The Return of the Inflation Chupacabra

My Comments: A few weeks ago I wasted several hours exchanging replies with someone who asked “who is responsible for inflation?” My initial response was to the effect it is a “what” question and not a “who” question.

But that soon devolved into discussion about irrelevant issues that I decided meant the writer had never taken Economics 101, much less passed it. By the fourth day, it was obvious he had heard on Fox News that the Fed was evil incarnate, and he was looking for confirmation. I couldn’t give it to him.

Inflation, in moderation, is a good thing. That’s mainly because deflation to any degree means we are sliding backward into a pool from which escape is very difficult. Since equilibrium is virtually impossible given the number of people on the planet and inevitable lag times between supply and demand, some inflation is desirable. Just not too much.

posted by Jeffrey Dow Jones May 29,2014 in Cognitive Concord

The first quarter GDP was revised lower. It was the first time the economy contracted since 2011, an annualized rate of -1.0%. The market celebrated by making a new all time high!

I wrote for Pro Subscribers last month that a new high in the market would indicate that the “sideways” market we’ve had in 2014 might be coming to an end. The market did indeed break out to a new all time high and it did it quickly enough inside my expected time horizon to maintain a sense of bullishness about the market.

The funk of the first few months of a year may be wearing off. And GDP this quarter is projected to increase at a 3.5% clip.

There aren’t any major other warning signs flashing right now, either. Yes, what’s happening in small caps and certain pockets of technology might be indicative of broader volatility to come. But as I’ve written about repeatedly, as long as earnings keep growing the market is a fundamental buy.

Wait until companies start lowering earnings guidance before adopting too bearish a stance. In the meantime, let’s shift our focus to a long-forgotten topic around these parts. Inflation!

The Return of the Inflation Chupacabra

The reason why the world spends so much time speculating about Fed Policy and interest rates is that it matters to the market. If you think it doesn’t, let me ask: how would you feel about the stock market if cash paid you 3%?

Because that’s what the Fed says the overnight rate may be by 2016 or 2017.