Stealth Inflation

This has been another theme we've been talking about as all of the seemingly cheery manufacturing reports have consistently shown producer prices rising rapidly, when the companies can't absorb the costs or trim anymore of the fat, they take a hit to EPS and /or raise consumer prices (see NKE this week which did exactly that) in a consumer market that is in shambles, the result more or less could be an extreme form of stagflation.

MIT has released this chart showing that the US is on track for inflation over 8% for 201l, about 4x the Fed's target rate. So what can be done, as Fisher said in the last article I published an hour or so ago, they can do several things without adjusting interest rates higher, one was to sell treasuries. This is a flat out fallacy. When QE2 ends, there's a big problem. Up until now, the Fed has been absorbing the Treasury notes, which makes it easier to issue a few more as countries like China and Japan could absorb the small excess. When QE2 ends, so does that situation. Worse yet, Japan is unlikely to be buying treasuries anytime soon and to make matters even worse, the Japanese government and insurance companies are likely to flood the market with treasuries. This is almost like the perfect storm coming together and one more reason the market outlook is historically bleak.

So what will the economy and market look like when the Fed is forced to raise rates to sell treasuries and absorb the excessive liquidity that has been driving commodities parabolic?