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  • Rev Shark:

    Inflation Takes Its Toll
    10/7/2005 8:30 AM EDT

    "When future historians look back on our way of curing inflation they'll probably compare it to bloodletting in the Middle Ages."

    -- Lee Iacocca

    It has been a rough week for the bulls and the monthly jobs report that is due out this morning is likely to keep things difficult. After a month of hurricanes, rising energy prices and increasing concerns about a slowing economy, it was talk about inflation that finally took down the market beast.

    The big problem is that the Federal Reserve is in a bit of trap. The way they battle inflation is by raising interest rates, but that slows down economic activity and softens the upward pressure on prices. The difficulty the Fed faces is that the economy is already showing signs of slowing, with high energy prices, the hurricanes and other issues already affecting economic growth.

    That leaves us with the worst possible combination: inflationary pressures and a slowing economy. If the Fed keeps raising rates it risks slowing the economy into a recession, but if it doesn't battle inflation it risks hurting the economy even more as prices accelerate.

    None of this is really new, but the market finally decided it was time to start worrying about it. The recent spate of jawboning by Fed Reserve officials caught the market's attention and is primary reason the market has sold off so hard the last three days.

    This morning we are presented with another piece of the economic puzzle: the monthly jobs report. It is anticipated that nonfarm payrolls will decrease by 150,000 jobs and the unemployment rate will tick up to 5.1% from 4.9%, largely due to Hurricane Katrina.

    Slowing jobs growth is generally anti-inflationary but it is going to be important to look at the increase in average hourly earnings as well. That is expected to tick up to 0.2% and if that stays strong while jobs losses mount the word 'stagflation' is going to be heard with increasing frequency.

    This very gloomy scenario is unfolding as the market has suffered extreme technical damage and market sentiment grows very negative. The bulls best hope is that the negativity is being priced in and selling will start to slow. However that is a very poor bet right now. There is nothing to indicate that we are due to turn back up other than for some sort of relief bounce.

    After the health hit the market has taken since mid-day on Tuesday we are due for some sort of relief bounce but the bears are lining up and will be looking to sell that strength. The bulls are running scared right now and we have to be patient and wait for them to finish with their selling. It usually takes long than you think for that to occur.

    We have positive early indications. Oil and gold are up and overseas markets mostly weak. The jobs report is due out at 8:30 am ET and is going to be our primary catalyst today.

    Gary B. Smith:

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