higher in a low-inflation environment. So we have a perfect storm in the markets.

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G-20 meeting where the G doesn't stand for growth

As G-20 Finance Ministers meet in  Turkey this week to coordinate a response to deflation and stagflation across the globe, many are looking at the US with a leery eye.

Fed chief Janet Yellen has been talking the talk on raising rates in the US by the summer. This despite US multinational companies complaining that a strong dollar is hurting overseas sales.

As an aside I do not believe the Fed will be able to raise rates this year. In actuality, I believe that as we import disinflation through crude oil, and other Asian products, the Fed may need to consider more easing in late 2015, early 2016.

Strong dollar policy is easy when all around you are deflating their currency in a race to growth or the bottom depending on your outlook.

As the Greek tragedy ( it is anything but a tragedy for the Greek people, who could never pay back all the foreign investment fostered upon them by multinational banks in 2004-2008), and as the tide gets lower you will see who has exposure to the derivatives off of these loans. Many Wall St and European banks have said they are not exposed to a default, yet they might be.

Funny thing with derivatives, you never know your true exposure to the second or third levels of debt, until it is triggered.