Inflation and higher rates on the horizon

“There are three kinds of lies: lies, damned lies and statistics.”
Quote origin disputed by 35%!

Last month I asked if the euro was a good buy or good bye. I qualified my comments with a depends (again it’s not the product that requires ‘discreet shipping’); instead I explained a range of scenarios that, if followed, should give you direction on buying or selling.  This led me to questions posed over other currencies, and as this is now January (it’s actually December and I haven’t had my fill of turkey) I thought best to lay out some observations for the New Year.

In no particular order…my New Years predictions, sell euro, sell Sterling, sell Canadian dollar, sell the Japanese Yen. oh, and did I mention sell the euro?  Buy the dollar.  Why so bullish on the dollar?

This is the bit that will come around to bite my butt. The Fed has had an agenda, as far back as Greenspan’s hay days, to keep the yield curve as flat as possible. They don’t like long term borrowing costs outstripping short term rates.  Most of Greenspan’s obtuse commentary over the years, if you re-read them, was intended on bring down the long term rates, either through policy or rhetoric.  Stability is the name of the game and their ultimate goal.

They would love a goldilocks economy and part of that are lower long term rates, stable borrowing costs for the borrower fixed over their lifetime, no more Ninja loans with balloon interest rate hikes after two years, 30 year fixed rate loans at low rates for all!  How noble.  The trouble the Fed faces is that they are no longer in charge of the economy, there are a lot of stimulus dollars at work and they are strapped to this missile hoping they can direct it.  They can’t.  Inflation and higher rates are coming.

I think, and I may have mentioned this before, that the US is under reporting inflation.  It hasn’t really mattered because everyone reacts to, and measures CPI based on the numbers produced, but what if you want to get ahead of the curve? 

Inflation is out there, increased fuel costs, food costs and commodity prices are all rising, despite the economic slowdown. Trust your judgement:  if you see steady retail shopping, higher prices on everyday items, increased fuel costs and little in the way of sales, coupled with a general optimism, you can bet a fair chunk of cash that the economy is firm, that inflation is occurring, retail sales are up and possibly jobs are up (jobs are a difficult one and is always referred to as a lagging indicator, as you need growth and optimism of future growth to spur hiring).  Try and not be dissuaded by actual numbers and concentrate on what you know, everyone else will catch up… eventually.


Money Markets with Phil Turnbull, Butterfield Bank