The Last Piece Of The Inflationary Puzzle

Everyday, I receive some comment either in an e-mail, a comment on this blog, or a comment on my radio show regarding future inflation.  When will it come?  What will it look like?  Why hasn’t it started already?

The Fed has injected more money in the system (along with other governments) than we’ve ever seen.  The monetary base (basically the amount of money in the system) which goes up about 6% per year has risen over 130% in just the last 12 months.  TIPS have risen in price.  Gold has risen dramatically this year.  Other commodities have followed suit.  So, why is everyone still worried about deflation?  I think it’s interest rates.  Interest rates have stayed low for some time while all of these other inflationary indicators have been rising.  They have been artificially held down by the Fed through their bond purchasing program.  Remember, when bonds are purchased, rates go down.  When bonds are sold, rates rise.  The Fed is slowing down their purchasing of all different types of bonds from treasuries to mortgage bonds.  In addition, they’ve started testing reverse repos to remove some of the liquidity.  We’ve seen rates begin to slowly rise.

On Tuesday, there were several pieces of economic data released.  the Producer Price Index was much higher than anticipated.  We knew these numbers would be high because they are being compared to an abnormally low number last year at this time.  But, they were even much higher than the estimates.  This caused rates to move up even more.

You can see above that we’ve broken the downtrend that had been in place since early summer.  This may be the beginning of rates rising at a faster pace.  Once this starts, I believe it’ll be like a freight train.  It’s going to be very hard to stop.  This is the time to look in the portfolio and see how much is in interest rate sensitive securities.  This could not only put a damper on bond prices but equity prices as well.

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2 Responses to “The Last Piece Of The Inflationary Puzzle”

  1. 1 jc December 18, 2009 at 9:14 am

    whats your outlook for sugar? and what caused the recent climb?

    • 2 keggerss December 18, 2009 at 7:13 pm

      I’m bullish on sugar fundamentally and have been for several months as Brazil continues to get hit with rain ruining crops. Technically, it’s broken out and is a buy on the pullbacks.

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