Friday, January 18, 2019
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Fed Plays a Dangerous Game; Commodities the Likely Winners!

Last week, markets were surprised — and inflation hawks shocked — to see core consumer prices post the biggest monthly gain since 2009 ... surprise, surprise!

Now, we all know the flawed Consumer Price Index does a lousy job capturing the actual rate of inflation. That's because it downplays too many real-world costs that are spiraling ever higher, including health care and education.

But now, even the "official" inflation numbers are accelerating to the upside.

Take travel costs ... auto insurance jumped 4.8 percent year over year in May, hotel costs are up 5 percent, and airfares surged nearly 6 percent higher.

Expect your summer vacation to cost more this year!

And what about soaring food prices, which jumped the most last month in nearly three years: Eggs are up 10 percent, bacon rose 15.3 percent, while citrus and coffee prices are likewise soaring this year.

Your well-balanced breakfast is a lot more expensive than a year ago!

Fed discounts inflation danger

The year-over-year change in CPI has more than doubled in less than one year. That's clear evidence that inflation is already simmering and may soon boil-over.

From an investment perspective, commodities are the likely winners from the Fed's dangerous game.

With the unemployment rate steadily declining and inflation now suddenly at the top of the Federal Reserve's comfort zone, you would think Fed officials would be growing concerned about ultra-easy money policies stoking more inflation ... but you'd be wrong.

Concluding a two-day policy meeting last Wednesday, it was business-as-usual as Fed chief Janet Yellen quickly dismissed the inflationary CPI report as "noise."

Long ago, economist Milton Freidman warned that "inflation is always and everywhere" the result of excess money growth. In the 1970s, the Federal Reserve ignored this principle ... and a decade of stagflation was the result.

The Fed is playing a very dangerous game because ignoring simmering inflation today won't make it go away; it will only fan fears of future inflation all the more.

Adding fuel to fire

True, deflation has for the most part had the upper-hand in the global economy since 2008. And money velocity — or the turnover of dollars in our economy — has been unusually weak in recent years.

But the Fed has exploded its balance sheet to more than $4 trillion, with $2.5 trillion sloshing around the banking system as excess reserves.

This is like high octane rocket-fuel just waiting to ignite much greater inflation once the velocity of money does pick up.

From an investment perspective, commodities are the likely winners from the Fed's dangerous game. The evidence has been plain to see all year, and especially last week after the Fed ignored the uptick in CPI.

There is a growing unease that the Fed is hopelessly behind the curve on inflation, and commodities markets sense it!

Gold jumped 3.25 percent, the biggest gain in nine months. Silver soared even more, up 6.9 percent. Although precious metals may be the most obvious beneficiaries, they aren't alone in posting strong gains so far this year.

* Crude oil is up 7.9 percent year to date while natural gas has gained 5.6 percent ...

* Gold is up 9.5 percent, platinum 5.5 percent and palladium jumped 13.5 percent ...

* Corn is up 5.5 percent, sugar 9.3 percent and coffee is up a stunning 56 percent just since January 1st!

In fact, the broad-based CRB Commodity Price Index is up 11.4 percent so far this, well ahead of the stock market's return with the Dow up just 2.6 percent year to date!

Consider the uptrend of inflation and commodity prices; it's a good idea to consider adding more commodities, or at least commodity-related stocks to your portfolio mix. One way to accomplish this with a single trade is an ETF like the Market Vectors Natural Resources ETF (HAP), which provides a diverse mix of natural resource stocks that are tracked by the Rogers-Van Eck Hard Assets Producers Index.

The index was developed in concert with legendary investor Jim Rogers, former co-manager with George Soros of the famed Quantum Fund, and author of numerous investment books including: Hot Commodities. Rogers is a recognized expert on hard asset investing and his index is viewed by many as the best benchmark for commodity stocks.

HAP includes 341 of the world's largest and most prominent companies engaged in the production and distribution of hard asset commodities. As of March 31, 40 percent of the ETF was invested in the red-hot Energy sector, 39.6 percent in Materials, 9.5 percent in Consumer Staples and 5.5 percent in Industrials.

This is one ETF with the potential to be a very big winner as the Fed plays its dangerous game with inflation.

Good investing,

Mike Burnick

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