Inflation to worsen

Last Saturday John Mauldin wrote a very timely newsletter about the Fed's QE2 (2nd quantitative easing) Treasury buying program.  The question is will it end, or will QE3 be announced to follow it?  In this article John questions if the Fed will be able to continue buying Treasuries after June.  While core inflation is low, inflation including food and energy is running at 5% on an annual basis over the last three months.  I previously predicted a jump in inflation and this week companies such as Kimberly, Colgate, and P&G announced 5-7% price increases.  I fear that this is just the beginning.  In his newsletter John explains why rents will be rising as well.

My view is that the catastrophe in Japan is going to exacerbate producer price inflation.  Japan produces around 30% of global flash memory, 20% of semiconductors and 40% of electronic components.  I believe it will be months, not weeks before they are able to resume normal production.  In the meantime, limited supply will push prices up, and the less price elasticity, the higher price will go.

More seriously, questions about food safety in Japan are going to worsen an already delicate food supply situation.  The world has been consuming grains faster than farmers can grow them.  This is draining reserves and pushing prices higher.  According to Keith Collins, former chief economist of the U.S. Department of Agriculture "The stage is set for very serious disruptions, should weather disasters happen," he also added "It seems clear to me that the chance of a more widespread global food crisis has increased."  He said this before Strontium-90 and Cesium-137 were raining on Japanese arable land.

For me it is unthinkable that the Fed would NOT announce QE3.  Without it, I believe, we have little chance of funding our deficits.  Especially with Japan now more likely to sell Treasuries to raise money needed to rebuild.  Without ongoing QE, we would need to raise taxes significantly, reduce transfer payments such as social security and Medicaid, or reduce military operations substantially.  Essentially the Fed's traditional tools to reduce inflation are a jail sentence for our economy.

Natural Gas Poised to Rise?

Natural gas prices are about to change course and rise due to several factors.  Natural gas prices have been depressed due to an amazing over-supply caused by new fracturing technologies combined with limited storage facilities.  There is currently an inadequate distribution chain for natural gas, and so the supply has had no where to go.  This will change with a new distribution infrastructure that is being built which will absorb the supply.  Natural gas will begin replacing the traditional sources of coal and oil.  Right now, electric utilities are in the process of converting from coal as a major electricity-generation system to natural gas.   Our algorithms will most likely spot the bottom in natural gas prices but no need to worry about perfect timing because the potential for gain is so great.