The Rubber Meets the Road

The great thing about low inflation is that central bankers can continue accommodative monetary policy without too much criticism. Stocks love easy money. The crummy thing about low inflation is that it makes it that much tougher to prop up the US dollar. For some reason, investors just don’t believe the FOMC will keep hiking rates while prices are falling. Investors are funny that way.

A lower USD, of course, means a lower USDJPY. Stocks don’t like a falling USDJPY — which has, again, dropped through its SMA200.For its part, DXY has spent over a week bumping along an important channel line, and is testing it again today. With USDJPY struggling, the onus has been on VIX, CL and RB to help prop up stocks.

VIX did it’s best yesterday, with a dramatic turnaround at its SMA200 as expected. But, the charts suggest it could be pushing 14 by next Wednesday.

RB is trying to rally, but the last two inventory reports argue for lower prices, not higher. And CL…well, it’s the key, isn’t it? As we discussed earlier this week, it’s one sure way to get PPI/CPI up to where it needs to be. That’s important, because the Fed’s inflation problem is morphing into a credibility problem.

If inflation were measured accurately and not gamed the way it has been for years, there would be no credibility problem at all. Between healthcare, gas and housing, true inflation is closer to either 6% or 10% (Shadowstats.com.) Of course, if the Fed ever acknowledged this, higher interest rates and cost of living increases would increase the deficit and debt to untenable levels.So, instead, we live in a world where average Americans are increasingly unable to make ends meet, where their income can’t keep up with the bills despite what the official data says. The savings rate is dropping just as fast as consumer credit is rising.At what point will oil’s rally and the dollar’s drop run out of steam? If the past is any indication, we have two specific patterns with which to concern ourselves.