As my good friend Fred Hickey noted last week, it's absurd that the whole world would be waiting for the congressional testimony of a man with nothing to say. But that was the scene Wednesday as Federal Reserve Chairman Ben Bernanke made his way up Capitol Hill.
Bernanke can do all the tough talking he wants. But he's not going to take much action to reduce liquidity, given that the economy does not appear to be in a self-sustaining mode. Confirmation comes from two data points last week: Month-to-month new-home sales dropped 11.2%, after expectations of a 3.5% gain, and consumer confidence declined significantly.
Results for the latter prompted lots of chatter about misleading results, given that recent readings on other measures of sentiment haven't been as negative. Perhaps consumer confidence isn't quite as disappointing as the number seemed to indicate. But on the other hand, I wouldn't be shocked if it was. Faced with fears about jobs, the housing crisis and incipient inflation, the consumer is really in a bind.
To repeat, Bernanke has been trying to talk tough lately -- for example, saying he plans to end quantitative easing (which means the Fed would stop buying Treasurys and mortgage-backed securities to pump money into the system). But as soon as signs of a meaningful economic recovery begin to recede, I expect him to coo like a dove.
San Francisco Fed President Janet Yellen took a page from that playbook last week at a gathering in San Diego, and her comments prompted this Wall Street Journal headline: "Fed's Yellen won't rule out new MBS buying if conditions warrant" (subscription required).
The real risk is inflation
Now, let's look away from the money-printing machine to what lurks in our future: inflation. It's got a way of sneaking up on you, and it has already popped up in places, not all of which you'd necessarily expect. Dennis Gartman, the editor of The Gartman Letter, provided a recent example I'd like to pass along:"We thought we'd take a look at some of the prices of finished products as evidence of commodity price strength. For example, FoodBusinessNews notes that where 2005 = 100, the price of a milk chocolate bar was approximately 120 in early '09, and had gotten as high as 187 in late January. The vanilla ice cream index rose from approximately 84 (again, where 2005 = 100) in early '09 to 122 in late January.
"Interestingly, the 'devil's food cake index,' which notes the prices of the ingredients necessary to make a perfectly fine devil's food cake, rose from just about 140 (again, where 2005 = 100) in early '09 to just above 180 in late January. In other words, inflation in food prices is, or at least was, apparent and obvious."
Gartman then points out that the proximate cause has been the big jump in sugar prices. But that's not the only item that has sprinted higher in the past year, and the prices of many other items could rise prospectively.
In the end, I don't know when it will be recognized that stagflation or inflation is the outcome, as folks seem inclined to believe deflation is in our future. But stagflation or inflation is where I think we are headed.
Continued: The market road ahead