Bears, Bulls and Squirrels

There's something squirrelly in the stock market lately, some kind of disconnect between the Dow Jones and the economic indicators. As of 11:30 a.m. EDT, the DJIA was up 80 points, even while we're seeing clear signals of recovery-killing inflation:

Treasury 10-year note yields reached 4 percent for the first time since October on concern surging budget deficits and a falling dollar will prompt investors to reduce holdings of U.S. debt as issuance climbs to a record.
Treasuries tumbled 6.5 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion and raising the risk of inflation.
"People are increasingly concerned about supply," said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. "The government running a deficit of 12 or 13 percent is not something we’ve seen since World War II. It's very hard to digest."

Ed Morrissey calls attention to the spiking money supply, and gas prices are ticking up -- both inflation factors. What to make of the fact that the Dow keeps rising despite all this? The best I can figure, you're seeing a continual stream of new "buy" orders that are essentially a function of 401K and other accounts pre-set to purchase X-amount of stocks every week, and which are therefore immune to short-term economic signals.

In the event of a sudden bear shift -- a sell-off by institutional investors and market-timers -- individual investors with these kinds of pre-set retirement accounts will be the big losers, because they are scheduled to keep buying a certain percentage of stock every pay period, whether the market is up or down.

On plus side, these 401K account holders (call them "squirrels") add stability and a steady upward pressure on stocks. On the negative side, the 401K squirrels already took a big hit in the 2008 market meltdown. With unemployment rising, more and more squirrels are feeling the pinch. If they get burned by another meltdown . . . well, who knows whether they'll wise up, and what they'll do once they figure out they're being played for chumps?

UPDATE: Another possibility? Kudlowism, defined as the bullish influence of Larry Kudlow, who's never seen a market signal that didn't say "buy." I'm sitting here with CNBC on the tube, and Larry's giving the most rosy possible interpretation to every indicator that comes across his desk.

Classic Kudlowism: Hundreds of thousands of new unemployment claims reported, but there are fewer new claims than in the previous reporting period. Therefore, while unemployment continues to rise -- as both consumer buying power and productive output decrease -- Kudlow spins this as good news!

It's like trying to have an objective discussion about the relative merits of various automobile models with the salesman at a used car lot. So long as he thinks you're a potential customer, Kudlow's advice is always to buy now.