Jeff  Carter

PPI was out today, with an increase, but less than expected. Jobless claims were down. The labor participation rate is the lowest it has been.

These are data points. There are things going on in the background that are alarming.

The Federal Reserve is still pursuing a 0% interest rate policy, with lots of M2 money creation. There has been no indication that they are going to tighten up any part of their easy money policy. That’s inflationary. There is plenty of dry tinder out there to start an inflation fire.

Meanwhile, growth is still slow. GDP is anemic. Bears are dreaming of stagflation.

I don’t see stagflation yet, and I don’t see rampant inflation, yet. It’s still the great decoupling that I wrote about on December 7. Europe sucks. China is going down. But the US is the most ingenious economy the world has ever seen, in spite of really crappy fiscal policy enacted over the last several years.

Commodity prices have been all over the map this year. I think the attitude that saw commodities as an “asset class” is on the wane. The commodity markets exist to transfer risk. If you want to invest in commodities as an asset, buy a farm, buy or invest in a commodity company. Buying corn ($ZC_F) and expecting a similar return to the stock market is sort of idiotic. Gold ($GC_F) is losing its lustre. On the whole, commodity prices will stay muted until the rest of the world economy heats up again. They are influenced by supply and demand, not speculation.

To play devils’ advocate to the inflation bugs, demographics are far different today than they were in 1975. The baby boomers were younger then. They were spenders. They are old people now, they don’t spend. They aren’t consuming like they were. That should give the Fed some comfort.

The other fly in the ointment is the crushing amount of government debt that is projected. That amount of debt will be a huge drag on economic growth, because the private sector will be crowded out. Debt slowing growth with the huge supply of M2 could lead to stagflation.

It might not be until the baby boomlet that is just graduating from college gets on sound financial footing before we see some real live inflation. But, that demographic is growing. It won’t be long. That demographic bubble is going to start consuming. Inflation is on the horizon if the Fed doesn’t start using policy to pull back the M2 money growth it has aggressively pursued for the last three years.

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Jeff Carter

Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.