February 22, 2001

Stagflation Bursts Stock Market Bubble

We are entering the worst of all possible worlds for stocks. January's inflation data is not a fluke. There is overwhelming evidence that inflation is picking up steam. And in the midst of an economic slowdown, inflation is the last thing that companies want to see.

As prices rise, demand falls faster than it has already. As of yet, consumer spending hasn't plunged off a cliff. Housing and auto sales enjoyed a slight bounce last month. However, we have seen a glimpse of the retraction to come. High oil and natural gas prices ate into consumer spending power and sent company sales spiraling in the last two quarters of 2000. We also saw how investors reacted to those earnings disappointments. That was merely a preview.

Now we see inflation rising in the majority of sectors -- housing, services, autos, prescription drugs, health care, tobacco, natural gas, etc. -- according to the latest CPI data. It's no wonder why consumer confidence has plummeted dramatically. And that spells disaster for future spending data, as well as company earnings and the stock prices that depend on them.

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