Panic and confusion are setting in over inflation. This may be the beginning of the "recognition wave" in the inflationary bull market for non-dollar forex, commodities, real estate (yes!), and interest rates. Since 1980, inflation was "supposed to" last only a year or two at most, and then when the FED tightened inflation was to and did drop back. There were so many assumptions learned in this process: that the FED or any Central Bank really controls anything, that inflation is "controllable", and that it is a temporary aberration. Inflationary flareups were not rare during that period after 1980, but "it's different now".
Since most market people are unaware of long term economic supply and demand trends, their confusion leads to scapegoating. "OK, who is responsible for this terrible inflation we are just recognizing?" Even the Bond King himself is flailing around and bashing "the usual suspects" in his most recent Investment Outlook. http://www.allianzinvestors.com/commentary/mgr_billGross06012008.jsp In turn he rails against the general informed public ("
we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate"); then he lambastes the statistical analysts at the Bureau of Labor Statistics and Treasury ("Somebody’s been foolin’, perhaps foolin’ themselves—I don’t know.") ; and, of course, he takes an obligatory potshot at the current US Administration ("Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this
Outlook) the market’s assumption of low relative U.S. inflation in comparison to our global competitors.").
If you are the Bond King and a good judge of markets, the recognition wave of inflation will naturally be distressing to say the least. What it means is that bonds will be going down a lot and for a long time.
