Blog : Budget/Inflation Worries

by Ed Zwirn on May 15th, 2013

Anybody hawking budget deficit fears and inflationary warnings ought to be on the defensive this week, because the latest evidence indicates that the deficit is shrinking and deflation becoming the new paradigm that penny stock pickers ought to take to heart.

The stock market had already been pricing in a 0.5% fall for April producer prices, but today's announcement, which showed instead a drop of 0.7%, following on a March fall of 0.6%, shows that the deflationary trend is accelerating, bad news for commodity-driven penny stocks like mining ventures but good news for other penny stocks with costs to meet.

Since producers actually have to make the stuff before we can consume it, the PPI is more of a leading indicator than the CPI. Market watchers are expecting tomorrow's consumer price index release to show a 0.2% drop, a continuation of the same deflation rate seen in March.

At the same time inflationary expectations are being confounded, as they are being worldwide in the face of decreasing demand, the budget deficit hawks were themselves confounded by a Congressional Budget Office report projected that the federal deficit will shrink this year to $642 billion, some $200 billion less than its February estimate and, at 4% of GDP, less than half 2009's 10.4%.

Both of these news items have the potential for a significant effect on your penny stock portfolio. While penny stocks are primarily individual stories of company balance sheets, patent approvals and lawsuits, they also tend to rise and fall based on overall market, or systemic, risks. The market for everything from penny stocks to blue chips is currently in a sweet spot: With unemployment still relatively high and inflation low (or nonexistent), the short- to medium-term prospects call for a continued influx of cash from sources like the Bank of Japan and the U.S. Federal Reserve Bank, the latter of which recently committed itself to continuing (and possibly increasing) easy money.

With both of these central banks pumping $85 billion into their respective economies each month, in addition to the money they both print to manipulate their target interest rates, you are looking at a massive cash infusion looking for investment vehicles. And at least some of this money will be looking for stocks to buy. This is not to say that the bubble predictors and inflation hawks might not be proven correct down the road nor meant to deny the serious problems still facing the U.S. and global economies, but these days of reckoning are being postponed for the time being.