Rising Inflation Turning Up the Heat on Central Bankers!

A hilarious thing happened earlier this month. The President of the New York Fed, William Dudley, tried to justify the Federal Reserve’s easy money policy.

In a speech before the Queens Chamber of Commerce, he claimed inflation wasn’t a problem, noting as one example that:

“You can buy an iPad2 that costs the same as an iPad1 … you have to look at the prices of all things.”

The response from the crowd? Utter disbelief! One person in the crowd referenced the rampant food inflation we’re seeing by asking Dudley,

“When was the last time, sir, you went grocery shopping?”

Another quipped,

“I can’t eat an iPod!”

Me?

I can’t believe the claptrap the Fed is peddling either! Former Goldman Sachs economists like Dudley and his Ivy League-educated boss Ben Bernanke may say (at least publicly) that inflation is under control. But the rest of us in the Real World know that’s bupkis.

Gas. Food. College. Heck, Diet Coke! It’s all getting more expensive.

More importantly, the OFFICIAL data is now confirming what you and I are seeing every day. That’s turning up the heat on central bankers worldwide — with important investment ramifications for you.

Don’t Look Now, but Inflation
Gauges Are on the Rise!

We get three major inflation reports every month here in the U.S. — one each on import prices, producer prices, and consumer prices. So what did the latest figures show?

* Import prices jumped 1.4 percent in February from January. That easily topped forecasts, and it was the fifth month in a row where prices rose by more than 1 percent. Imports cost 6.9 percent more than they did a year earlier, the fastest inflation rate in nine months. And imported food shot up the most in any month since the government began tracking in 1977!

Last month import prices leaped higher than had been expected.

* Producer prices surged 1.6 percent, the biggest monthly gain since June 2009! Wholesale goods and services are now rising in price at a 5.6 percent year-over-year pace, the most in almost a year. Further up the pipeline, intermediate goods rose in price at the fastest pace since July 2008 while crude goods jumped another 3.4 percent.

* Consumer prices jumped 0.5 percent, the most in 20 months! Price increases at the “core” level are also picking up, rising by two-tenths of a percent for two months in a row. That’s something we haven’t seen since the fall of 2009.

Then earlier this week, we learned that U.K. inflation surged to 4.4 percent in February. That was faster than the 4.2 percent expected by economists, and the worst reading in any month since October 2008. Consumer inflation in the 17-nation euro zone is also picking up. At 2.4 percent in February, it’s now comfortably above the European Central Bank’s 2 percent “limit.”

Market Sands Shifting as
Price Pressures Increase

Look, central bankers can try to stick their heads in the sand for a while when the numbers take a turn for the worse. That’s what U.S. policymakers — and their developed world counterparts in the euro zone and U.K. — were doing for a while.

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But our foreign counterparts are showing increasing signs of breaking ranks. That’s leading to speculation the ECB could hike rates as soon as next month, with the U.K. not far behind in July.

Here in the U.S., Bernanke is still (yes, STILL!) dragging his feet. But the yield curve continues to flatten as I predicted several weeks ago. And investors are continuing to bet against him in the interest rate futures market.

So why should this matter to you?

Interest rate hikes will likely push stock prices down.

Well, I wouldn’t be surprised to see risk assets like stocks get hit as slightly tighter monetary conditions get priced in. I also continue to believe the dollar is vulnerable.

I’d use the “relief rally” we’ve seen in the wake of the Japanese quake and nuclear crisis to lighten up on stock market risk. I’d also look to hedge currency risk in my fixed income portfolio using investments such as the iShares S&P/Citigroup 1-3 Year International Treasury Bond Fund (ISHG). Foreign bonds tend to rise in value when the dollar falls because each interest or principal payment remitted in a foreign currency translates into more dollars as it’s repatriated.

Oh, and if a Fed official shows up in YOUR town to talk policy? Feel free to heckle all you want! These guys don’t know what the heck they’re talking about when it comes to inflation.

Until next time,

Mike

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money, Interest Rates Profits and LEAPS Options Alert. He is often quoted by the New York Sun, Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

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Disaster in Japan; Just When the World’s Third Biggest Economy Was Turning Up

By Mitchell Clark, B.Comm.

It’s difficult thinking about stocks, commodities and investing in general when you see the tremendous devastation in Japan. Stock picking seems like a flippant endeavor compared to dealing with the loss of life in this natural disaster. My cousin’s husband is a Japanese American executive with Coca-Cola in Tokyo. Their immediate family is all right, but, as they communicated over e-mail, the entire country is virtually shut down.

The markets are clearly reflecting the shock of it all, as well as the very real economic worries now affecting the globe’s third largest economy. Japan consumes a lot of the world’s exports and there will no doubt be an immediate adjustment to businesses selling product to that country. As Japan’s economic interests naturally turn inward to focus on recovery and restoring infrastructure, the country’s fiscal situation will no doubt worsen. All this, just when Japan’s economy was seemingly coming out of a long period of stagnation.

Domestic lumber stocks are slightly ticking higher as speculators bet on Japan’s new infrastructure requirements. This, of course, is mostly just trading noise at this point. It’s way too early for any economic analysis of Japan’s actual need, other than it is enormous. This kind of speculation is just as likely not to work out anyway. Japan may choose to rebuild with metal studs instead of spruce. I don’t even want to think about it.

From a purely financial point of view, my analysis of domestic capital markets is that they will withstand this natural disaster. The stock market is now in the “lull” between earnings seasons and is actually holding up well considering the severity of events. The stock market has been due for a correction and it seems like events in Japan are unfortunately the catalyst. As the first quarter of 2011 is quickly coming to an end, the expectation is for strong corporate profits once again and that’s what institutional investors care about. This is what’s keeping investor sentiment in stocks generally positive.

I want to repeat a sentiment I’ve been writing about recently. There isn’t any rush for investors to be making any bold new bets in this market. I remain bullish on equities this year, although the action in the Dow Jones Transportation Average is still worrisome. Investing in gold has been, and continues to be, a good idea, but that commodity is also due for a major pullback. Over the very near term, global capital markets will reflect the daily events taking place in Japan. Domestic markets are now in a correction.

Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.

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Dollar Turning Point?

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A Financial Armageddon subscriber recently asked me (in a nice way) if I was too negative in my economic outlook, and if I "was capable of a semi-bullish statement of any sort."

I responded that there is always the risk I am wrong in my views. Indeed, I added, when I first began to contemplate the prospect of an economic meltdown (when most economists were expecting the "Goldilocks economy" to continue for the foreseeable future), I underestimated the degree to which authorities would pull out all fiscal and monetary stops to try and keep the leaking ship afloat.

But in the end, I said, nothing has changed. The factors and circumstances that led me to write Financial Armageddon in the first place (e.g., extraordinarily high debt levels) are still there, and in some cases things are much worse than they were four years ago.

But as to my correspondent's second point, I have been known to be bullish on occasion. Those who have been following my work since the crisis began will recall that I was predicting a stock market rebound in March 2009 (I am on the record in several places). Admittedly, I did not anticipate a two-year, 100% rise. Nevertheless, I've learned the hard way that when most investors are on the same side, even if it makes sense longer term, Mr. Market usually finds a way of proving them wrong, at least temporarily.

With that in mind, I wrote a post last week, "Now Is Not the Time," in which I argued that it was risky to be betting on further dollar weakness right now because sentiment towards the currency had become so lopsidedly bearish. As proof, I cited nine recent articles from a variety of business news outlets that made it clear the bulls were few and far between. Other reports since then have noted that speculators have been shorting the greenback with relative abandon.

Today, however, I came across what may well be the best evidence yet that a moment of contrarian reckoning -- that is, a dollar rally -- is at hand. I refer you to the cover story, "The Money Whirl," in this week's Barron's.

 

As was the (in)famous August 1979 BusinessWeek issue proclaiming "The Death of Equities," which preceded the greatest bull market in history, or the June 2005 Time magazine cover story, "Home $weet Home," which marked the peak of history's biggest housing bubble, when mainstream publications feature boldly assertive reports about popular and long-running investment themes that is often a bell-ringing moment, signaling that circumstances are set to change -- perhaps dramatically.

Is history about to repeat itself?

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