Inflation Is Heating Up; Here's What You Need to Know

 | Feb 14, 2017 | 1:00 PM EST
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Inflation is accelerating -- as I predicted all the way back in December 2015. Look at today's Producer Price Index for January. The headline rate is up 0.6%. The core rate (excluding food and energy) is up 0.4%. These are five-year highs.

In December 2015, I noted that inflation would turn back up once the Fed reversed course and started to engage in rate hikes, suggesting you gold at the time -- at the bottom of its 2011 to 2015 bear market, a price of $1045.

I have explained in the past how rate adjustments are simply price adjustments. In fact, that's what you should start calling them -- not rate increases or rate decreases, but rather, price hikes or price cuts. By adjusting rates, the Fed affects the price of credit -- and the price of credit is reflected in the cost of all goods and services. Rate hikes are price hikes.

This is why, when the Fed took rates down to zero, it did not create the inflation that everyone (except for the MMT people) thought. The opposite happened. Inflation fell, because rate cuts were price cuts. It's all reversing now.

Some things to understand in this environment:

  1. Inflation will be good for gold and commodities. Even though these markets, and gold in particular, are grudgingly going higher, that's a good, healthy, thing. It's the sign of a rally that can endure. Those are the best kinds of rallies, because they keep people unsure and uncertain and skeptical. That's the proverbial, "wall of worry" that the market climbs.
  2. Inflation is NOT good for the dollar. Forget about all the dollar bulls telling you that the Fed will raise rates and that will make the dollar go up. Inflation literally means your money is worth less -- and that is not something that is reflected in foreign exchange markets with a higher exchange rate. The whole notion is ludicrous. The dollar is going down, and every time there is a dollar rally based on expectation of higher rates, or in reaction to the Fed actually raising rates, you should sell the dollar. The dollar's rise is over.
  3. Treasuries are in a bear market. They were never in a bear market for the years that the Fed was holding rates at zero and conducting QE -- contrary to what all the "inflationistas" believed -- but now they are in a legitimate bear market. That's right, the Fed will raise rates many more times attempting to "fight" inflation, when in fact they will be fueling it. The irony is, the only thing that is keeping inflation from being even higher now is the fact that the Fed is basically sitting on its hands. But that's not going to last. They'll raise -- and Treasuries will go lower.
  4. This stock rally will not end well. An unrelenting rally that does not have any healthy back-and-forth price action creates huge excesses and imbalances. You get the weakest in at the top. Furthermore, inflation means that the future value of earnings is reduced. Stocks initially should reflect this through the process of discounting; that is, share prices coming down. When share prices do not come down, as in the situation currently, it means that valuations are getting more and more stretched. Think of an elastic band getting stretched tighter and tighter. The snapback will be that much more violent.
  5. Everyone is buying on some nebulous Trump effect. I saw the sketchy details of his tax plan last week and many parts of it just doesn't add up. How do you incentivize exports and foreign earnings with tax exemptions then ask companies to "bring their profits back" to get taxed? Even if that tax is small, who is going to do that? And it's those "repatriated profits" that Trump's team is banking on to fix our infrastructure. It's just not going to happen.

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