Four Dead Bodies - Right now, gold, the dollar, bond spreads, and commodities all point to inflationary money from the Fed.

All:

Below is a link to an article I was reading in the National Review.

Their economics editor is Larry Kudlow whom you may know from his CNBC show Kudlow and Company. To be fair, he is not a trained economist per se (though he did work as the Chief Economist at Bear Stearns in the 1990s and for a short time as a staff economist at the Federal Reserve Bank of NY early in his career).

I think what he says is interesting here. His basic premise is that when there are FOUR dead bodies all together, one better take notice. That is, there is risk if four key market-price indicators (i.e. rising gold, a soft dollar, expanding bond spreads, and strong commodities) are all pointing to inflationary money from the Fed.

As for the first THREE bodies, the JoC industrial metals index is up 16.5 percent year-to-date, gold is up 12 percent, and the dollar index has declined 3 percent. Added to this, the core inflation rate for the personal consumption price index (which is closely tracked by the Federal Reserve) has climbed from 1.4 percent last December to 2.8 percent in February on a 3-month annualized basis.

He points out that some of his supply side colleagues have been warning about inflation for a few years based on these THREE dead bodies - rising gold and commodity prices and a soft dollar index. The reason he hasn't seen a need to call for inflation is that the bond market hasn't moved up as well (which he argues is more important as it has more of an impact than the others).

The real question is whether this is the FOURTH body. To answer the question, he breaks out the 10-Year Treasury Bond into two components - the growth factor (the real rate) and the inflation factor (the spread on inflation ADJUSTED bonds aka the "TIPS Spread"). So far this year, the 10-Year TIPS inflation spread has risen about 21 basis points reaching above its 5 year average.

Interestingly, he points out that while the modest widening of the TIPS inflation spread may not spell imminent doom, the fact is that the Fed needs to take notice.

He concludes by saying that "loose talk from a protectionist-leaning Congress is arguing for a lower dollar to curb the trade deficit. This would be exactly the wrong policy. The Fed should ignore this banter and instead keep its eye on all four dead bodies in the inflationary morgue."

I think he is right.
http://article.nationalreview.com/print/?q=NWYyYTU2NTRlNmVhZDUwYWUxZDE1OTFkYTIzYjYxN2U=