WSJ.com - Delphi Seeks Far-Reaching Givebacks

With autos, auto parts, airlines and many others seeking give backs from labor, one should be able to surmise that inflation is not likely to raise its ugly head too far.

Back in the early 80's, Stan Salvigsen wrote one of the best research pieces I have ever read. It was called Bingo, Bango, Bongo. In it he traced the way inflation comes alive. The process starts when demand for commodities are strong during a recovery. The commodities soar, leading to workers demands for "catch-up" raises, since labor is a huge portion of our total economy, when labor costs are up inflation is in full bloom and finally the cost of capital has to go up (interest rates up, stocks down).

In this cycle, we have had the strong surge in commodities but the global economy will not allow lobor inflation to occur. Labor is having to deal with the fact that there are millions willing to take jobs that can be done overseas.

This makes for a confusing inflation picture. Items that are not likely to be outsourced internationally, such as dental care and a university education has seen huge price increases. On the other hand, many manufactured items such as computers, telephones, clothing, etc. have seen dramatic deflation.

The good news for Americans is that there are good jobs available for those willing to learn and the sum total of the inflation rate is very tame. A great environment for stocks. Look for a break out in stocks in the next week or two or three.

A very interesting indicator today was that when the market broke out strong, the option market lagged. There is little sentiment for chasing stocks. That story will change when stocks break above the trading range of the past two years! YOU SHOULD BUY BEFORE THE CROWD JUMPS ON AS THE MARKET IS GOING TO TRADE TO THE TOP OF THE RANGE AND THEN BREAK OUT STRONG!