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In just the last few days, we’ve seen …
* Brent crude hit $100 overseas. That’s a key benchmark of world oil prices, and the fact that it breached the triple digits for the first time in over two years is a huge harbinger of inflation pressure.
* Soybean prices continue to rocket, up 55.1 percent from their most recent low. Wheat is up 99.7 percent, while corn has soared 98.4 percent. Sugar is trading at prices it hasn’t seen in 31 years, while both cattle and hog futures just hit the highest in history.
So you can add food inflation pressures to the mix.
Meanwhile, the stock market is marching steadily higher. Import prices jumped 1.1 percent in December after rising 1.5 percent in November and 1.1 percent in October. Producer prices jumped 1.1 percent in December, the biggest increase in 11 months, while consumer prices gained a greater-than-expected 0.5 percent.
The bottom line?
Inflation is already rising overseas. It’s already rising here, even if the Federal Reserve still insists it’s not by using the thoroughly discredited “core” measure.
So I just have to ask … what exactly is the Fed waiting for when it comes to raising rates?
It’s Not Just Inflation —
It’s the Growth Outlook
and the Deficit, Too!
At the most recent Fed meeting, Chairman Bernanke and his fellow policymakers went out of their way to tamp down speculation about interest rate hikes. In fact, they played down any inflation risk whatsoever — and included a virtually ironclad promise to keep rates very low for a very long time. Specifically, the post-meeting statement read …
“Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward … The Committee continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”
That’s a sign Bernanke just doesn’t get it! He’s going to keep digging in his heels come what may.
Meanwhile, the foreign rate hikes keep on coming in the emerging markets … and they may soon spread to developed markets, too. A very well known, plugged-in forecasting group, Britain’s National Institute of Economic and Social Research, just predicted three hikes in the U.K. over the next year.
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That would be a huge step because the Bank of England has been marching in lockstep with the U.S. Fed, even launching its own $321 billion quantitative easing program. But it can’t keep doing that forever because inflation is surging. It climbed to 3.7 percent in December, almost double the central bank’s target.
What else tells me Bernanke is behind the curve? More of the market signals I told you about last week. Eurodollar futures selling continues pretty much nonstop, and the yield on the 30-year Treasury bond is flirting with a key technical breakout above 4.65 percent.
Then there’s the economic data …
It’s going nuts overseas. And here in the U.S., it’s pointing toward a stronger growth trajectory. The Institute for Supply Management’s manufacturing index climbed to 60.8 in January, the highest since 2004. Consumer spending rose 4.4 percent in the fourth quarter of last year, the strongest pace in four years. And auto sales are running at the fastest rates since the Cash for Clunkers program artificially juiced sales in 2009.
Last but not least, the deficit news keeps getting worse …
The Congressional Budget Office just jacked the 2011 budget deficit forecast up to $1.5 trillion. With states and towns clamoring for fresh bailouts, and Washington spending out of control, you can bet the final numbers will come in even worse than the early projections … just like they have for the past few years.
Make Sure You’re Protected
from Rising Rates!
My advice? Don’t listen to Ben Bernanke when it comes to interest rates. Pay attention to what the data, the market, and more responsible foreign central bankers are saying and doing. The message they’re sending out: Rates are going up, period, end of story!
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So what should you do to protect yourself?
First, sell any bond mutual funds or ETFs with average maturities longer than two years. Ditto for individual bonds — especially municipal bonds that have credit risk as well as interest rate risk piled on their weakening shoulders!
The iShares S&P National AMT-Free Municipal Bond Fund (MUB) is particularly vulnerable, for instance, as are ETFs like the iShares 10+ Year Government/Credit Bond Fund (GLJ). Consider buying something that actually goes UP in value when bonds fall — like the ProShares Short 20+ Year Treasury (TBF) ETF.
Second, stick with gold and contra-dollar investments. The further the U.S. Fed falls behind the interest rate curve vis-à-vis foreign central banks, the more the dollar will likely decline against the value of those currencies.
Until next time,
Mike