Wednesday, June 18, 2014

Inflation Boogeyman and the Fed

After that CPI report came out and bonds got dumped, I am seeing a growing chorus of hawks.  They believe that the economy is strong and that inflation is a growing problem.  They view QE as having unintended consequences.  Maybe one of them was sour grapes from being left behind the S&P choo choo train.

But in investing, what I do isn't important, it is what others do that is important.  And that big other is the Fed.  The Fed has a history of ignoring inflation and following their own timeline on when to raise and reduce rates.  What we're seeing in the CPI is nothing compared to 2007 and 2008 commodity surge.  During that surge, the Fed cut rates, not raise rates.  The Fed has always ignored food and energy inflation in their policy decisions.  In fact, in their warped views, they see it in the opposite way, fearing high food/energy inflation as being deflationary for discretionary spending.

It doesn't matter if I think their policies are asinine or just serving their masters, the Treasury and big banks.  I am here to try and predict what they will do, not what I think they should do.  And the Street is still underestimating the dovishness of the Fed.  How can any sane central bank but the Fed add to their balance sheet under these type of bubbly asset market conditions with an economy that is stable?  The Fed is insane, and nothing surprises me anymore with their easiness.

On Fast Money, I saw concern about higher rates that I haven't seen since last December.  Bonds are back in the doghouse among fast money traders.  And ahead of the FOMC meeting, traders are quite anxious and well aware of Yellen's last gaffe that crushed the short end of the yield curve.  I see yesterday's bond market selloff as front running possible hawkish talk from the Fed, and I am seeing speculation about a possible $15B taper.  I am obviously taking the other side with my long bonds.


MM111 said...

Well an even smaller correction to 1930 and now another breakout. This market seems endless.

Market Owl said...

My year end target is 2100. Could see a correction down to 1880 this summer and then a straight line shot to 2100.