What we used to call an ‘inflation day’ –

• $ down/oil up

• Gold through 900- if nothing else, it’s an inflation expectation indicator (not that they cause anything, just reflect it)

• Other metals up

• Grains going parabolic

• Stocks up

also,

• Export driven growth means demand coming from and output going to non residents, rather than retail sales and other domestic consumption.

• Changes of portfolio currency preferences away from the $US are driving the dollar down to low enough levels where non residents buy here to use up some of their $US financial assets.

• Japan/mof (and others) would probably like to buy $ to keep the yen from rising and hurting their exports, but Paulson has warned the world CB’s that this makes them ‘currency manipulators’ and subject to criticism.

This is an explicit weak $ policy that is probably altering CB portfolio preferences and inducing price pressures on our imports.

The Fed is sending signals it’s fine with this kind of inflation at least as long as they are forecasting the risk of weaker domestic demand as a result (somehow) of financial concerns. And because they analyze the risks as if we had a fixed exchange rate they see the risks of supply side credit issues as those of the great depression of the 1930’s. Doesn’t happen with today’s floating fx.

Don’t know when/if the Fed ‘figures it out’ but the curve can go from wherever it is to seriously negative should the Fed hike aggressively to ‘get ahead of the inflation curve.’

The inflation is coming from non monetary sources – monopolist pricing in oil, biofuels linking food to fuel, portfolio shifts out of $US due to US political rhetoric and apparent Fed policy of inflating your way out of debt without concern for the value of the currency. Enough to scare any portfolio manager out of $US risk.

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