Sharply lower factory orders – stagflation can plummet US Dollar and economy – time to buy bonds?
John Abelson
Jul. 3, 2007

The sharply lower factory orders data has sent a chill in the financial markets. For the first time, Wall Street is realizing what folks in Main Street were saying all along – it looks like stagflation, it smells like stagflation- it is stagflation.

The biggest question now is simple. Is it the right time to go long on bond and dump the stock market? The answer lies in how matured the stagflation is? Stagnation is bad for the economy. But bonds really do not care about that. The bond market wants disinflation and preferably deflation.

The deflation is not present all across the economy yet. Commodity inflation and Asian wage inflation are creating the higher input price for enterprises. The companies are paying higher cost for outsourcing, materials, and energy. But they do not have the pricing power for the finished goods and services due to stagnation.

It is definitely not the right time to stay in the stock market and US Dollar. But as far as the bond market is concerned, the inflation risk is there. The inflation can actually skyrocket before coming down sharply.

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