"Why I Disagree With Bernanke"

This post from Seeking Alpha makes a persuasive case based on the commodity price outlook that inflation will get worse and the Fed may have to increase rates.

When you contrast this with some of our earlier posts, such as ones on the distress in the housing market, the meltdown in the subprime sector, and generally weakening macroeconomic stats, points to a poor prognosis. The Fed won’t be able to lower rates to goose the economy as it has in the past. The Bush Administration profligacy in lowering taxes during a war means we don’t have the leeway to engage in fiscal stimulus. Probably the only measure open to the government (heh heh) is to shift the tax burden towards those who have a marginal propensity to save, meaning the rich, and away from those who have a marginal propensity to consume (the poor and middle class). And that probably won’t provide enough stimulus to fend off a contraction.

To the SeekingAlpha piece:

The chairman of the Federal Reserve, Ben Bernanke, gave Congress a positive view of the economy yesterday, predicting that declining energy and commodity prices are likely to reduce inflation. “There are some indications that inflation pressures are beginning to diminish,” Bernanke told the Senate Banking Committee.

The popular stock indexes rallied on this news. The Dow closed at an all-time high of 12,741.86. The S&P 500 rose to a six-year high of 1,455.30.

Since a market downdraft will eventually occur and one of these new highs will become the bull market top, it is my job to look at the other side: to review the facts critically, and see if the assumptions being made by the market are correct.

“There are some indications that inflation pressures are beginning to diminish.”

Bernanke probably studies inflation pressures by looking at economic data. I look at the three-year weekly charts for Crude Oil, Gold, and the CRB Index. Inflation pressures can not abate if those three are rising!

My read on these three is that they have finished a normal bull market correction, and are they are about to begin a new upswing which could be sharp and prolonged.

Crude Oil appears likely to challenge $70 this spring and could easily rise to $80 or higher later in the year. Gold has already risen strongly from the correction lows and appears ready to take out the old high of $730.40 in the near future. And the CRB Index, arguably the best measure of raw material costs which could impact consumer inflation, looks quite similar to the Crude Oil chart, only even more bullish. I believe the bull market in commodities is about to resume with vigor.

In view of this information, I believe the stock market’s optimism is not justified. I think inflation will remain problematic for the Fed. I do not believe they will cut interest rates this year and I suspect they actually may be forced to raise rates. I am very comfortable with my heavy commitment to energy stocks and my growing commitment to gold mining stocks. I expect the utilities, financial sector and REITs to come under pressure in the near future, perhaps enough to create a buying opportunity.

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