Rate Hikes Fuel Inflation, Use any Rally to Raise Cash

 | Mar 15, 2017 | 12:00 PM EDT
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The Consumer Price Index was up 0.1% in February, but is now rising at 2.8% year-over-year. That's the fastest rate of increase in five years. You have to go all the way back to January 2012 to see prices increasing at this rate.

We've had two rate hikes so far and we're about to get a third today. The orthodoxy says that's supposed to quash inflation. Everyone you talk to will tell you that rate hikes quash inflaton. Even Fed members would tell you that. Indeed, they're hiking rates today entirely on the fact that inflation is rising. Don't think they're hiking rates because the growth rate of 1.3% or 1.9% is too hot. That's a joke.

That's right, everyone tells you that rate hikes quash inflation and rate cuts stimulate inflation. Everyone except me, that is. Everyone except people who understand MMT (Modern Monetary Theory) -- though I am probably the most vocal of all MMT proponents.

I will say this once again: Rate hikes are price increases. That's why you have seen prices rising and inflation rising, starting with the very first rate hike going back to December 2015. I told you to buy gold and commodities back then. I am telling you now to do the same thing. The Fed will hike rates today and that will be another price increase, but the economy is not expanding that much. In other words the amount of output is rising more slowly than prices. That's called stagflation. Now you're probably reading about it, but just remember that I said it in these columns over a year ago. I called it.

You may also be reading something else that I have been talking about -- and that's the collapse in bank lending. The story is out. It's out all over the place. In fact it's being covered so much that it makes me nervous. Whenever I see something that becomes widely known and widely followed, it makes me want to go the other way. I will be looking for a turnaround in bank lending starting with this week's data. That doesn't mean it's going to happen, but I will be watching closely just because everyone now knows about the collapse in credit growth.

It cracks me up that nobody wants to own gold. Gold is the classic inflation hedge. You hear all the gold bugs talk about that all the time, but when we truly have inflation occurring, they're silent. They're nowhere to be found. That's great. That's the kind of bull market that I like. A stealth bull market in gold that has nobody participating. It's a beautiful thing.

Then there are the dollar buyers. They're buying because there's inflation, when inflation literally means your money is worth less. Yet they're buying dollars that are increasingly becoming worth less. What irony. It's almost comical. Trust me when I tell you this: The dollar is entering into a long-term decline. I am short the dollar. I am selling every rally. In six months or a year from now, or three years from now, the dollar will be a lot lower.

Which brings me back to stocks, which are ridiculously overvalued. Just as inflation reduces the purchasing power of your money, it also reduces the value of future earnings. Rising inflation just makes the stock market more expensive in real terms.

Today's rate hike might just be the thing that tips this market over. If not, it's coming soon. I will be using any further strength from here on in to raise more cash. Between inflation, falling credit creation, competition from rising bond yields, big Federal spending cuts coming (Trump signed another executive order mandating that yesterday) and not a tax cut nor dime of infrastructure spending in sight, we'll be lucky to see any positive growth in the first quarter.

It won't be long before this euphoric post-election zombie rally has everybody looking for the exits. I'll be laughing all the way to the bank.

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