Corporations finding it hard to raise prices to match increasing raw material and labor costs – what is the effect on stock market?
Peter Oberois
Oct. 15, 2006

It is happening all across the globe. It is most prominent in America and Western Europe. The cost of input for output has risen steadily in the last four years in a very stealth way. The purchasing power of consumers at the same has plummeted steadily. The scenario is ugly at the best and outright scary at the worst.

Rise in productivity has helped corporations maintain the profitability. But there is a limit of that. Now very recently besides commodity inflation, slight pressure on wage is making corporate executives scared. The pricing capability is missing. It is typical in a stagnating economy with accelerating inflation.

It is like a cancer patient. You can inject temporary relief and extend the life – but you are not providing real cure.

The Federal Reserve pumped enormous liquidity in the system. Inflation edged up. Economy survived but did not get cured. Gold more than doubled in price due to global stealth collapse of currencies. At this moment dollar or euro or yen buys much less gold that it used to four years back.

Fed finally has to raise the rates fast to gain control over rates. The long bonds responded with the signal from the economy – it is deflation on the consumer end. The yield curve inverted fast. The economy got further stagnated from housing slump.

While all that happened, the tax relief money of the rich was waiting on the side line and was confused with everything. They finally joined the bandwagon putting the sidelined money to work thinking the Fed will pause, even lower rates and inflation is under control.

Corporations are finding tough even to operate. Stagnation is the worst for stock market. The pricing power is missing while they have no control over the input costs. The market will realize the fact sooner or later. Manipulation of corporate books, where backdating stock options or otherwise can take them so far. It cannot be a permanent solution.

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READ MORE>>

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