Once every two months or so, I go through my “research stack” and look at the broad themes that have been affecting the markets. Here is what I found over vacation:

Inflation

1. Commodity prices are still hot, as are Baltic freight rates, though they have come off a bit recently. Lumber is declining in the US due to housing, but metals are still hot due to global demand. Agriculture prices are rising as well, partly due to increased demand, and partly due to the diversion of some of the corn supply into ethanol.
2. While the ISM seemingly does better, a great deal of the increase comes from price increases. On another note, the Implicit Price Deflator from the GDP report continues to rise slowly.
3. Interest rates are low everywhere, at a time when goods price inflation is rising. Is it possible that we are getting close to a global demographic tipping point where excess cash finally moves from savings/investment to consumption?
4. At present, broad money is outpacing narrow money globally. The difference between the two is credit (loosely speaking), and that credit is at present heading into the asset markets. Three risks: first, if the credit ignites more inflation in the goods markets which may be happening in developing markets now, and second, a credit crisis, where lenders have to pull back to protect themselves. Third, we have a large number of novice central banks with a lot of influence, like China. What errors might they make?
5. The increase in Owners Equivalent Rent seems to have topped out.

International

1. Global economy strong, US is not shrinking , but is muddling along. US should do better in the second half of the year.
2. The US is diminishing in importance in the global economy. The emerging markets are now 29% of the global economy, while the US is only 25%.
3. Every dollar reserve held by foreigners is a debt of the US in our own currency. Wait till they learn the meaning of sovereign risk.
4. Europe has many of the problems that the US does, but its debts are self-funded.
5. The Japanese recovery is still problematic, and the carry trade continues.
6. Few central banks are loosening at present. Most are tightening or holding.
7. There is pressure on many Asian currencies to appreciate against the dollar rather than buy more dollar denominated debt, which expands their monetary bases, and helps fuel inflation. India, Thailand, and China are examples here.

Economic Strength/Weakness

1. We have not reached the end of mortgage equity withdrawal yet, but the force is diminishing.
2. State tax receipts are still rising; borrowing at the states is down for now, but defined benefit pension promises may come back to bite on that issue.
3. Autos and housing are providing no help at present.

Speculation, Etc.

1. When are we going to get some big IPOs to sop up some of this liquidity?
2. Private bond issuers are rated one notch lower in 2007 vs 2000. Private borrowers in 2007 are rated two notches lower than public borrowers, on average. Second lien debt is making up a larger portion of the borrowing base.
3. Because of the LBOs and buybacks, we remain in a value market for now.
4. Volatility remains low ? haven?t had a 2% gain in the DJIA in two years.
5. Hedge funds are running at high gross and net exposures at present.
6. Slowing earnings growth often leads to P/E multiple expansion, because bond rates offer less competition.
7. Sell-side analysts are more bearish now in terms of average rating than the ever have been.
8. There are many ?securities? in the structured securities markets that are mispriced and mis-rated. There are not enough transactions to truly validate the proper price levels for many mezzanine and subordinate securities.

Comments to this? Ask below, and I’ll see if I can’t flesh out answers.