Here is how I am seeing the financial markets.

The government is wildly stimulating the economic with fiscal and monetary stimulations. There is a huge amount of cash on the sidelines restrained by fear. Everyone is cutting inventories and production is feeling the effects of the empting of the supply chain.

Some of this is constructive. There is excess capacity in automobile production and newer factories, largely built here by foreign firms, make older factories (mostly domestic) obsolete. This same change happened in steel in the last 20 years. Old names like US Steel, LTV, Bethlehem, and Republic have been replaced by Nucor, Gerdau (foreign), and Mittal (foreign).

I also feel that much of the federal stimulus is being counteracted by sharp cuts in state budgets and lower monetary velocity from tighter credit. When fear abates and credit starts flowing there may be a sharp uptick in inflation.

But with the supply chain empty any rebound will have a strong impact on prices. Steel stocks, especially Gerdau and Nucor are therefore a buy. Their prices have dropped sharply and may rebound sharply. They will also benefit from increased spending on infrastructure.

And while car sales are down, I still see people driving. These cars will wear out and need replacing, creating a pent up demand. Yet car demand is also the result of demographics. Some of the capacity needs to be reduced. It will be.

Like cars, housing and construction, has a way to go. In these businesses only the strong survive and I think it is too soon to bet.

The same applies to banking and finance. Top banks are cheap. Wells Fargo or Suntrust will likely be among the survivors and will share a smaller market with fewer competitors.

While short term this recession is deflationary, we are all wondering how our government will pay back the huge deficits it is creating by the minute. Inflation seems inevitable. That is the only reason I am skeptical. Can Obama really solve the deficit by changing the Washington culture when so many have promised and failed? Can he really make government THAT much more efficient? The question is not the possibility; it is the testicular fortitude.

To do so he will have to dramatically cut Social Security and Medicare benefits and defense spending. There are other programs such as the farm programs that need to be cut, but expect such howling when these are attempted that the huge deficit will be quickly forgotten.

I would be very reluctant to be in long term bonds. With interest rates so low, they can only go up and the looming threat of inflating our way out of the deficit makes bonds unattractive. The spread between long term treasuries and high grade corporate bonds is the largest in over 50 years. Long term treasuries are probably the riskiest investment out there. There is real opportunity in medium term corporates and high grade municipals.

The global markets will not allow Obama to inflate and the domestic market will not allow reckless tax hikes. He may be forced to actually solve the spending problems that others have only promised to address. That could be the best outcome we can expect.