Ford and GM bonds on the verge of "junk" status. Consumer price inflation "surprisingly" high. And just when you thought our trade deficit didn't really look like that of some South American banana republic, it hits another record high.

Yes folks, as the smiling gentlemen in D.C. will rush to assure you, these are the makings of a healthy expansion, and solid, albeit "measured" economic growth. Everything remains on track as rampant speculation in real estate by the gluttons for punishment who didn't quite lose enough in the collapse of the stock market bubble (but will soon have what's left of their heads handed to them on a platter) make quite clear.

The most recent CPI data revealed a "surprisingly high", (as brain-dead analysts and CNBC pundits like to call it), annualized rate of 7.2%. That's "surprising" if you live under a rock or you fill in the word "economist" next to the signature line on your Form 1040, but if you have a real job which doesn't pay you for being dead wrong week in and week out, the only surprise is that the figure wasn't in the double-digits.

This data means it'll now take only nine years for the Fed to hack away another 50% of the value of the colored pieces of paper masquerading as money in your wallet. That is, assuming that inflation remains steady at the current rate, a patently laughable assumption as long as Bubbles Greenspan remains at the helm and Bubbles Jr. Bernanke waits in the wings for the old man's demise.

It also means that REAL inflation, the stuff that hits you at the gas pump, the grocery store and on the health insurance payment IS well into the double-digits as we know that "accuracy" is to "government data" as "Harley Davidson Road King" is to "duck-billed platypus."

If one were to take seriously the prattling of that bespectacled government shill Greenspan who, after analyzing reams of up-to-the-minute data always concludes that things are pretty much OK and there's nothing ever to worry about, we might assume that the fires of inflation are being fanned by strong economic growth.

Were we to do our own homework and realize that after record amounts of stimulus the economy is massively short on jobs and wages are going nowhere, we'd realize that the recovery is in fact a sham and that inflation is being caused by the usual suspects: the Fed.

Inflation is what happens when more and more money is created out of thin air at a rate well ahead of economic output. Anybody capable of skills that lie even modestly beyond drooling into a bucket must surely recognize that this is precisely what's happening today.

Not that inflation rings the death knell for economic expansion, mind you. But as we discussed last time, the bulk of this so-called "economic expansion" has been a mere monetary fabrication, an illusion created by the pumping up of asset markets and statistical hocus-pocus. Now that the very same inflation is seeping into pocketbooks and sucking the life out of paychecks, we have to wonder if the "expansion" can continue to be fabricated, even if just on paper. If you can't fabricate it on paper anymore, even the stock market will be unable to deny reality.

The days of denial might be over. For such a healthy economy I have to wonder why IBM is down 28% this year. Why is GM off more than 50% from its peak? How come everybody's favorite tech, Intel, has gone nowhere but down since late 2003? Why do the folks at Nissan camp out in front of my house shouting "Hey! Are you ready to buy another SUV yet?" every day?

I'll tell you what REALLY worries me: Starbuck's stock is down more than 30% from its high, undergoing its biggest correction in years. When investors fret that pushing $4 cups of brown water sprinkled with a dollop of whipped cream or steamed milk and $2.50 animal cracker-sized pastries by underpaid starving artists and college girls might not rake in the profits, it's time to worry if maybe about our 21st century "service economy" is running out of service. And economy, for that matter.

But were these four stocks my only cause for concern. Alas, no. The stock market as a whole has taken the sort of drubbing we'd almost forgotten could occur in these days of Greenspan-worship and market complacency. Today the S&P 500 plunged to yet another intermediate-term low after an anemic two-session rally that served only to sucker in some juice from "bargain hunters" and impatient short traders.

From a technical perspective it looks as though a major top could be in place following last week's violation of critical support. The patterns in the Dow and Nasdaq look equally horrendous.

Has the cyclical bull finally peaked? Is the secular bear back in command? Or is it just another sell-off preceding yet another yawn-fest of sideways action in a market that has done virtually nothing in a year and a half? (The S&P 500 is now once again at levels visited in January, March, April, June, July, and October of 2004. Yawn.)

I don't have a definitive answer to that question but I wouldn't bet that ranch on shorting into markets that are routinely managed, manipulated, inflated and controlled by the powers that be. Inflation is undeniably increasing yet gold continues to flounder. Anyone in his right mind would demand much higher rates for holding the paper of a bankrupt nation yet interest rates remain low. And as we've noted frequently in the past, every major stock market decline since the cyclical bull began has been stopped dead in its tracks by an "out of left-field" surge of buying.

The S&P 500 hasn't seen a 10% correction in two years during the most anemic economic expansion on record. That just plain ain't natural. And it's unprecedented. (I'm not 100% sure about that, but it sounds good, helps my case, and I'm banking on my readers not checking the historical data. What's good for the government is good for the citizen, I say!) Tell me again about "free" U.S. markets. I have some shares of Dr. Koop you might be interested in.

My guess is that amid record deficits, a slowing "expansion", rising inflation, high energy prices, rising interest rates, a weak dollar, a war in Iraq and soon probably another in Iran, the top is more than likely in. In this environment, what could possibly inspire the market to new highs?

But equally important, what could possibly inspire the folks at the Fed, armed with unlimited resources and printing presses, to allow the market to follow its natural course? Fall it will, and to new lows eventually. But don't count on its going down without a big fight. I wouldn't dream of being long, but your shorts had better have some deep pockets...

Mark M. Rostenko
Editor
The Sovereign Strategist

April 20, 2005

Mark M. Rostenko, a veteran of Chicago's commodity exchanges and editor of The Sovereign Strategist, spends far too much of his time enthralled by the never-ending procession of inane prattle emanating from Wall Street. Nonetheless, it hasn't stood in the way of accurately forecasting the dollar's top, the beginning of the gold bull market, and nearly every significant turning point in the stock market since the bear market began. Please visit www.sovereignstrategist.com for a free sample issue and more commentary. And while you're there, feel free to join our international family of well-informed and successful investors.