The markets are acting as surprised by Bernanke’s comments that there is inflation in the economy as when Captain Renault exclaimed in Casablanca, “I’m shocked, shocked to find that gambling is going on in here!”… Really Ben, really? I just paid $4 for a gallon of gas and $5 for a ½ gallon of milk, and you’re just noticing?
The funny thing about the current inflation is that’s it’s entirely Fed produced. By lowering the dollar, we pushed investment towards the emerging markets accelerating growth. In addition, because commodities are priced in dollars, they naturally rise in price when the dollar falls. This could in fact be the catalyst for popping the current bubble, as the economy cannot stand on its own without continued stimulus, but continued stimulus will raise prices so high as to cut off growth.
Regardless of any of this, stocks like some inflation, and the plan to make people feel good through the “wealth effect” is working. Although the bubble is getting bigger and when it blows will be catastrophic, there are opportunities to take advantage of in this market as long as you’re a tactical investor. Buy and hold investors are going to get killed when this is over.