Inflation Alarm

The Federal Reserve, as expected, hit the snooze button and held interest rates steady at this week’s policy meeting. Unfortunately the committee could not bring itself to clearly acknowledge the inflation which is intuitively obvious to everyone else. This grudging statement is all they had to say: “The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high… the upside risks to inflation and inflation expectations have increased.”If this seems unlike the words of a committee that is concerned about inflation, you are correct. More important, holding interest rates at today’s artificially low level is not the action of a committee that is concerned about inflation. Are they that blind? No, we think not. These are smart people who know exactly what they are doing. If the Fed’s policies and rhetoric add up to higher inflation, maybe it is because the Fed wants higher inflation. Why? We can’t know for sure, but bear this in mind: inflation helps those with high levels of debt. And who has more debt than anyone else? More even than homeowners? The answer is “banks.” What industry is the Fed charged with protecting? You guessed it: banks.

Whatever the Fed is up to, the markets moved quickly today to adjust to the new and higher inflation outlook. Financial stocks plunged even lower, crude oil and gold climbed higher, and the Dow dropped to a new low for 2008. Year-to-date through today, the Dow is off -13.6%, the S&P 500 is down -12.6%, and the Nasdaq Composite has fallen -12.5%.

While most sectors are approaching oversold conditions and could bounce back, prudence tells us now is a good time to scale back some of our exposure. With momentum mostly concentrated in specific sectors, style-based funds give us less confidence now. To check out how we’re protecting our subscribers in our model strategies…

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