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Inflation is Already Here

Profit from Bernanke's Tortured Logic Today

Written by Brian Hicks
Posted November 11, 2010

This is just too stupid not to comment on.

Federal Reserve Chairman Ben Bernanke just said: "We're not in the business of trying to create inflation, our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation, which I think we all agree could also be worrisome."

How does this guy still have a job?  

First, the Fed is in the business of creating inflation. It's their goal. Their target is always set around +2% every year.

Second, Bernanke is trying to convince us that inflation is well below the 2% target.  

Third, he's not even looking at the right numbers. The only way inflation isn't a worry is if he's looking at core CPI numbers, which exclude volatile food and energy.  

Something big is happening in the markets. And yet "official" numbers are telling us everything is fine — leading me to believe there's a huge disconnect between CPI and the world the rest of us live in.

Honestly, Bernanke's insanity would be laughable, were it not so economically destructive. It's absurd that he would argue inflation is under control when the cost of everything has spiked... 

Inflation has arrived

And for Ben to not see that, I'm worried. It all reminds me of 2007, when he saw "little chance" of the subprime housing mortgage problem spreading to the general economy...

Just take a look at these commodity prices and tell me — with a straight face — that inflation isn't here:

  • Gold is at all-time highs above $1,400.
  • Silver is at a 30-year high. 
  • Cotton is running, with prices being passed on to consumers. 
  • Sugar is at 30-year highs, and we're likely to see food prices increase because of it. 
  • Oil is running well above $85. 
  • Grain markets are exploding: December wheat, last checked, was just under $7.30. Corn was at $5.88 per bushel, and soybeans are rocketing well above $12.80 a bushel.

In the last year alone, palladium and cotton have doubled. Corn, silver, and wheat are up close to 60%.

In the months since Bernanke told us QE1 would not jeopardize the stability of prices, the price of oats is up 40%.

Orange juice is up 45%... rice is up 50%... coffee is up 60%... copper is up 70%... and silver is up 100%.

Passing the price to consumers

The prices are, and will continue to be, passed on to consumers.

Kraft just told investors about half of the company's input costs have spiked 20% to 30% year over year, and the company had to raise prices on consumers.

Just last week, Kraft Foods (KFT) posted a 26% rise in Q3 revenue; however, due to rising material costs, profits fell close to nine percent. Plus, Kraft is hiking prices some 40% shortly...

Kroger announced it would have to raise prices. McDonald's, Safeway, and Domino's are all doing the same. General Mills is raising prices by "low digits" on 25% of its cereals on November 15. For crying out loud, bacon is up 16% in September 2010 from September 2009.

Even UPS just announced it was raising shipping rates an average of 4.9% in January.

Is it possible all these companies lost Ben's memo that inflation was under control?

All Bernanke has managed to do is create an environment where companies are forced to raise prices... And it'll only get worse, as the dollar drifts lower.

Bill Gross, for example, thinks the dollar will fall another 20% if the Fed continues this monetary easing policy.  

Companies are paying more for the things that produce the things you buy. When the prices you pay go up, that's inflation. That's what's happening right now, even as you read this.

Cat's out of the bag

No one really believes inflation doesn't exist right now — except Bernanke.

Likewise, nobody believes that dollar devaluation will lead to higher consumer spending, better employment, and a healthier economy. In fact it'll only lead to more inflation, less economic growth, and higher unemployment.

Take your head out of your ass, Ben. There's a lot of pain in store for consumers.

Of course, once Ben realizes just how bad inflation really is, he'll defend recent actions. My colleague Adam Sharp recent described it as “necessary to prevent yet another Great Depression; the Fed couldn't have seen it coming (like the subprime mess) and things would have been much worse if the Fed just stood by.”

And no one can really depend on CPI figures...

Sure, CPI is the government's way of measuring cost of living for consumers. But it's not perfect... It excludes food and energy.

According to the Bureau of Labor Statistics, “Food and energy costs are volatile, which would potentially distort Core CPI readings therefore they're omitted.”

That means core CPI is not an accurate read on inflation. I'm not telling you anything you don't already know here; I'm pointing this out because Bernanke has no real grasp of inflation.

Plus, we have to deal with the stupidity of “product substitution.”

Say, for example, the cost of steak soars. The cost of steak will then be replaced with hamburger meat.

“In fairness, much of what has become distorted in the CPI series has resulted from pressures outside of the Bureau itself, ranging from the perceived political needs of overseeing administrations, to Congress and the Federal Reserve,” states John Williams, economist and publisher of ShadowStats.com.

Profit in spite of Ben's stupidity

Buy shares of fertilizer companies and sellers of farm equipment. Sell food company stocks.

I'm buying the Market Vectors Agribusiness ETF (MOO) up to $52. It holds Monsanto (MON) and Potash (POT).

And I'm looking to buy puts (or short) food company stocks like Tyson (TSN), which could see a repeat of the 2008 plunge. We've already taken a 43% gain using MOO options in just 16 trading days in my Options Trading Pit service. And we're holding for more gains.

Plus, as the price of oil spikes on a weaker dollar, we're likely to see attention shifted to domestic oil companies looking to set up shop in what could be the only safe, stable place left to drill for oil.

But I also have to thank Ben...

If it weren't for his tortured logic, commodities wouldn't have spiked — and my readers wouldn't be sitting on piles of loot. So thanks, Ben.

As for those that weren't a part of our epic run, here's what's likely to happen over the next few months:

  • The economy will not improve. It will actually worsen, as unemployment grows worse and housing sinks. 
  • The U.S. dollar will fall further, sparking renewed currency wars.
  • China could abandon its peg to the dollar and revalue its currency.
  • Gold could rocket above $2,000... and oil could easily nail $125 next year.
  • Natural resource costs, like rare earth, will jump to record highs.

That's a reality — so long as Ben's in charge...

Invest in commodities. They're going much higher.

Stay Ahead of the Curve,

Ian L. Cooper
Editor, Wealth Daily

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