Rising Prices Are the Fear

An extraordinary event for bond markets occurred yesterday when the Treasury sold $10 billion of 5-year inflation-protected securities, or TIPS, at an auction with a yield of negative 0.55 percent. That’s right. Negative. Can’t remember when that’s happened before.

In other words, investors were willing to pay the Treasury 105 cents in order to buy $1 of inflation protection.

Now how does that square with the Fed’s newfound fear of deflation? Does the central bank ever listen to markets?

Ever since Ben Bernanke announced his QE2 pump-priming monetary-stimulus idea late last August, inflation-sensitive markets have been going wild. The dollar is down. Gold is up. Commodities are up — big time.

Treasury head Tim Geithner made some noises about protecting King Dollar, and I gave him the benefit of the doubt. But he endorsed QE2 at the G-20 meeting in South Korea, and that really dooms the dollar. You can’t print $1 trillion of new money without sinking the currency. The dollar is already overproduced. Just ask China and other Asian countries, or Brazil, each of which is fighting against the inflow of excess dollars.

Again, judging by inflation-sensitive markets, rising prices are the fear, not falling prices.

Wall Street strategist Peter Boockvar writes about the CRB index rising to its highest level in two years, including booming cotton and copper. He also notes companies like Starbucks, McDonald’s, General Mills, Goodyear, and Kimberly-Clark, which have all reported higher cost inflation. And then comes this priceless sentence: “Ahead of next week’s FOMC meeting, where the Fed wants higher inflation, all will be okay as long as you don’t drive, eat, drink, wear cotton-based clothes, use copper wire for any type of construction, blow your nose, diaper a kid, or wipe your arse.”

Boockvar is right. The Fed is wrong. Investors will even take negative real yields to protect against inflation. What does that tell you?