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Stocks soared Tuesday amid signs of a strong U.S. economy and hopes for a peaceful outcome to the upheavals in Egypt. So would say Dr. Pangloss, who in Voltaire's Candide insisted this was the best of all possible worlds.
To give the good doctor his due, the historic events in Egypt are turning out about as well as could be expected, at this point, with Mubarek acceding to the inevitable by declaring his intention not to run for reelection.
As another doctor, Dr. Ed Yardeni, the eponymous president and chief investment strategist of Yardeni Research, points out, what's happening now in Egypt has the potential to turn out like events in the Philippines, with a popular uprising against an authoritarian government resulting in a relatively non-violent transition to democracy, rather than Iran, where the Islamic revolution against the Shah yielded a rather worse result. Anything could happen.
All of which helped to contribute to a $300 billion increase in the value of the U.S. stock market Tuesday, based on the Wilshire 5000 index. That reflected a 1%-plus surge in prices that pushed the Dow Jones Industrial Average over the 12,000 level and, more importantly for institutional investors, the Standard & Poor's 500 past the 1300 mark.
But those aren't the only prices that are up. Commodities continue to surge, both industrial and agricultural goods alike. And soaring food prices are integral catalysts of the political unrest that has spread from Tunisia to Egypt, as well as Yemen and Jordan. High unemployment and dear food make for a combustible mixture.
The effects also are being felt in the U.S. The latest Purchasing Managers survey from the Institute for Supply Management showed a stronger-than-expected gain in manufacturing activity, to a reading of 60.8 in January from 58.5 in December. (A reading above 50 denotes expanding factory activity, and vice versa.) That was the highest ISM index since May 2004 and vastly higher than the 32.5 reading when the economy was in free-fall in December 2008.
A separate index of prices paid by manufacturers jumped to 72.5, its highest level since last April when it hit 78, and up sharply from the December 2008. Of the respondents to the ISM, 48% indicated they were paying higher prices and only 3% said they were paying less. Moreover, the institute said 30 commodities were up in price but none were down.
That would imply that stuff ought to be short supply all over the place as manufacturers scrambled for tight stocks to meet surging demand, observes Joan McCullough of East Shore Partners. Not so; there are no shortages of anything, according to the purchasing managers, who ought to know.
"Increased demand is not the catalyst behind these moves in commodities," she writes in her invaluable afternoon commentary. "And so they should not be touted as signs of an improving economy. On the contrary, they are the toxic side-effect of too much liquidity."
That same liquidity is lifting the prices of copper and equities as well as wheat. Higher asset prices make the rich richer; higher prices for wheat make the poor poorer.
In the Lord's Prayer, we ask to "give us this day our daily bread." For much of the world, including the Middle East, that remains as much of a quest as it was 2000 years ago. The Bible doesn't mention a daily rise in the Dow.
Comments: E-mail: randall.forsyth@barrons.com
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