By Anthony Mirhaydari
It's clear now: The cheap-money pumping isn't going to stop unless inflation kicks higher. It's inevitable now as both the Bank of England and the Federal Reserve weaken their "forward guidance" constraints on near 0% interest rates as unemployment rates fall faster than expected (mainly due to labor-force dropouts).
They've moved the goalposts to keep the cheap money — and the liquidity-addicted stock market — on a roll.
Instead, more nebulous concepts like spare capacity, long-term unemployment, and workforce-participation rates are cited as policy benchmarks. But more than anything, the central bankers feel they don't need to act unless inflation — with the Fed's preferred measure rising at just a 1.1% annual rate — becomes a problem.
And thus, with a small group of unelected bureaucrats responsible for the price of money and, indeed, the price of financial assets as well, it's all but assured that the cost of living is headed higher.
The market is already responding. Crude oil is pushing toward $102 a barrel for the first time since October. Gold is making a run toward its 200-day moving average, a level it hasn't been above in a year. And precious metals mining stocks are coming to life in a big way, reversing persistent downtrends going back to the last inflation scare in 2011 -- when higher food prices encouraged Arab Spring revolts and higher oil prices.
Central bankers have grown increasingly creative (or is it desperate?) over the last few years as they use every trick in the book to keep the economy going. The result has been a flood of liquidity into the financial system that has pushed interest rates to lows never before seen in human history.
In an era of household indebtedness, stagnant wages, government deficits and unfunded entitlement liabilities, there's really no other way. A more lasting solution would involve solving the root causes of the economic malaise, including unreformed social programs, a lack of corporate investment, unskilled workers, and an overreliance on credit.
But those are harder. It's easier to just juice the stock market with cheap money and hope for the best. And that's what they're doing as indicated by comments from Bank of England head Mark Carney and Fed chair Janet Yellen this week. And as a result, they're making the same mistake their predecessors have made: Forgetting that monetary policy operates with a nine- to 12-month lag.
If they think that inflation is going to return to their 2% targets and that the economy is showing signs of improvement, rates should already be recovering to more normal levels. Instead, not only are short-rates pegged near 0%, but the Fed is still buying $65 billion a month in long-term bonds.
Households will soon feel the pinch, likely via higher food and fuel prices this spring and summer. An epic drought in California will hit prices for fresh fruit, vegetables, and nuts while severe weather has decimated America's cattle herd.
The good news is that this is presenting an opportunity in gold and silver mining stocks — one of the only areas left in this market that presents a modicum of value. I've added the Global X Silver Miners /zigman2/quotes/207060602/composite SIL -3.15% and Great Panther Silver /zigman2/quotes/209836794/composite GPL -0.68% to my Edge Letter Sample portfolio . Both are carrying gains of 5% since being added on Monday.
Disclosure: Anthony has recommended SIL and GPL to his clients.