Up, Up and Away

"Would you like to ride, in my beautiful balloon .... Up, up and away, in my beautiful balloon" - words from the song Up, Up and Away, written by Jimmy Webb

It is really amusing to me to see that once again it is a Friday and once again we are breaking through to new highs.  It seems like every Friday afternoon the market magically recovers from the slump of Monday and Tuesday to end the week on a positive note.  In fact the last 5 of 6 Fridays were good for the market; not that you should trade this statistic as it is certainly not a trend that can be maintained but it is remarkable.

Enough of trivia and turning my attention to the markets it has been a pretty rocky rode for government bonds around the world.  After reaching record low yields traders suddenly seemed to decide that enough was enough and that the hot coal could no longer be passed to the next chump so they dumped bonds en masse driving yields higher.  This was then followed by a surge in buying which has stabilized the yields but did not return them to their former lows.

It is interesting to note that during this frenzy world stock markets followed in the same path, first turning down and then resuming their meteoric rise.  Not all of them have acted as well as the S&P 500 but they have recovered from the sell off.  It is not often that you see bond prices moving in lock step with stock prices so this is a clear indication that the markets around the world are currently heavily reliant on cheap money to fuel their rise. It is also clear from the recovery in bonds that the world continues to believe that low interest rates are here for an extended period.  It also shows that any spike in yields will be met by huge demand as the world is desperate for higher interest on their savings and investments.

It was also interesting to watch the silver and gold markets which appear to have broken out of their trading range, jumping higher and breaching their 200 day moving averages.  This is interesting as typically these commodities run on fear or inflation so could these be signalling a move away from the slow growth and low inflation environment of the past years and into a more frenetic period of higher growth and inflation?  With oil prices above $60 a barrel and well above their lows recorded only a few months ago, there is a chance that inflation could be creeping back into the picture but it is far too early to say for certain.

If inflation is making a come back, which undoubtedly it will at some point in time, will it remain under control or take off like wild fire?  I have to believe that at least for the remainder of the year there is little chance of runaway inflation.  Unemployment is far too weak and oil prices are still miles from their peak but, if the consumer is forced to spend more on goods and services caused by higher prices there may be a small boost in spending and this might surprise a few economists and possibly the Federal Reserve.  Should this occur, the chance of the Federal Reserve raising rates increases and, as I believe that this would be a premature move, should they fall for the false signal it would put a bullet right through the heart of the market much like popping a balloon.  Would you like to ride in my beautiful balloon?