Inflation or Deflation?

On Friday, US markets closed early at 1 pm instead of 4 pm, making for what should have been a dull day. However, the day was not dull at all:

• The US dollar fell to 19 month lows today against the Euro and has fallen to near record low levels against the Pound and Chinese Yuan recently.
• In addition, the US 10-year treasury bond receded below 4.55% today down to 4.548%. The 10-year bond has not been this low since January 2006.
• Gold also climber to $637.90, within $30 of its record high
• Oil prices also climbed today above $60 per barrel, which would be expected given global growth in energy demand, except for the fact that US inventories of oil are much higher than last year at this time.

Other data that came out this week include the fact that:

• Employee wages as reported by the government are soaring, up 5% year over year. I would not have believed this statistic given the lack of raises in much of corporate America these days. However, a coworker of mine, recently left our telecom company and she is getting a signing bonus plus a big raise to take another offer.
• Discounts at retailers are extremely aggressive this season with Wal-Mart continuing to lower prices on electronics, toys, and food.

What can we make of all of this data?

Inflationary signals: Dollar falling, Commodities rising, Wages rising.

Deflationary signals: 10-year treasury bond interest rate, retailers dropping prices.

Conclusion:

1. The US economy is slowing due to slowing real estate prices, slowing car purchases, and slowing retail purchases.
2. Inflation will be muted even though commodities are increasing in demand and price worldwide. This is due to the fact that the US economy has become more of a services economy and less of a commodity based economy.
3. Those who are highly-skilled will continue to be in high demand and will be able to charge a premium for their services in today's global economy, thus continuing the paradigm shift of making some folks in the US economy very successful and wealthly while at the same time others are struggling. This conclusion is reinforced by the record bonuses to be given out on Wall Street this year.

So how do we invest successfully in an environment where the US economy is slowing, but the rich continue to do well? I will be discussing several mega-trends and themes for investing over the course of the next month.