Is It Time To Worry About Inflation Once Again?

It looks like the market is saying yes.

Bond yields are rising.  The 10 year closed above 3% which it has not done since the summer:

Gold rose $25 today and closed near it's all time highs of $1424:

Oil also soared and closed at it's highest levels today since the commodity bubble burst back in MAy/June of 2008:

My Take:

Let the debate begin.  We have seen some signs of life out of the economy this week.  It's been seen most notably in retail sales and the service sector numbers which didn't look bad today. 

Unemployment still sucks but when the government is handing out free unemployment/entitlement checks like water does it really matter for the time being? 

The problem the market now has is if we are about to see some sort of an economic recovery then inflation will rapidly become a serious issue because the Fed is printing money and tossing it out of helicopters.

The Fed is in a tight spot here because unemployment still sucks yet the economy does show signs of turning around.  I personally believe that this is only a temporary fluctuation higher economically but nonetheless it must be priced into the market.

So the question now becomes is will the Fed be able to react to the risk of inflation before it becomes a serious issue?  History has told us they have always been too late to take away the punch bowl.

The Bottom Line

I have been warning over the last couple of weeks that if oil gets up to $100 per barrel we will lose any positive momentum we have seen in the economy.

We closed over $90 per barrel today so we are officially in the "danger zone". 

I think we could easily reach $100 per barrel very soon because the Fed still has the "easy money" gas pedal nailed to the floor as it desperately tries to avoid deflation.

This irresponsible behaviour is starting to kill our currency because the rest of the world is tightening up their purse strings.  The currency traders will start to beating the crap out of the Fed with a giant stupid stick via flushing our currency down the toilet if they don't stop this insanity.

The bond market will do the same thing with treasuries.  The technical breakouts seen in oil and the 10 year today must be paid attention to.  The market is scared that the easy money Fed POMO's are rapidly starting to look reckless as the economy begins to show signs of a little life.

This being said, I just don't see how the economy recovers with unemployment at these levels.  Nonetheless, the economy will show signs of life at times during secular bear markets.   Nothing heads down in a straight line.

The fact that treasury yields are rising despite the Fed's purchases should not be taken lightly.  This is a serious problem for the Fed because they can't afford higher rates because we have issued so many trillions of treasuries that we must pay interest on.

If rates keep rising as a result of inflation fears then the USA could be bitch slapped "Greece" style by the bond market because the USA will begin to look insolvent due to the rising costs of servicing their debt issuance.

The Fed has to be sweating bullets.  If the economy recovers then inflation soars, bond market yields then soar as they attempt to keep pace, and millions will find it very difficult to survive because they won't be able to afford to live.

If the economy continues to deteriorate then a deflationary collapse is likely in the cards as the unemployment situation forces the consumer to eventually fall off a cliff.

Mr. Bernanke can't be sleeping well at night these days.  No win situations aren't fun for any central bank to go through.

BTW, Don't forget to buy stocks on Monday!  The trading robots are counting on you!  Remember:  All is well...All is well....All is well....