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An Old Bear Market Trick or a New Bull Market Treat?


Inflation is that annoying child that keeps ringing the doorbell.

The bears strongly believe we've been in a bear market rally since March. A "rally" that will suck in the very last dollar before the market plunges once again into a giant bull trap.

The bulls believe a new secular bull market has begun and the lows in March will most likely never be seen again. They believe the Federal Reserve has once again saved the day and a new bull is rising.

Both the bulls and the bears have equally convincing arguments, leaving investors wondering what they should be doing with their money at this point. Let's examine the viewpoints of each.

The bears see the following as reasons to be skeptical of the rally:

1. The real-estate depression continues.

One in eight homeowners is either in foreclosure or delinquent, and two-thirds of sales are either foreclosures or banks taking a loss on a mortgage. The next big shoe to drop will happen when 65% or more of existing commercial real estate loans fail to qualify.

2. Bankruptcy filings surged 35%.

Tax revenues have plunged the biggest amount since the great depression and one in nine people are now living on food stamps.

3. The US government debt bubble is the biggest in history, and we're one failed treasury auction from a serious fiscal funding crisis.

The bears believe that President Barack Obama is digging an even deeper hole for America with temporary stimulus and government bailouts. Once the stimulus is done, the economy will also be done from the resulting enormous debt burden.

The bulls see the following reasons to be bullish:

1. The worst of the credit crisis is far behind.

Confidence and optimism are returning, which will drive "the giant pile of money off the sidelines" into the stock market, pushing it higher and higher.

2. Rates are low and the Fed will continue to keep money loose for a very long time.

This will push money out of safe low-yielding instruments into a high and rising new bull market.

3. Money managers, who were down in 2008 and lagging in 2009, will capitulate and buy more stocks (or face losing their jobs).

Shorts, which have been covering, will also finally capitulate resulting in a market meltup. In other words, "don't fight the Fed and don't fight the tape."

The deflation bears believe we're repeating the 1930s-style depression. The inflation bears see the prospects of mass Fed money printing resulting in hyper inflation.

In my book, Discover the Upside of Down, I make the case for Stagflation, which is a deadly mix of both.
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